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Operating costs ratio

Method of calculation

Formula for operating costs ratio: operating costs / net revenues from sales

Ratio's description

This ratio informs about the share of operating costs (expenses) in the value of revenues from sales, thus it indicates which part of revenues from sales is used for covering the operating expenses.

Ratio's interpretation

  • High ratio's values (above 0.9) suggest incorrect cost management policy in the company.
  • Ratio's values above 1.00 indicate incorrect situation, in which operating costs prevail over revenues from sales (base operating activity is unprofitable).
  • It also indirectly informs about the level of margin on sales. Higher ratio's values (close to 1.00) mean low margin on sales.
  • When assessing the changes in the ratio's value over time (over few periods):
    • the increase of ratio's value is assessed negatively and interpreted as a proof of taking unprofitable actions within the operating activities,
    • the decrease of ratio's value is assessed positively and interpreted as a proof of taking profitable actions, lowering the operating expenses.

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