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Operating Expense Ratio

(OER)

What is the Operating

Expense Ratio (OER)?
The operating expense ratio (OER) is equal to a
company's operating expenses divided by its
revenues. The measure is very common in real
estate analysis, whereby analysts are measuring
the costs to operate a piece of property versus
the income it generates. 

Operating Expense Ratio

(OER) Formula
OER = Operating Expenses / Revenues

Let's assume Company XYZ's operating expenses

in 2019 were $2,000,000 and its revenues were
$10,000,000. Using the formula above, we can
calculate that Company XYZ's OER is:

OER = $2,000,000 / $10,000,000 = 20%

If Company XYZ were a real estate company, it

might calculate the OER on a potential property
similarly. Let's assume it could rent a property to
tenants for $100,000 a month but would have to
pay $35,000 a month in utilities, maintenance,
insurance, and upkeep. In that case:

OER = $35,000 / $100,000 = 35% per month

Why the Operating

Expense Ratio Matters
Operating expenses are costs associated with
running a business's core operations on a daily
basis. Thus, the lower a company's operating
expenses are, the more profitable it generally is.
Over time, changes in the OER indicate whether
the company can increase sales without increasing
operating expenses proportionately (i.e., if the
business is scalable). In real estate, companies can
compare properties by using the ratio.

As such, the OER is also a measure of managerial

flexibility and competency that makes companies
easier to compare. However, it is important to
note that some industries have higher OERs than
others. This is why comparing OERs is generally
most meaningful among companies within the
same industry, and the definition of "high" or
"low" expenses should be made within this
context.