An expense ratio measures a particular expense as a percentage of a company’s net sales, which are sales revenues adjusted for returns and discounts. Expenses are the costs a company incurs, such as wages and supplies, related to producing and selling its products and services. A company reports its net sales and expenses on its income statement, which reports a company’s profit or loss for an accounting period. Calculate an expense ratio to determine how a company spends various portions of its revenue.
Find a public company’s income statement in either its 10-Q quarterly report or its 10-K annual report. You can obtain these reports from the investor relations section of the company’s website or from the U.S. Securities and Exchange Commission’s EDGAR online database.
Identify the amount of the company’s net sales, listed on the income statement. For this example, assume a company has $100,000 in net sales.
Determine the amount of an expense, listed on the income statement, for which you want to calculate an expense ratio. In this example, assume the company has $3,000 in wages as an expense.
Divide the amount of the expense by net sales. In this example, divide $3,000 in wages expense by $100,000 in net sales to get 0.03.
Multiply your result by 100 to calculate the expense ratio. In this example, multiply 0.03 by 100 to get a 3 percent expense ratio for the wages expense. This means the wages expense accounts for 3 percent of net sales.