As the name suggests, operating efficiency measures the efficiency of a company. It measures the associated costs versus production and profits. Basically every company wants to produce a high quality product with as few resources as possible. Operating efficiency is best described as producing the same amount with less resources. This can be measured in a few ways:
Operating margin is used to calculate how much profit a company makes after variable costs of production but before paying interest and taxes. Some variable costs examples are wages, raw materials, packaging, and transaction fees. The amount of variable costs is different for each company and industry. In general, a higher operating margin is better as this implicates that a company is running efficiently. To calculate the operating margin:
For investors, a higher operating margin is a good sign. Although you should always look at operating margin in the long term. If operating margin is fluctuating over the years this might be a sign that things are not running efficiently enough. It’s a way to check how much profit a company is making from its core business.
Operation earnings can be calculated in multiple ways:
Don’t worry about all the terms, I already calculated the operation margin for every company. Just use the search bar at the top of this page and fill in the ticker symbol of the stock you want to check. A healthy operating margin is above 15%. Always compare operating margin between the same companies and industries.
The operating ratio also measures the efficiency of a company at keeping low costs while generating profits from sales. It compares the total operating expenses to the net amount of sales. The total operating expenses exists of:
Operating expenses are all the costs the company makes that are not directly tied to the production of the service or product. Where COGS are costs that are directly tied to the product.
To calculate the operating ratio:
Do note that COGS is not always available in the income statement. Some companies include COGS in the operating expenses while others list COGS separately. To make it even more confusing, COGS is also known as costs of sales and costs of sales is the same as costs of revenue.
The operating ratio tells you how efficient the company is creating its products or services while keeping prices low. In this case, a lower ratio is better. Higher or rising operating ratios might tell you that costs are rising while sales are not improving or staying the same.
|Operation efficiency type||How to calculate||How to interpret|
|Operating margin||Operating earnings / revenue||Above 15% is considered healthy|
|Operating ratio||Operating expenses + COGS \ Net sales||Lower is better|
Join the conversation.