Operating Ratio (OPEX)

What it is

The operating ratio measures how efficiently a company turns net sales into operating costs. It compares the sum of operating expenses and cost of goods sold (COGS) to net sales. A lower operating ratio indicates greater operational efficiency — a smaller share of revenue is consumed by operating costs.

Formula

Operating Ratio = (Operating Expenses + Cost of Goods Sold) / Net Sales

Expressed as a percentage, the ratio shows what portion of net sales is required to cover operating activities and production costs.

How to calculate (step-by-step)

1. From the income statement, find:
2. Net sales (revenue minus returns, allowances, discounts)
3. Cost of goods sold (COGS)
4. Operating expenses (selling, general & administrative, R&D, etc.)
5. Add COGS and operating expenses.
6. Divide that sum by net sales.
7. Multiply by 100 to convert to a percentage (optional).

Note: Some companies report COGS within operating expenses; if so, ensure you don’t double-count.

Components

• Net Sales: Revenue after returns, allowances, and discounts.
• Cost of Goods Sold (COGS): Direct production costs such as raw materials, direct labor, production facility rent, and production-related repairs.
• Operating Expenses: Costs of running the business not directly tied to production, including:
• Salaries and wages (non-production)
• Sales and marketing
• General & administrative expenses
• Rent, utilities, office supplies
• Accounting, legal, and bank fees
• Non-capitalized R&D

Interpretation

• A decreasing operating ratio is positive: operating costs are shrinking relative to sales, or revenue is rising faster than costs.
• An increasing operating ratio is a warning sign: operating costs are growing faster than sales.
• Track the ratio over multiple periods to identify trends rather than relying on a single snapshot.

Limitations and cautions

• The operating ratio excludes interest and taxes, so it does not reflect leverage or debt burden. Two firms with identical operating ratios may have very different financial risks if their debt levels differ.
• Accounting differences across companies and industries can affect comparability (e.g., what is included in operating expenses).
• Short-term cost cuts can temporarily improve the ratio; analyze sustainability and context.
• Always compare within the same industry and use alongside other metrics (ROA, ROE, debt ratios, profit margins).

Operating Ratio vs. Operating Expense Ratio

• Operating Ratio: Broad metric comparing total operating costs (COGS + operating expenses) to net sales — used across industries to assess operational efficiency.
• Operating Expense Ratio (OER): Primarily a real estate metric comparing a property’s operating expenses (minus depreciation) to its gross operating income — used to compare property operating costs.

Example

Using a simplified example:
– Net sales: $90.75 billion
– COGS: $48.48 billion
– Operating expenses: $14.37 billion

Operating Ratio = ($48.48B + $14.37B) / $90.75B = 0.69 → 69%

This means 69% of net sales were consumed by production and operating costs for that period. Trend analysis and comparison to peers are required to assess whether this is favorable.

Practical use

• Investors and managers use the operating ratio to monitor efficiency, identify cost-management issues, and benchmark against peers.
• Combine the operating ratio with profitability and leverage metrics to form a complete view of financial health.

Bottom line

The operating ratio is a straightforward measure of how much of a company’s revenue is used to run the business and produce goods. It’s most useful when trended over time and compared to peers, and when used alongside other financial ratios to account for debt levels and profitability.