Operating Ratio Formula

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Operating Ratio Formula?

The operating ratio formula is the ratio of the company’s operating expenses to net sales. Operating expenses include administrative expenses, selling and distribution expenses, cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more, salary, rent, other labor costs, depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, etc. It is also called the operating cost ratio or operating expense ratio. The ratio is generally expressed in percentage terms. The lesser the operating ratio, the better it is for the company. A lower ratio indicates it is carrying out its operations efficiently.

The cost of goods sold is added to operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more to determine the operating ratio.

Operating Ratio Formula = Operating Expenses / Net Sales* 100

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Operating Ratio Formula (wallstreetmojo.com)


Certain items such as goods returned are deducted from the gross sales to find net sales.

The following steps are to be undertaken to calculate the operating ratio in case the operating expenses include the cost of goods sold.

  1. Aggregate all the operating expenses.

  2. Find out the net sales. Certain items such as goods returned are deducted from the gross sales to find net sales.

  3. Use the following to find the operating ratio:

    Operating Ratio Formula = Operating Expenses / Net Sales * 100

  4. The cost of goods sold is given separately from operating expenses in certain cases. In such cases, the cost of goods sold is added to operating expenses.

Financial Modeling & Valuation Course (25+ Hours of Video Tutorials)

If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Video Explaining of Operating Efficiency Ratios


Calculation of Operating Ratio

The following examples will give us more clarity on the subject matter.

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

Example #1

The net sales for Blue Trust Inc. are $5,000. The operating expenses are $3,000. The cost of goods sold, which are not included in the operating expenses, is $1,000. Calculate the operating ratio for the company.


Use the below-given data for the calculation of the operating ratio.

  • Operating Expenses: 3000
  • Cost of Good Sold: 1000
  • Net Sales: 5000

Therefore, the calculation of the operating ratio is as follows,

Example 1.1png


Operating Ratio Formula Example 1.2png
  • The operating ratio for Blue Trust Inc. is 80%.

Example #2

The Cost Accountant of Radley Inc. was going through its records. He found out that the following expenses were incurred in January:

  • Sales & Marketing Expenses: $400
  • Salary: $1,000
  • Repair & Maintenance Costs: $500
  • Direct Material: $600
  • Direct Labor: $1,200
  • Office Supply Costs: $300
  • Rent of Factory: $500

The sales were $11,000, and the sales returns were $1,000. Calculate the operating ratio.


First, we need to calculate Net sales

Net sales

Operating Ratio Formula Example 2.1
  • = $11,000 – $1,000
  • Net Sales = $10,000

Operating Expenses

Operating Ratio Formula Example 2.2


  • Operating Expenses = 4500

Therefore, the calculation of the operating ratio is as follows,

Operating Ratio Formula Example 2.3


Operating Ratio Formula Example 2.4


Interest expensesInterest ExpensesInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more are not added as they are not operating expenses.

Example #3

An Economist compares the operating ratios of different firms in the same industry. He gets the following data: Calculate the operating expenses for each of these firms. Which firm has the highest degree of operating efficiency?

Firm Net SalesOperating Ratio


Therefore, Operating Expenses can be calculated using the below formula,

Operating Expenses = Operating Ratio * Net Sales

Example 3.1


  • Operating Expenses = 30000

Similarly, we can calculate operating expenses for firms B, C, D, E, F, and G.

Example 3.2
The firm with the lowest operating ratio has the highest operating efficiency. Firm G has the lowest operating ratio of these firms. Hence, firm G has the highest degree of operating efficiency.


You can use this calculator

Operating Expenses
Net Sales
Operating Ratio Formula

Operating Ratio Formula=
Operating Expenses
Net Sales
X100= 0

Relevance and Uses

Recommended Articles

This article has been a guide to Operating Ratio Formula. Here we discuss the formula to calculate the operating ratio and examples and a downloadable excel template. You can learn more about financial analysis from the following articles –