Operating Ratio Formula & Example

Definition: Operating ratio is the ratio of cost of sales plus operating expenses to net turnover. It is an indicator of the operational efficiency of a business, a low operating ratio indicates high operating profit.

Formula:
Operating Ratio = [(Cost of sales + Operating expenses) / Net sales] * 100%

Example 1:
Calculate operating ratio given the following figures:
Cost of sales is $300,000, other operating expenses are $50,000, and net sales is $1,000,000.

Solution:
Operating Ratio = [(300,000 + 50,000) / 1,000,000] * 100% = 35%

Example 2:
The following information relates to Peter Ltd. for the year ended 31 December 2010:
Rental $30,000
Electricity $3,000
Total sales $89,000
Salaries and wages $12,000
Postage $600
Cost of goods sold $9,400
Sales returns $1,000

Calculate the operating ratio.

Solution:
Overhead expenses = Rental + Electricity + Salaries and wages + Postage = 30,000 + 3,000 + 12,000 + 600 = $45,600
Net sales = 89,000 - 1,000 = $88,000

Operating Ratio = [(9,400+ 45,600) / 88,000] * 100% = 62.5%

* Next: Expense Ratio Formula & Example

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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