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The operating ratio can be used to determine the efficiency of a company's management by comparing operating expenses to net sales. It is calculated by dividing the operating expenses by the net sales. The smaller the ratio, the greater the organization's ability to generate profit. The ratio does not factor in expansion or debt repayment. [2]
Vagueness stems from the term "best" which is subjective. While some research and evidence must go into determining a practice the "best" it is more helpful to simply determine if a practice has worked exceptionally well and why. Instead of it being "the best", a practice might simply be a smart practice, a good practice, or a promising practice.
A good operating margin is needed for a company to be able to pay for its fixed costs, such as interest on debt. A higher operating margin means that the company has less financial risk. Operating margin can be considered total revenue from product sales less all costs before adjustment for taxes, dividends to shareholders, and interest on debt.
The answer to whether an expense ratio is a good one largely depends on what else is available across the industry. So let’s take a quick look at what’s been happening.
Return on capital (ROC), or return on invested capital (ROIC), is a ratio used in finance, valuation and accounting, as a measure of the profitability and value-creating potential of companies relative to the amount of capital invested by shareholders and other debtholders. [1] It indicates how effective a company is at turning capital into ...
Improving operational efficiency begins with measuring it. Since operational efficiency is about the output to input ratio, it must be measured on both the input and output side. Quite often, company management is measuring primarily on the input side, e.g., the unit production cost or the man hours required to produce one unit.
Return on capital employed is an accounting ratio used in finance, valuation, and accounting. It is a useful measure for comparing the relative profitability of companies after taking into account the amount of capital used.
It identifies the percentage of manufacturing time that is truly productive. An OEE of 100% means that only good parts are produced (100% quality), at the maximum speed (100% performance), and without interruption (100% availability). Measuring OEE is a manufacturing best practice.