Operating Ratio

What Does Operating Ratio Mean?

The operating ratio is a financial metric that compares a company’s operating expenses to its net sales. It serves as an indicator of how effectively a company is managed and how efficiently it generates profits, even during periods of declining revenues.

Insuranceopedia Explains Operating Ratio

When a company’s operating ratio is low, it indicates that it has effectively managed its operational budget while remaining profitable. Conversely, a high operating ratio suggests poor budgeting and mismanagement of financial resources. Because operating ratio shows how well an insurer runs its day-to-day business rather than overall profit, it’s one of the numbers to look at when comparing the best car insurance companies or the best homeowners insurance companies.

Taxes and interest payments are excluded from the calculation of the operating ratio, as they are not considered part of operating expenses. As a result, a company can have an impressive operating ratio even if it is heavily indebted and not financially healthy.