Operating Profit Ratio is

$$Operating\quad Profit\quad Ratio=$$$$\frac { Operating\quad Profit }{ Net\quad Sales }$$

**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 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.__

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**Operating Profit Ratio Can also be calculated as:**

**Operating Profit Ratio = 1 – Operating Ratio or (100 – Operating Ratio in per cent 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

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**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 |

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**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%**

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**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.**

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**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%**