If the operating ratio of a company is 75 percent operating profit ratio will be ........
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Answer:
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Explanation:
The operating ratio shows the efficiency of a company's management by comparing the total operating expense (OPEX) of a company to net sales. The operating ratio shows how efficient a company's management is at keeping costs low while generating revenue or sales. The smaller the ratio, the more efficient the company is at generating revenue vs. total expenses.
KEY TAKEAWAYS
The operating ratio shows the efficiency of a company's management by comparing the total operating expense of a company to net sales.
An operating ratio that is decreasing is viewed as a positive sign, as it indicates that operating expenses are becoming an increasingly smaller percentage of net sales.
A limitation of the operating ratio is that it doesn't include debt.
Operating Ratio
How the Operating Ratio Works
The calculation for the operating ratio is:
Operating\, Ratio = \frac{Operating\, Expenses\, +\, Cost\, of\, Goods\, Sold}{Net\, Sales}OperatingRatio=
NetSales
OperatingExpenses+CostofGoodsSold
From a company's income statement take the total cost of goods sold, which can also be called cost of sales.
Find total operating expenses, which should be farther down the income statement.
Add total operating expenses and cost of goods sold or COGS and plug the result into the numerator of the formula.
Divide the sum of operating expenses and COGS by the total net sales.
Please note that some companies include the cost of goods sold as part of operating expenses while other companies list the two costs separately.
What Does the Operating Ratio Tell You?
Investment analysts have many ways of analyzing company performance. Because it concentrates on core business activities, one of the most popular ways to analyze performance is by evaluating the operating ratio. Along with return on assets and return on equity, it is often used to measure a company's operational efficiency. It is useful to track the operating ratio over a period of time to identify trends in operational efficiency or inefficiency.
An operating ratio that is going up is viewed as a negative sign, as this indicates that operating expenses are increasing relative to sales or revenue. Conversely, if the operating ratio is falling, expenses are decreasing, or revenue is increasing, or some combination of both. A company may need to implement cost controls for margin improvement if its operating ratio increases over time.
Components of the Operating Ratio
Operating expenses are essentially all expenses except taxes and interest payments. Also, companies will typically not include non-operating expenses in the operating ratio.
Operating expenses are the costs associated with running the business that is not directly tied to the production of the product or service. Operating expenses include overhead expenses such as sales, general, and administrative costs. An example of overhead might be the expense of the corporate office for a company because although necessary, it's not directly tied to production. Operating expenses can include:
Accounting and legal fees
Bank charges
Sales and marketing costs
Non-capitalized research and development expenses
Office supply costs
Rent and utility expenses
Repair and maintenance costs
Salary and wage expenses
Operating expenses can also include the cost of goods sold, which are the expenses directly tied to the production of goods and services. However, most companies separate operating expenses from the cost of goods sold. Therefore, the two costs must be added together to form the numerator in the operating ratio calculation. Cost of goods sold can include the following:
Direct material costs
Direct labor
Rent of the plant or production facility
Benefits and wages for the production workers
Repair costs of equipment
Revenue or net sales is the top line of the income statement and is the amount of money a company generates before expenses are taken out. Some companies list revenue as net sales because they have returns of merchandise from customers whereby they credit the client back, which is deducted from revenue.
All of these line items are listed on the income statement. Companies must clearly state which expenses are operational and which are designated for other uses.