Accountancy · Ch 10 — Accounting Ratios
Operating Profit Ratio
Operating Profit Ratio
The operating profit ratio measures the operating margin — the profit a business earns from its core operations, before considering finance costs and non-operating items. It tells you what percentage of revenue is left after covering all operating expenses.
There are two ways to find it. The first is a shortcut: if you have already computed the operating ratio, simply subtract it from 100.
Operating Profit Ratio = 100 – Operating Ratio
The second method is to calculate it directly.
Operating Profit Ratio = (Operating Profit / Revenue from Operations) × 100
Where:
Operating Profit = Revenue from Operations – Operating Cost
Operating Cost includes the cost of revenue from operations (i.e., cost of goods sold) plus all operating expenses such as selling expenses and administrative expenses. It does not include non-operating items like interest, loss on sale of assets, or dividend income.
Significance
The operating profit ratio is the direct counterpart of the operating ratio. While the operating ratio shows the proportion of revenue consumed by operating costs, this ratio shows the proportion left as profit from operations.
A lower operating ratio (and therefore a higher operating profit ratio) is a very healthy sign — it means the business is efficient at controlling its operating costs relative to its revenue.
This ratio is extremely useful for:
- Analysing the performance of the business.
- Judging the operational efficiency of the business. …