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Operating Ratio

An operating ratio as defined in a financial term as a mathematical calculation that describes the operational efficiency of a company. The most common operational ratio usually describes the operating expenses of the company from the net sales. In calculating the sum of the overall net sales, take the gross revenues minus allowances, sales returns and discounts. This operating ratio will help the company to identify and recognize how good they can obtain revenues having the basis on the company’s expenditures on a specific period of time. The detailed information of the operating ratio is usually listed and can be seen in the income statement of the company.

The ratio is usually expressed in terms of percentage computed by dividing the operation expenses to its net sales of the company. The resulting quotient will provide a picture of the company of how they can obtain profit if expenses increase or revenues decrease. For instance, an enterprise with having a monthly operating cost of about $100 million USD and $500 million in net sales is most likely will have an operating ratio of about 20%. Generally, if the ratio of the calculation is smaller, the company will have a better chance to generate more profits.

Another way to view the operating ratio in another perspective is through finding out the amount of money that will be obtained to be settled in the operating expenses. Most of the companies utilize the very basic profit of the gross ratio when it comes to calculating the profit percentage. This formula can be computed by getting the net sales minus the expenses of the goods sold then divided by the company’s net sales. The figure once again is expressed in terms of profit percentage of the items sold through the company. In the event that the company would want to maintain a particular profit percentage, the company has to combine the gross profit ratio and the operating ratio to be able to produce more comprehensive mathematical operation.

A hybrid ratio contains the operating expenses as well as the amount of goods sold divided again by the net sales. This operating ratio will describe how good the company is in covering all the expenditures during the accounting period. In the same manner as the first formula, a calculation of a smaller percentage typically means that the company is obtaining higher profits rather than the operational expenses and the cost of goods.

Companies can also opt to utilize other kind of operating ratios in order to recognize the efficiency and effectiveness of the whole operations. Some of these other types is the operating leverage and the net worth calculations.

Financial operating ratio offers to the companies a benchmark to utilize as a tool for comparison in the business industry. Companies have their own options in calculating the ratio and use it as a basis for comparison on leading companies. Through this comparison, managers and directors can have a deeper analysis on the operation of the business and thus will give them an idea on how to improve it.