Operating expenses include office expenses, administrative expenses, selling expenses, distribution expenses, depreciation and employee benefit expenses etc.
The operating profit ratio, also known as the operating margin ratio, is a financial metric that measures the profitability of a company's core business operations.
It is calculated as follows: Operating Profit Ratio = (Operating Profit / Net Sales) * 100
Where: Operating Profit = Gross Profit - Operating Expenses
Operating expenses are the day-to-day expenses incurred by a company to run its core business operations. These expenses include items such as salaries, rent, utilities, advertising, and bad debts. Bad debts refer to the portion of accounts receivable that is expected to be uncollectable due to customers' non-payment. When calculating the operating profit, bad debts are treated as an operating expense because they represent a cost directly related to the company's revenue-generating activities. By including bad debts in the operating expenses, the operating profit ratio reflects the impact of potential credit losses on the company's profitability from its core business operations. This provides a more accurate measure of the company's ability to generate profits before considering non-operating items. |
