Operating Ratio is a key financial metric used to assess a companyís operational efficiency. It measures how effectively a business manages its operating costs relative to its revenue. In simple terms, the ratio shows how much of every rupee earned is spent on running day-to-day operations. A lower operating ratio indicates better efficiency, as it means the company is spending less to generate each unit of revenue.

The Operating Ratio formula is: Operating Ratio = (Operating Expenses / Net Sales) ? 100 Here, operating expenses include cost of goods sold (COGS), administrative expenses, and selling expenses, but exclude interest and taxes. Net sales represent the total revenue earned after deducting returns and discounts.

For example, if a company has net sales of ?100 crore and operating expenses of ?70 crore, its operating ratio would be 70%. This means 70% of its revenue is used to cover operating costs, leaving 30% as operating profit. Typically, companies aim for a ratio between 60% and 80%, depending on the industry. A high ratio suggests rising costs or inefficient management, while a low ratio reflects strong cost control and profitability.

Investors and analysts use the Operating Ratio to compare firms within the same sector and track performance trends over time. It helps in identifying whether a business is improving operationally or facing margin pressures. However, it should not be viewed in isolation. Factors such as debt levels, non-operating income, and industry benchmarks also influence financial health. Overall, maintaining an optimal operating ratio is vital for long-term sustainability and competitiveness.