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Operating Ratio:

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The operating ratio is determined by comparing the cost of the goods sold and other operating expenses with net sales.


Following formula is used to calculate operating ratio:

[(Cost of goods sold + Operating expenses / Net sates)] 100

Here cost of goods sold = Operating stock + Net purchases + Manufacturing expenses - Closing stock


= Net sales - Gross profit

Operating expenses = Office and administrative expenses + Selling and distribution expenses


This ratio is a test of the efficiency of the management in their business operation. It is a means of operating efficiency. In normal conditions, the operating ratio should be low enough so as to leave portion of the sales sufficient to give a fair return to the investors.

Operating ratio plus operating profit ratio is 100. The two ratios are obviously interrelated. For example, if the operating profit ratio is 20%, it means that the operating ratio is 80%. A rise in the operating ratio indicates a decline in the efficiency.

Lower the operating ratio, the better is the position because greater is the profitability and management efficiency of the concern. The higher the ratio, the less favorable is the situation, because there will be smaller margin of profit available for the purpose of payment of dividend and creation of reserves.


From the following details, calculate the operating ratio:

Cost of goods sold 6,00,000
Operating Expenses 40,000
Sales 8,20,000
Sales returns 20,000


Operating ratio = [(Cost of goods sold + Operating expenses) / Net Sales] 100

= [(6,00,000 + 40,000) / 800,000*] 100

= 640,000 / 800,000

= 80 %

*(8,20,000 - 20,000)

More study material from this to

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis



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