Operating Expense Ratio Formula | Calculation with Examples - YouTube

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by clicking the bell icon Friends today we have going to learn a concept which is known as the

operating expense ratio formula as you can see in this particular dialog

operating expense is something written when we compare the cost of the

operations with the revenue generated we get the expense ratio now what exactly

they are talking about let's understand that see the operating expenses are

required for operating any business now without operations they cannot be

revenue without operations they cannot be expenses so there has to be some

operations involved when we compare this sort of cost of the operations when we

compare the cost of the operations with the revenue that has been generated that

the revenue that has been generated we get the operating expense that is known

as the OER right we are is very popular in the real estate segment now real

estate industry and its really common ratio that is used while doing a real

estate analysis in real estate analysis the analysis judge the cost of the

operating a property with the income generated by the property the formula

was for the operating expense ratio goes something like this

the operating expense ratio is equal to your operating expenses divided by the

revenues so this is going to be your formula for the operating expense ratio

let's understand the explanation part of this and then we'll go with one of the

example since this this ratio is more useful in the real estate industry let's

look at the oer from that perspective now in this ratio there are two

component the first and the foremost component is the most important it is

the Operating expenses right and in this case of the

real estate industry the operating expenses includes like utilities you

have property I mean property management fees so you can say those kind of fees

are not variable yeah you can see sort of a variable one then there is a

maintenance that is involved property taxes if any and insurance and

repairs these are all the costs that are involved in the operating expenses the

second component in this is the revenue part now when we talk about the revenue

if the revenues are the income that has been generated from a specific property

like for example a company has bought conceived the company has bought a

property to rent out to other similar source much smaller companies now to

find out how the property is doing the company would look at it we are that is

the operating expense ratio so if the operating ratio that is the oer if this

is let's say if this is higher the company would think twice about keeping

a property on the other hand if if the if your we are if the operating ratio if

that is lower the company would consider the property as a great investment so

these are the two comparisons let's take an example to illustrate the operating

expense ratio formula let's say there's a company called kiichi Inc and it has

been comparing its operating expenses for a property but in trying to find out

the oer it has been give it has given given with some details like operating

expense details and they have the data for revenue how about we just take all

this control C ctrl alt v we and just transpose the data here so we have

couple of their the operating expenses like forty thousand in the utilities

property management fees let's say one lakh dollars there is a maintenance

expenses standing $60,000 the property taxes which is

let's say standing at $10,000 insurance $25,000 and repairs which is standing at

$12,000 with this data provided we can find the operating expense but details

that is the operating expenses going to be the sum total of all now the revenue

part let's say they have two segments the first segment if both are in the

real estate and the second segment let's say they have two segment revenue and

the first segmental revenue is standing at $1,000,000 and the other second

segment is standing at let's say $2,00,000 it has just started the the

second segment has just started so what we need to do is to find the OER of the

kg in company over here so using the operating ratio formula we get the OER

operating expense ratio which is your operating expenses $2,47,000

divided by your first segments revenue and the second segment

revenue you just need to divide this and let's see what is the expense involved

in this particular scenario press ok and we see that 21%

2,47,000 compared to 1.2 million so if we compare the ratio with the

other companies in the same industry or with the same companies in the same

industry we'll be able to interpret the OER in a very precise fashion so this

is the data for 21% of yours but how about if you know the

industry data which is standing and let's say 15% then in that

scenario you are your expenses are more by 6%

had it been 25% you have lesser expenses compared to industry so

in that fashion you can actually make in your own analysis about the ratio and

you'll be in a good position to make sound decision now what is exactly the

use of the operating expense ratio formula the operating expense ratio

formula is used heavily as I told you in the real estate industry

but that is not the only industry with very it it gets used it is used in the

many manufacturing industry and and also in the service industry like like the

airline industry the hotel management and so on and so forth so the hotel

industry the purpose of using the OER is to see how much income of the company

has been generated in relation to the operating expense it is incurring second

every company wants its oay are to be lower right so lower the always remember

this lower the oer is basically better for the company so this is going to be

the comparison now if you are looking at the company as an investor let's say you

are an investor then you need to see the oer of the company for a longer time

span now if you look if you look at the owner of the company for let's say for

the longer time span you'll be able to discover a trend that it is following of

how the ratio has been between the operating expenses and the and and the

revenues that are getting shaped now then you can take the trend to compare

with the oer of the other companies under the same industry or i mean to say

we are of the other companies under the same industry if the we are of the

target if the we are of the target company is let's say lower than the

other companies in the same industry then the target company can be a right

company to invest in however you also need to look at the other financial

ratio which is a quite a thing to do you cannot just make an analysis just on

business ratio before you actually decide seven-a measures the flexibility

and the competency you can see that so of the of the managers of the company

and understanding this will help you as a lot as an investor so I hope we have

discussed the use we have done the example the explanation part and also

where exactly this has been used you must have got the great insight

regarding this particular formula so that's it for this particular topic if

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