What is Working Ratio?

A working ratio is a financial metric which measures the ability of a company to recover operating costs from its annual revenue. It is used by investors and analysts to assess the financial performance of a company, and is an important indicator of profitability and financial health.

The working ratio is calculated by dividing total annual expenses (excluding depreciation and debt-related expenses) by the total annual gross income. A lower working ratio is typically considered to be more favourable as it indicates a higher level of profitability; a working ratio below one implying that the company has managed to recover its operating expenses, while a higher ratio indicates an inability to recover the costs.

In addition to its profit analysis functions, the working ratio can also be used to compare companies in the same industry. By comparing the working ratios of different firms, investors or analysts can evaluate how efficiently each company manages its operating costs. It also helps identify areas where one company may be outperforming another.

For example, if two companies have similar annual revenues, yet one company has a much lower working ratio than the other, this could suggest that the former is more efficient in its cost management, suggesting higher levels of profitability. Alternatively, it could indicate that the higher working ratio company has not operated as cost-effectively as the other.

In summary, the working ratio is a key financial indicator which can to be used to assess the profitability of a company and to compare the operational efficiency of companies within the same industry. It is important for investors and analysts to understand the implications of the working ratio when making investment or financial decisions.