Operating ratio is one of profitability indicators. Its formula can be easily derived from the profit margin formula (Return on sales). It expresses how much cost is incurred for each unit of sales.
- it is particularly suitable for comparison within the company - especially as an indicator of operating costs (OPEX) increases over time, because increase of the ration can indicate rising costs, and vice versa
- comparisons between companies makes sense only if they are very similar businesses in the same industry where we can expect similar cost level and gross margin %
- appropriate comparison is with the industry average