Financial Statement Analysis
- Profitability Ratios
- Profitability Ratios Formula
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- Profit Margin
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- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBITDA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
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- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Equity Ratio
- Return on Capital Employed (ROCE)
- ROCE Formula (Return on Capital Employed)
- Return on Invested Capital (ROIC)
- Return On Investment (ROI)
- Rate of Return on Investment
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Total Assets Formula
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Ratio Analysis (17+)
- Liquidity Ratios (29+)
- Turnover Ratios (17+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)
Overhead ratio is the ratio of operating expenses to the operating income; giving details about the percentage of fixed costs involved in generating a specific operating income for a company; a lower overhead ratio means that the higher proportion of expenses are related to direct product costs, implying that the company has minimized expenses that are not directly related to production.
Overhead Ratio Formula (Table of Contents)
Overhead Ratio Formula
The overhead formula is specifically useful for banks. Here we take the operating expenses into account and compare the expenses with the total income that can’t be attributed directly to the production of goods and services.
Here’s the overhead ratio formula –
Alternatively, many argue that overhead can be expressed as the proportion between operating expenses and the revenue; however, this proportion is called the operating expense ratio, not an overhead ratio.
Overhead Ratio Example
Let’s take a simple example to calculate overheads.
HoHey Restaurant has the following information –
- Operating Expenses – $23,000
- Operating Income – $115,000
- Taxable Net Interest Income – $46,000
Find out this ratio of HoHey Restaurant.
We know both the numerator and the denominator of this ratio.
4.9 (1,067 ratings)
- Operating expenses are $23,000.
The denominator would be the sum of operating income and taxable net interest income.
Using the overhead formula, we get –
- Overhead Formula = Operating Expenses / (Operating Income + Taxable Net Interest Income)
- = $23,000 / ($115,000 + $46,000)
- = $23,000 / $161,000 = 14.29%.
To interpret this ratio of HoHey Restaurant, we need to look at the ratios of other restaurants serving the similar food and providing the similar services.
Explanation of Overhead Formula
In this ratio, we have to consider two components.
The first component is the operating expenses. Operating expenses are the day to day expenses that the company needs to run the business. For example, utilities, machinery maintenance, office rent, professional fees, insurance etc. are operating expenses.
The second component of overhead Ratio is a tricky one.
- We will take the operating income and also the taxable net interest income.
- When we deduct the operating expenses from gross profit, we get the operating income.
- To get the net interest income, we need to look at the difference between how much a company receives interest and how much it pays off.
- Net interest income is a common measure for banks. But we can calculate the same for companies also.
- We will add the operating income and the taxable net interest income to get the denominator.
Use of Overhead Formula
Overhead Formula is a significant measure for any company; because if it is lower, better would be the performance of the company. On the other hand, if it is higher, the company isn’t utilizing its resource prudently.
Every company should try to lower the ratio as much as it can.
There are two portions of the operating expenses that a company can look at.
- The first component of the operating expenses is expenses that can’t be curbed at all. In this case, the company should try to reduce this component as much as they can.
- The second component of the operating expenses can be removed completely. The company should take steps to pare down this second component to reduce this ratio.
However, reducing the ratio shouldn’t affect the company’s performance. Too much reduction in operating expenses may affect the company negatively. The company should try to maintain a balance and reduce only that much which doesn’t reduce the efficiency of the company.
Overhead Ratio Calculator
You can use the following Overhead Ratio Calculator
|Overhead Ratio Formula =|| |
Overhead 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 three inputs of Operating Expenses, Operating Income, and Taxable Net Interest Income.
You can easily calculate the ratio in the template provided.
Overhead Ratio Formula Video
This has been a guide to Overhead Ratio formula, its uses along with practical examples. Here we also provide you with Overhead Ratio Calculator with downloadable excel template. Learn more from the below articles –