Operating Profit Ratio

Operating Profit Ratio is a type of Profitability Ratio that determines the mathematical relation between Operating Profit and Revenue from Operations. It indicates the Operating Profit in Net Sales.
Operating Profit Ratio = Operating Profit / Net Sales
Where,
  • Operating Profit = Net Sales – (Operating Expenses + Cost of Goods Sold)
  • And Net Sales is the Total Revenue from Sales.
  • Gross Profit Ratio multiplied by 100 provides the Gross Profit Margin in percentage terms.

Operating Profit Ratio Can also be calculated as:

  • Operating Profit Ratio = 1 – Operating Ratio or (100 – Operating Ratio in percent terms)
Where,
  • Operating Ratio = (Operating Expenses + Cost of Operating Goods Sold) / Net Sales

Significance and Interpretation

  • Operating Profit Margin of a company is a narrow measure of profit as compared to its Gross profit Margin; it considers all the necessary expenses incurred by the company in the day to day activity. Higher Operating Profit Margin indicates the healthy profit status of a company.
  • The Operating Profit Ratio of a company is always low as compared to the Gross profit Margin, however, an increase in Gross Profit Margin may or may not have a similar impact on Operating profit Margin.
    • If the increase in Operating Profit Margin > Increase in Gross Profit Margin: This implies that the company is having a significant control on its Operating Expenses with respect to Cost of Goods Sold 
    • If the increase in Operating Profit Margin < Increase in Gross Profit Margin: This implies that the company has a significant operating Expense over the Cost of Goods Sold.
Gross Profit Ratio > Operating Profit Ratio

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the Operating Profit Ratio for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Revenue from Sales (Cash) 250000.00
Revenue from Sales (Credit) 25000.00
Cost of Labour 45000.00
Material Cost 45000.00
Salary Expense 90000.00
Rent of Premises 40000.00
Insurance Expenses 15000.00
  • Solution:
  • Cost of Goods Sold = Cost of Labour + Material Cost = Rs. 90000
  • Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses = Rs. 145000
  • Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales = Rs. 275000
  • Operating Profit = Net Sales Revenue – (Cost of Goods Sold + Operating Expenses)= Rs.40000
  • Operating Profit Ratio = Operating Profit / Net Sales revenue = 40000 / 275000 = 8 / 55
  • Hence, Operating Profit Ratio = 8/55 or 0.1454 or 14.54%

Example 2: M/S ABC ltd. has an Operating Ratio of 0.6585 or 65.85%, find the operating Profit Ratio of M/S ABC Ltd.
  • Solution:
  • Operating Profit Ratio = 1 – Operating Ratio or 100 – Operating Ratio in Percentage Terms
  • Operating Profit Ratio = 1 – 0.6585 or 100 – 65.85
  • Hence, Operating Profit Ratio = 0.3415 or 34.15%
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