Operating Expense Ratio Formula

Operating expenses are required for operating a business. When we compare the cost of operation with the revenue generated, we get the operating expense ratio (OER).

OER is popular in the real estate industry, and it is a common ratio used while doing real estate analysis. In real estate analysis, the analysts judge the cost of operating a property with the income generated by the property.

Here’s the formula for operating expense ratio –

Operating Expense Ratio = Operating Expenses / Revenues

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Explanation of Operating Expense Ratio Formula

This ratio is more useful in the real estate industry; let’s look at OER from that perspective.

In this ratio, there are two components.

  • The first component is the most important one. It is operating expenses. In the case of the real estate industry, operating expenses include utilities, property management fees, maintenance, property taxes, insurance, repairs, etc.The second component is the revenue. Revenues are the income generated from a specific property.

For example, a company has bought a property to rent out to other smaller companies. To find out how the property is doing, the company would look at OER.

  • If the operating ratioOperating RatioOperating Ratio refers to a metric determining how efficient a company’s management is at keeping operating costs low while generating revenues or sales, by comparing the total operating expenses of a company to that of its net sales. Operating Ratio Formula = Operating Expenses / Net Sales* 100
  • read more is higher, the company would consider keeping the property.On the other hand, if the operating ratio is lower, the company would consider the property a great investment.

Example of Operating Expense Ratio Formula

Let’s take a simple example to illustrate the operating expense ratio formula.

  • Operating expenses – $40,000Revenues – $400,000

Find out the OER of Onus Inc.

Using the operating expense ratio formula, we get –

  • OER = Operating Expenses / RevenuesOr, = $40,000 / $400,000 = 10%.

If we compare the ratio with the other companies in the same industry, we will be able to interpret the OER properly.

Use of Operating Expense Ratio Formula

The operating expense ratio formula is used heavily in the real estate industry. But that is not the only industry where it gets used. It is also used in the manufacturing industry and service industries.

  • Using OER  is to see how much income a company has been generating concerning its incurring operating expense.Every company wants the OER to be lower. The lower the OER, the better the company is performing.If you are looking at a company as an investor, you need to see the OER of the company for a long period.If you look at the OER of a company for a long time, you will be able to discover a trend of how the ratio between operating expenses and revenues is getting shaped.Then you can take that trend and compare it with the OER of other similar companies under the same industry.If the OER of the target company is lower than other companies in the same industry, the target company can be the right company to invest in. However, it would be best if you also looked at other companies’ financial ratiosCompanies’ Financial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more before you decide..OER measures the flexibility and competency of the managers of a company. Understanding this will help you a lot as an investor.

Operating Expense Ratio Formula Calculator

You can use the following Operating Expense Ratio Calculator.

Operating Expense Ratio Formula in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. You need to provide the two inputs of Operating Expenses and Revenues.

You can easily calculate the ratio in the template provided.

Video on Operating Expense Ratio Formula

This article has been a guide to the Operating Expense Ratio formula, its uses, and practical examples. We also provide you with an Operating Expense Ratio Calculator with a downloadable excel template.

  • Examples of Operating ExpenseExamples Of Operating ExpenseLegal fees, rent, depreciation, office equipment, and supplies are examples of operating expenses, as are accounting expenses, insurance, repairs and maintenance expenses, and utility expenses such as electricity and water.read moreExpense Journal EntriesExpense Journal EntriesExpense Journal entries are crucial accounting entries that record the entity’s expenditures. The foundation of accounting is journal entries. All journal entries contribute to the creation of financial statements and aid in financial analysis and decision-making.read moreRisk-Reward Ratio DefinitionRisk-Reward Ratio DefinitionThe risk-reward ratio is the measure used by the investors during the trading for knowing their potential loss to the potential profit. Hence it is used by the traders for effectively managing their risk and capital during the trading process.read moreOperating Ratio FormulaOperating Ratio FormulaThe operating ratio formula is the ratio of a company’s operating expenses to net sales, where operating expenses include administrative costs, selling and distribution costs, cost of goods sold, salary, rent, other labour costs, depreciation, and so on. Operating ratio = Operating expenses/Net sales* 100.read more