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Operating Ratio Formula:
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The Operating Ratio (OR) is a financial metric that measures a company's operating efficiency by comparing operating expenses to revenue. It indicates what percentage of revenue is consumed by operating expenses, with lower ratios generally indicating better operational efficiency.
The calculator uses the Operating Ratio formula:
Where:
Explanation: The formula calculates the proportion of revenue that is spent on operating expenses. A ratio of 80% means that 80% of revenue is used to cover operating costs.
Details: Operating Ratio is crucial for assessing a company's operational efficiency, cost management, and profitability. It helps investors and managers understand how well a company controls its operating costs relative to its revenue generation.
Tips: Enter operating expenses and revenue in the same currency units. Both values must be positive numbers. The calculator will compute the operating ratio as a percentage.
Q1: What is a good Operating Ratio?
A: Generally, lower ratios are better. A ratio below 80% is considered good, while ratios above 95% may indicate operational inefficiency. However, this varies by industry.
Q2: How does Operating Ratio differ from Operating Margin?
A: Operating Ratio shows the percentage of revenue consumed by expenses, while Operating Margin shows the percentage of revenue remaining as profit. They are complementary metrics.
Q3: What expenses are included in Operating Expenses?
A: Operating expenses typically include costs of goods sold, salaries, rent, utilities, marketing, and other day-to-day business expenses, but exclude interest and taxes.
Q4: Can Operating Ratio be over 100%?
A: Yes, if operating expenses exceed revenue, the ratio will be over 100%, indicating the company is spending more on operations than it's earning.
Q5: How often should Operating Ratio be calculated?
A: It should be calculated regularly (quarterly or annually) to track operational efficiency trends and identify areas for cost optimization.