# Profitability Ratios Related to Sales
These ratios express various measures of profit or expense as a percentage of Sales. They tell us how much profit (or cost) is generated per rupee of sales.
## Operating Profit Ratio
Operating profit is the profit a business earns from its core operations, before accounting for interest and taxes. For this reason it is commonly called EBIT (Earnings Before Interest and Taxes).
$$\text{Operating Profit Ratio} = \frac{\text{Operating Profit (EBIT)}}{\text{Sales}} \times 100$$
Where:
$$\text{Operating Profit} = \text{Sales} - \text{COGS} - \text{Operating Expenses}$$
## Expense Ratios
Because "expenses" can be defined in several ways, the expense ratio has several variants — each measures a category of cost against sales:
| Ratio | Formula |
|---|---|
| COGS Ratio | (COGS ÷ Sales) × 100 |
| Operating Expenses Ratio | (Admin OHs + Selling OHs ÷ Sales) × 100 |
| Operating Ratio | (COGS + Operating Expenses ÷ Sales) × 100 |
| Financial Expenses Ratio | (Financial Expenses ÷ Sales) × 100 |
Note on Financial Expenses: these exclude taxes, loss due to theft, goods destroyed by fire, etc.
Administration Expenses Ratio and Selling & Distribution Expenses Ratio are computed in the same manner (each expense category ÷ Sales × 100).
## Key Idea
- A lower expense ratio is generally better (costs are well controlled).
- A higher operating profit ratio is better (core operations are efficient).
- The Operating Ratio and Operating Profit Ratio are complementary: a higher operating ratio means a lower operating margin.