Working Ratio

What is Working Ratio?

The working ratio represents the financial sustainability of the company by measuring the capacity of a company to recover operating expenses using its annual gross revenue. The operating expenses does include expenses such as depreciation and also excludes any finance expenses such as interest on debts.

The lower the ratio, the higher the level of financial sustainability since it would mean that fewer revenues are being used to meet the expenses. However, the ideal working ratio is one. A company that is not able to cover the operating expenses that it incurs on the business activities can’t survive for long.

Formula

Working Ratio Formula

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For eg:
Source: Working Ratio (wallstreetmojo.com)

Working Ratio

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

To calculate the working ratio, annual operating expenses are divided by annual gross revenue. However, depreciation is to be excluded from the annual operating expenses.

Examples of Working Ratio

Let us understand its calculation with the help of the following example:

Working Ratio (Given Data)

Now, let us calculate the working ratio using the above data.

Answer

Here the working ratio is 0.40, which is favorable for the company since it can recover its annual operating expenses from the annual gross revenue. The company is financially sustainable as less portion of revenues is going towards the recovery of expenses.

Importance

The working ratio is important for assessing the financial sustainability of the company. It reflects what extent the company’s revenue can cover its operating expenses. A ratio below one indicates that the company can recover its operating expenses through its gross revenue. On the contrary, a ratio above one indicates that the company cannot meet its operating expenses through its gross revenues. A ratio equivalent to one shows an equilibrium position.

Companies need to have a ratio either equal to or less than one. This would mean that they can recover their annual operating expenses from the income generated through gross revenues.

Advantages

It is an important financial ratioFinancial RatioFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more and is helpful for analysis due to the following reasons:

Disadvantages

There are many limitations. Some of them are listed below for your reference:

Conclusion

The working ratio helps to determine the ability of the company to meet its annual operating expenses from its annual gross revenue. It determines the financial sustainability of the company. However, this ratio alone doesn’t give us fruitful results. Other financial ratios shall also be considered for reaching a meaningful conclusion; otherwise, the conclusion arrived might not be an accurate one.

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