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Use the working ratio formula with an explicit operating-cost boundary. A worked services-company example separates depreciation, reconciles business units and shows why accrued expenses differ from cash paid.
The working ratio formula used here divides operating expenses excluding depreciation and amortization by operating revenue. It compares revenue with a stated group of cash-type operating costs, rather than measuring working capital. Define those costs before comparing business units, because the label alone does not establish a consistent calculation.
Working ratio = Operating expenses excluding depreciation and amortization / Operating revenue
Working ratio as a percentage = Working ratio × 100
For this example, the numerator includes direct service-delivery costs, administrative payroll, facilities and other operating expenses. It excludes depreciation and amortization, financing costs and income taxes. There are no other noncash operating charges in the example; a company with such charges must decide and document their treatment before making comparisons.
The denominator is net operating revenue recognized for the same period. It excludes financing income and other nonoperating gains. It is not cash collected from customers.
This is a declared management-report definition, not a claim that every report labeled “working ratio” uses these boundaries. Ask for the account mapping behind an unfamiliar figure. A numerator including only expenses below gross profit would answer a narrower question, covered by operating expense margin.
The SEC's guide to financial statements explains the separation of operating expenses, depreciation, interest and income taxes. It also distinguishes an income statement from a cash flow statement. Those distinctions matter when constructing this ratio from a ledger.
Use a closed-period income-statement or ledger export with business unit, account code, account description, posting period and amount. Keep recognized operating revenue in a separate category from financing and incidental income. Group expenses by the boundary agreed with the controller.
Tag depreciation and amortization even when they are embedded in departmental expenses. The fixed-asset schedule can help locate the charges, but it should reconcile to the ledger rather than add another copy of them. Keep capital purchases outside the expense calculation.
Apply the same mapping to each unit. A service-delivery salary belongs in the numerator even if one unit reports it as cost of services and another uses a department-expense account. For a business selling goods, the definition must also state how cost of goods sold enters the numerator; excluding product costs without disclosure would make the comparison misleading.
Use operating ratio analysis when the question is total operating costs including depreciation and amortization relative to net sales. The two ratios should reconcile through the explicitly excluded charges.
A US commercial maintenance company compares its North and South units for one closed quarter. The included expense rows below are accrued costs with cash-type character. All amounts are USD, and the company has no inventory or additional noncash operating charges in this example.
| Export category | North (USD) | South (USD) | Company (USD) | Working-ratio treatment |
|---|---|---|---|---|
| Operating revenue | 800,000 | 400,000 | 1,200,000 | Denominator |
| Direct service delivery | 360,000 | 160,000 | 520,000 | Include |
| Administrative payroll | 120,000 | 100,000 | 220,000 | Include |
| Facilities | 60,000 | 30,000 | 90,000 | Include |
| Other operating expenses | 40,000 | 30,000 | 70,000 | Include |
| Depreciation and amortization | 60,000 | 20,000 | 80,000 | Exclude |
Add the included expense categories, then divide by operating revenue. Ratios are shown to four decimal places and percentages to two; calculations use the underlying amounts.
| Calculation step | North | South | Company |
|---|---|---|---|
| Included operating expenses (USD) | 360,000 + 120,000 + 60,000 + 40,000 = 580,000 | 160,000 + 100,000 + 30,000 + 30,000 = 320,000 | 580,000 + 320,000 = 900,000 |
| Divide by operating revenue | 580,000 / 800,000 | 320,000 / 400,000 | 900,000 / 1,200,000 |
| Working ratio | 0.7250 | 0.8000 | 0.7500 |
| Percentage equivalent | 72.50% | 80.00% | 75.00% |
South consumes more operating revenue in the included expenses than North. That prompts questions about staffing, contract mix and facility utilization; it does not establish that South's managers performed worse. The underlying service commitments may differ.
First, the company result must divide total included expenses by total revenue. The simple average of the unit percentages is (72.50% + 80.00%) / 2 = 76.25%, which overweights the smaller South unit. Weighting each unit percentage by its revenue instead returns the company figure:
(800,000 × 72.50% + 400,000 × 80.00%) / 1,200,000 = 75.00%
Second, add the excluded depreciation and amortization back to reconcile to total operating costs and operating income.
| Company reconciliation | Calculation | Amount (USD) |
|---|---|---|
| Included operating expenses | 580,000 + 320,000 | 900,000 |
| Add depreciation and amortization | 60,000 + 20,000 | 80,000 |
| Total operating costs | 900,000 + 80,000 | 980,000 |
| Operating income | 1,200,000 − 980,000 | 220,000 |
Revenue exceeds the working-ratio numerator by $300,000, but operating income is $220,000 because depreciation and amortization still matter. The ratio is a limited coverage measure, not a substitute for the full income statement or the broader financial ratios review.
Removing depreciation does not remove accrual timing. The IRS explanation of accounting methods distinguishes expenses incurred under accrual accounting from expenses paid under cash accounting. That timing distinction also explains why an expense-based ratio cannot be read as a disbursement report.
Suppose the company's included expenses have only operating-payable and prepaid-expense timing differences, with no other adjustments. The following balances bridge the expense total to payments for those costs:
| Payment bridge | Amount (USD) |
|---|---|
| Accrued included operating expenses | 900,000 |
| Add beginning operating payables | 50,000 |
| Subtract ending operating payables | −80,000 |
| Add ending operating prepayments | 20,000 |
| Subtract beginning operating prepayments | −10,000 |
| Cash paid for these expenses | 880,000 |
The $20,000 difference comes from timing, despite identical operating expense recognition. Customer collection timing is a separate issue as well. Use the working capital guide for the balances behind those timing differences; the working ratio does not replace that analysis.
Bring a sample of your own operating workbook with revenue, expense accounts, business units and the charges excluded by your definition. Covirage maps the columns, and its tools compute and check the figures; the external AI model explains the result with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the supporting finance workflow.
Under the definition used here, included operating expenses exceed operating revenue for the period. Check missing revenue, unusual expenses and accounting cutoffs before diagnosing the cause. The result does not measure available cash, borrowing capacity or the timing of customer collections.
No. This working ratio compares period expenses with period revenue. A working capital ratio typically refers to current assets divided by current liabilities at a balance-sheet date. Confirm the formula whenever a report uses either label without a definition.
No. Accrued payroll, supplier invoices and prepaid expenses can make expense recognition differ from payment timing. Removing depreciation and amortization removes specified noncash charges, but it does not convert the remaining income-statement expenses into actual cash disbursements.
Compare the same cost boundary across your own periods and similar units. A result below one indicates coverage of included expenses, but excluded depreciation, capital replacement, financing costs and collection timing still matter. There is no universal target that establishes complete financial health.