Operating ratio studies the relationship between the cost of activities and net sales I.e. cost of goods sold and net sales. This ratio shows the percentage of the cost of goods sold with net sales. This ratio is expressed in percentage. Purpose of operating ratio is to ascertain the efficiency of the management regarding the operation of the business concern. It is used to test the operational efficiency of the business. This ratio is the yardstick which measures the efficiency of all operational activities of business I.e. production, management, administration, sales, etc.
Formula:
Limitation of operating ratio:
1) It cannot test the profitability of business without considering extraordinary items.
2) The utility of operating ratio is limited owing to its vulnerability to changes in management decisions.
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