Expense Ratio


Expense Ratio:

Definition:

Expense ratios indicate the relationship of various expenses to net sales.The operating ratio reveals the average total variations in expenses. But some of the expenses may be increasing while some may be falling. Hence, expense ratios are calculated by dividing each item of expenses or group of expense with the net sales to analyze the cause of variation of the operating ratio.

The ratio can be calculated for individual items of expense or a group of items of a particular type of expense like cost of sales ratio, administrative expense ratio, selling expense ratio, materials consumed ratio, etc. The lower the operating ratio, the larger is the profitability and higher the operating ratio, lower is the profitability.

While interpreting expense ratio, it must be remembered that for a fixed expense like rent, the ratio will fall if the sales increase and for a variable expense, the ratio in proportion to sales shall remain nearly the same.

Formula of Expense Ratio:

Following formula is used for the calculation of expense ratio:

Particular Expense = (Particular expense / Net sales) × 100

Expense ratio formula can be further categorized as on basis of use

1- Administrative expense ratio formula
2- Operating expense ratio formula
3- Variable expense ratio formula

 

Example:

Administrative expenses are $2,500, selling expenses are $3,200 and sales are $25,00,000.

Calculate expense ratio.

Calculation:

Administrative expenses ratio = (2,500 / 25,00,000) × 100

= 0.1%

Selling expense ratio = (3,200 / 25,00,000) × 100

= 0.128%

You may also be interested in other articles from “financial statement analysis” chapter:

  1. Horizontal and Vertical Analysis
  2. Ratios Analysis
  3. Horizontal Analysis or Trend Analysis
  4. Trend Percentage
  5. Vertical Analysis
  6. Accounting Ratios Definition, Advantages, Classification and Limitations:
  7. Gross profit ratio
  8. Net profit ratio
  9. Operating ratio
  10. Expense ratio
  11. Return on shareholders investment or net worth
  12. Return on equity capital
  13. Return on capital employed (ROCE) Ratio
  14. Dividend yield ratio
  15. Dividend payout ratio
  16. Earnings Per Share (EPS) Ratio
  17. Price earning ratio
  18. Current ratio
  19. Liquid/Acid test/Quick ratio
  20. Inventory/Stock turnover ratio
  21. Debtors/Receivables turnover ratio
  22. Average collection period
  23. Creditors/Payable turnover ratio
  24. Working capital turnover ratio
  25. Fixed assets turnover ratio
  26. Over and under trading
  27. Debt-to-equity ratio
  28. Proprietary or Equity ratio
  29. Ratio of fixed assets to shareholders funds
  30. Ratio of current assets to shareholders funds
  31. Interest coverage ratio
  32. Capital gearing ratio
  33. Over and under capitalization
  34. Financial-Accounting- Ratios Formulas
  35. Limitations of Financial Statement Analysis

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