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Operating ratio

Operating Ratio

The operating ratio is a financial metric that measures a company's operational efficiency by comparing its operating expenses to its net sales. It is calculated by dividing total operating expenses by net sales and is expressed as a percentage. A lower operating ratio indicates that a company is managing its operating costs well and is more efficient in generating revenue. It is commonly used in industries like transportation and utilities.

Example

A transportation company with $500,000 in net sales and $350,000 in operating expenses has an operating ratio of 70%, meaning 70% of its sales revenue is used to cover operating costs.

Key points

• Measures operational efficiency by comparing operating expenses to net sales.

• A lower operating ratio indicates better cost management and higher profitability.

• Commonly used in industries with high operating expenses, like transportation.

Quick Answers to Curious Questions

What does a high operating ratio indicate about a company’s efficiency?

A high operating ratio suggests that a significant portion of revenue is being consumed by operating expenses, which could indicate inefficiency.

How can a company improve its operating ratio?

By reducing operating costs or increasing net sales, a company can lower its operating ratio and improve efficiency.

Why is the operating ratio important for evaluating profitability?

It provides insight into how well a company is managing its costs relative to its revenue, which directly affects profitability.

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