Operating Expense Ratio Formula

Operating Expense Ratio is the ratio between the cost of operation to the net revenue and is typically used in evaluating real estate properties, where higher Operating Expense ratio means higher operating expense as compared to its property income and serves as a deterrent and lower operating expense ratio implies lower operating costs and therefore, preferable and investment-friendly.

Operating Expense Ratio Formula

Operating expenses are required for operating a business. When we compare the cost of operation with the revenue generated, we get operating expense ratio (OER).

OER is popular in the real estate industry, and it is a common ratio that is used while doing real estate analysis. In real estate analysis, the analysts judge the cost of operating a property with the income generated by the property.

Here’s the formula for operating expense ratio –

Operating Expense Ratio = Operating Expenses / Revenues

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Source: Operating Expense Ratio Formula (wallstreetmojo.com)

Explanation of Operating Expense Ratio Formula

This ratio is more useful in the real estate industry; let’s have a look at OER from that perspective.

In this ratio, there are two components.

  • The first component is the most important one. It is operating expenses. In the case of the real estate industry, operating expenses include utilities, property management fees, maintenance, property taxes, insurance, repairs, etc.
  • The second component is the revenue. Revenues are the income generated from a specific property.

For example, a company has bought a property to rent out to other smaller companies. To find out how the property is doing, the company would look at OER.

Example of Operating Expense Ratio Formula

Let’s take a simple example to illustrate the operating expense ratio formula.

You can download this Operating Expense Ratio Excel Template here – Operating Expense Ratio Excel Template

Onus Inc. has been comparing its operating expenses for a property it bought and trying to find out the OER. Here’re the details –

  • Operating expenses – $40,000
  • Revenues – $400,000

Find out the OER of Onus Inc.

Using the operating expense ratio formula, we get –

  • OER = Operating Expenses / Revenues
  • Or, = $40,000 / $400,000 = 10%.

If we compare the ratio with the other companies in the same industry, we will be able to interpret the OER properly.

Use of Operating Expense Ratio Formula

The operating expense ratio formula is used heavily in the real estate industry. But that is not the only industry where it gets used. It is also used in the manufacturing industry and service industry.

Operating Expense Ratio Formula Calculator

You can use the following Operating Expense Ratio Calculator.

Operating Expenses
Operating Expense Ratio Formula

Operating Expense Ratio Formula =
Operating Expenses
= 0

Operating Expense Ratio Formula in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. You need to provide the two inputs of Operating Expenses and Revenues.

You can easily calculate the ratio in the template provided.

Operating Expense Ratio Formula in Excel

Video on Operating Expense Ratio Formula

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This article has been a guide to the Operating Expense Ratio formula, its uses along with practical examples. Here we also provide you with an Operating Expense Ratio Calculator with a downloadable excel template.

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