Operating Expense Ratio (OER) is a financial metric used to evaluate the operational efficiency of a business. It measures the proportion of operating expenses incurred by a company in relation to its revenue.
The OER is calculated by dividing the business’s operating expenses by the total revenue of the company. The OER gives a measurement of how much of a company's revenue is being used to cover its operating costs.
The operating expenses are calculated by adding all the expenses of running the business. This might include wages, utilities, advertising, insurance, and office supplies.
Take, for example, a company that generates $1,000,000 in revenue and has operating expenses of $400,000. To calculate the OER, you would divide the operating expenses by the revenue and multiply by 100, resulting in the OER percentage.
OER = (Operating Expenses / Revenue) x 100
OER = ($400,000 / $1,000,000) x 100
OER = 40%
In this example, for every dollar of revenue generated by the company, 40 cents are being used to cover operating expenses. The remaining 60 cents represents the company's gross profit margin.
Sometimes a company will compare its OER to other businesses in the industry to evaluate how efficiently it is performing against its peers. If the OER is higher than the industry average, it can show that the company is incurring higher than average operating expenses, which could impact profitability. A lower OER may show that the company is operating more efficiently, resulting in higher profitability.
Investors and analysts also use the OER measurement when looking at a company’s financial health. If a business is spending a high portion of revenue on operating expenses, it could be a sign of inefficiencies. Potential investors could see a low OER as a sign that the company has efficient cost controls in place.
The OER can vary widely between industries and businesses. For example, a restaurant may have a higher OER than a software company, as the former requires significant food and labor costs. A company's size and growth stage can also affect the OER. Smaller businesses may have higher OERs because of their limited economies of scale.
The Operating Expense Ratio is a useful metric for evaluating a company's financial efficiency and cost management. Investors and analysts should consider the OER with other financial metrics to gain a comprehensive understanding of a company's financial health.