Operating Profit Ratio

Operating Profit Ratio

Operating Profit Ratio is referred to as the ratio that is used to define a relationship between the operating profit and the net sales. Operating profit is also known as Earnings before interest and taxes (EBIT) and net sales can also be defined as the revenue that is earned from the operations.

Operating profit ratio is one type of profitability ratio and is therefore expressed in the form of a percentage.

Net sales consist of cash and credit sales. Therefore, the operating profit ratio helps in comparing the operating profit earned by a business in relation to the revenue that will be generated by the business.

Calculating Operating Profit Ratio

Operating profit ratio is calculated by dividing the operating profit with the net sales. The formula for calculating operating profit can be represented as follows:

Operating profit Ratio = Operating Profit / Net Sales × 100

Where, Operating profit = Net profit + Non-operating expenses – Non-operating incomes

And, Operating Profit Ratio = 100 – Operating Ratio or

Operating Profit = Gross Profit – Operating expenses or

Operating profit = Net sales – (Cost of goods sold + Administrative and office expenses + Selling and distribution exp.)

Since, the operating profit ratio is expressed as a percentage, therefore we need to multiply by 100, the value obtained by the division of operating profit with the net sales.

Let us understand the real world calculations of the operating profit ratio by using a solved example.

Solved Example

Q. Calculate the operating profit ratio from the following data available for Green Joy Enterprise.

Net Sales – ₹1,00,000, Gross Profit – ₹1,50,000, Administration expenses – ₹50,000, Selling Expenses – ₹30,000.

Answer:

Now we know that,

Operating profit = Gross Profit – Operating expenses

Here Operating expenses are Administration and Selling Expenses which translates to

Operating expenses = 50,000 + 30,000

= 80,000

Now, Operating Profit = 1,50,000 – 80,000

= 70,000

Therefore, Operating Profit Ratio = Operating Profit / Net Sales × 100

= 70,000 / 1,00,000 × 100

= 70%

This concludes our article on the topic of Operating Profit Ratio, which is an important topic in Class 12 Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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