The process involves determining the proportion of operating expenses relative to revenue. A simple formulation divides total operating expenses by net sales. For instance, if a business incurs $500,000 in operating costs and generates $1,000,000 in revenue, the result is 0.5, or 50%, when expressed as a percentage.
This metric provides a crucial benchmark for evaluating a company’s efficiency in managing costs associated with core business activities. A lower result typically indicates superior cost control and greater profitability. Historical trend analysis of this ratio can reveal potential improvements or declines in operational effectiveness, aiding in strategic decision-making and investor confidence.