Accounting ratios-How do you calculate operating ratios?

Question

Ive been asked to calculate operating ratios under ratio analysis in accounting. I think the formula is cost of sales + operating expenses / sales. Please correct me if im wrong. the problem is ive also been given number of employees for each year and my lecturer said i need to take them into consideration when calculating it. How do i calculate it? do i just stick to that formula or is it wrong? do i only take the no of employees into consideration when analysing the ratios after calculating it. A good answer will be extremely helpful. Thanks

Well....ive been asked to calculate profitability, working capital, liquity etc and profitability ratios. i have done all but the operating ratios (BTW i never heard of operating ratio until i saw dis questn). ive been given operating expenses already so i dont know what the number of employees is there for. from what i heard 4rm d lecturer, it seems that the employees is part of the calculation

BTW im analysing a retail companies performance over a 5 year period from a shareholder's perspective

Answer 1

THE OPERATING RATIO
Accountants use the information on an income statement to compute the operating ratio, which is normally used as a measure of the company's efficiency and ability to generate income. It is used by investors to determine how worthwhile an investment may be. The operating ratio is computed by dividing the sum of the cost of the goods sold and the operating expenses by the total sales.

However I think your teacher might have used the term operating ratios in the plural to mean Financial and operating ratios, such as gross profits as a percent of sales, which are derived from company financial statements. Ratios are calculated for categories such as liquidity, asset management, debt management, profitability, and market value. They are used to study changes in a company's operations over time.

If he wanted you to use the no. of employees, then he might have expected you to calculate the Average Wage and Benefit Cost per Employee over the 5 yrs. You take the wages amt and add on other personnel-related expenses like medical benefits and divide that by the no. of employees and you do that for the 5 yrs. From the trend, you can see if the cost per employee is getting more and more or less and less.

Answer 2

The number of employees is used to determine your wage expense which is part of your operating expense.

I'm not sure about your ratio. It's the name that I find confusing.. Maybe you should indicate in the question what you are trying to analyze.