Operating Ratio
The operating ratio is a financial metric that measures a company's operational efficiency by dividing its operating expenses by net sales, typically expressed as a percentage. This ratio highlights how much of a company's revenue is consumed by day-to-day costs, with lower values signaling better cost control and potential profitability; in today's volatile markets, it's a go-to tool for investors analyzing sectors like retail or manufacturing where slim margins make every penny count.
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In 2020, during the height of the COVID-19 pandemic, many airlines like Southwest achieved operating ratios under 85%, demonstrating remarkable resilience by cutting costs without grounding all flights—a feat that saved billions and highlighted how this metric can predict survival in crises. This ratio has been a game-changer in corporate turnarounds, such as when General Electric used it in the 1980s to slash inefficiencies and boost profits by over 300%.
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