Operating Ratio

What Does Operating Ratio Mean?

An operating ratio is a comparison between the operating expenses of a company and its net sales. It indicates whether a company is effectively managed and how efficiently it generates profits, even in periods when revenues have dropped.

Insuranceopedia Explains Operating Ratio

When a company's operation ratio is low, it means that it has managed to come up with a good operational budget while also remaining profitable. If, on the other hand, the ratio is high, it means that it has not done its budgeting well and has managed its financial resources poorly.

Taxes and interest payments are excluded from calculations of operation ratio because neither of these are part of operating expenses. Given these exclusions, a company could have an impressive operation ratio even if it is hugely indebted and cannot be considered financially healthy.