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.
$$Operating\quad Profit\quad Ratio=$$$$\frac { Operating\quad Profit }{ Net\quad Sales }$$ Where,
$$Operating\quad Profit\quad Ratio=$$$$\frac { Operating\quad Profit }{ Net\quad Sales }$$ 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 per cent terms)
- 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
Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses
⇨ Rs. 145000
Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales
Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales
⇨ Rs. 275000
Operating Profit = Net Sales Revenue – (Cost of Goods Sold + Operating Expenses)
Operating Profit = Net Sales Revenue – (Cost of Goods Sold + Operating Expenses)
⇨ Rs.40000
Operating Profit Ratio = Operating Profit / Net Sales revenue
Operating Profit Ratio = Operating Profit / Net Sales revenue
⇨ 40000 / 275000
⇨ 8 / 55
Hence, Operating Profit Ratio = 8/55 or 0.1454 or 14.54%
Operating Profit Ratio = 1 – 0.6585 or 100 – 65.85
Hence, Operating Profit Ratio = 0.3415 or 34.15%
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 TermsOperating Profit Ratio = 1 – 0.6585 or 100 – 65.85
Hence, Operating Profit Ratio = 0.3415 or 34.15%
