In finance, the operating ratio is a company's
operating expense
An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provi ...
s as a percentage of
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
. This
financial ratio
A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financia ...
is most commonly used for industries which require a large percentage of revenues to maintain operations, such as
railroad
Rail transport (also known as train transport) is a means of transport that transfers passengers and goods on wheeled vehicles running on rails, which are incorporated in tracks. In contrast to road transport, where the vehicles run on a pre ...
s. In railroading, an operating ratio of 80 or lower is considered desirable.
The operating ratio can be used to determine the efficiency of a company's management by comparing operating expenses to
net sales
In bookkeeping, accounting, and financial accounting, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sa ...
. It is calculated by dividing the operating expenses by the net sales. The smaller the ratio, the greater the organization's ability to generate
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory inter ...
. The ratio does not factor in expansion or debt repayment.
Alternatively, it may be expressed as a ratio of sales to cost. In such case, a higher ratio indicates a better ability to generate revenue.
Operating Ratio
InvestorWords.
See also
*Farebox recovery ratio
The farebox recovery ratio (also called fare recovery ratio, fare recovery rate or other terms) of a passenger transportation system is the fraction of operating expenses which are met by the fares paid by passengers. It is computed by dividin ...
References
Corporate finance
Financial ratios
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