Understanding Operating Expenses (Opex) Ratio
Operating Expenses Ratio measures the efficiency and profitability of the company. This metric indicates how well the company controls its expenses relative to revenue. Operating expenses refer to the costs that need to run operational activities. It is calculated as the operating expenses divided by total revenue. Operating expense ratio is commonly used for the Real Estate Industry compared to any other industry.
The formula to derive Operating Ratio
Operating Expenses - It refers to the costs that need to run operational activities. Operating expenses are also known as operating expenditure or opex. And it is found in the company's Income Statement. Some operating expenses are rent, selling, general, and administrative expenses (SG&A), Property taxes, wages, salaries, etc.
Total Revenue - It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.
Example of Operating Expenses Ratio: For the financial year, Oberoi Realty reported the operating expenses as Rs. 203 Cr. and total revenue as Rs. 2052.58 Cr.
The value as per the formula (Operating Expenses / Total Revenue), is calculated as (203 / 2052.58) x 100 = 9.89%.
Key Highlights
The operating expense ratio indicates the efficiency and profitability of the company in managing its operating expenses relative to total revenue.
It is calculated as operating expenses divided by total revenue.
A low operating ratio is considered good compared to a higher ratio.
Opex ratio is widely used for the analysis of real estate companies, as this metric is useful to determine the result of the cost of the operating property from which income is generated.
While looking at the Operating Expense Ratio, the following points should also take into consideration:
A lower operating expense ratio is more convenient because it indicates that the expenses of a company are minimal compared to its revenue. Generally, an operating expense ratio below 60% is considered good as it shows that the company has well-organized management of operating expenses.
A high ratio above 80% indicates that the company is not managing its operating expenses or overspending on business activities.
Opex ratio is widely used for the analysis of real estate companies, as this metric is useful to determine the result of the cost of the operating property from which income is generated. It is also helpful to measure whether the company can generate enough income to cover its operating expenditures.
The operating expense ratio does not include the market value of the property owned by a company. It only indicates the company's efficiency in managing its operating expense relative to its net revenue.
There is some concern relative operating expense ratio that the depreciation can be accelerated or straight-lined, resulting in different outcomes depending on which accounting technique is employed.
How to use Operating Expense (Opex) Ratio effectively
Investors should look for the company having an operating expense ratio below 60%, as it shows efficient management of operating expenses.
Always compare companies that operate in the same industry. If the particular company's opex ratio is lower than its industry peers, then it means that it is more efficient than its peers in managing operating expenses.
Also, look at the company's past performance for better analysis. If the particular company's operating expenses are decreasing over a period is a good sign as it suggests that the company is decreasing its operating expenses or increasing its revenue. And opposite to this, if the company's operating expense ratio is increasing over a period, it can be due to overspending on its operating activities or the revenue is decreasing.
While analyzing the company investors should check other financial metrics relative to the operating expense ratio such as
Operating Cycle,
Operating Margin,
Price to Cash Flow from Operation, etc.,
