Operating ratio

By: Rashid Javed | Updated on: October 26th, 2021

Operating ratio (also known as operating cost ratio or operating expense ratio) is computed by dividing operating expenses of a particular period by net sales made during that period. Like expense ratio, it is expressed in percentage.


Operating ratio is computed as follows:


The basic components of the formula are operating cost and net sales. Operating cost is equal to cost of goods sold plus operating expenses. Non-operating expenses such as interest charges, taxes etc., are excluded from the computations.

The following example may be helpful in understanding the computation of operating ratio:


The selected data from the records of Good Luck Company limited is given below:

  • Net sales: $400,000
  • Cost of goods sold: $160,000
  • Administrative expenses: $35,000
  • Selling expense: $25,000
  • Interest charges: $10,000

Required: Compute operating ratio for Good Luck Company Limited from the above data.


= (220,000* / 400,000) × 100
= 55%

The operating profit ratio is 55%. It means 55% of the sales revenue would be used to cover cost of goods sold and other operating expenses of Good Luck Company Limited.

*Computation of operating expenses:
Cost of goods sold + Administrative expenses + Selling expenses
= $160,000 + $35,000 + $25,000
= $220,000

Notice that the interest charges of $10,000 have not been included because they are categorized as financial expenses, not operating expenses.


Significance and interpretation:

The operating ratio is used to measure the operational efficiency of the management. It shows whether or not the cost component in the sales figure is within the normal range. A low operating ratio means a high net profit ratio (i.e., more operating profit) and vice versa.

The ratio should be compared: (1) with the company’s past years ratio, (2) with the ratio of other companies in the same industry. An increase in the ratio should be investigated and brought to attention of management as soon as possible. The operating ratio varies from industry to industry.

15 Comments on Operating ratio
  1. Nyombi Thembo

    Excellent defintion and good example-thanks.

  2. Accounting for Management

    Welcome Nyombi Thembo.

  3. Abi

    It is useful ratio.

  4. Rajesh Poudel

    Can we say, the operating cost is other than financial cost(interest, dividend…)?

  5. Disha modi

    Actually i want to know the main reason behind earning high operating ratio for a business…?

  6. alfred

    great I am pleased with this way of explanation through website

  7. regen-degen

    since operating ratio + operating profit ratio = 100%,
    does this imply that when the operating profit ratio is negative; operating ratio will be > 100%?

    1. Smoky RT

      You misunderstood. The operating ratio would be 80% but the profit ratio is NOT 20% !! Remember that the 20% had to cover TAXES and INTEREST. Both of those usually eat up MOST of the 20% (Corporate tax rate is 50%!!). Usually companies make about 3 to 4% after taxes and interest, not the 20% that you have deduced from this Operating Ratio analysis.

  8. Lindo

    what is the rule of thumb for this ratio

  9. dawit

    it is interesting explanation and more useful for everyone

  10. bunilal

    Where can i include depreciation ? in operating exp or non operating exp ?

    1. Accounting For Management

      Depreciation is an operating expense because it is incurred as a part of normal business operation.

  11. Manpreet sodhi

    Very helpful examles thanks alot

  12. Shiv

    What is administrative expenses ratio formula but the value of admini. Exp are not given

  13. Soumya dubey

    Dep. Is an operating exp as it had contributed in the production ..but dep. Is an. Non cash exp

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