Operating Profit Ratio is a hotel KPI that measures the relationship between operating profit earned and the net revenue generated by a property which is also labeled net sales. Net sales should include both cash and credit sales. Operating profit should be accounted for before interest and taxes. The ratio is a profitability ratio that is expressed as a percentage of sales.
What is Operating Profit Ratio For?
Operating Profit Ratio is used to evaluate the efficiency of a hotel in managing the costs and expenses associated with business operations. It shows how much profit a property makes after paying all variable operating and production costs.
It can also be used to compare one hotel against another, and identify top performing hotels within an industry segment. Using Operating Profit Ratio as a trend analysis between two different accounting periods, managers can analyze how a hotel’s operational efficiency has improved or deteriorated.
Benefits of Operating Profit Ratio
This profitability ratio allows revenue managers to compare operating profit earned to revenue earned from operations. It also allows managers to identify areas where a hotel is falling behind or outperforming the competition.
A high ratio can indicate elite management of hotel resources while a low ratio may indicate operational flaws and improper management. A low ratio tells managers that profits generated from operations are not enough when compared to total revenue from sales.
Limitations of Operating Profit Ratio
While Operating Profit Ratio is a key metric for identifying operation flaws or inefficient resource management, it doesn’t necessarily identify areas for improvement. Discrepancies between operating profit and net sales can be the result of a variety of factors, such as geography, hotel size, promotions, and business model.
How is Operating Profit Ratio Calculated
Operating Profit Ratio is calculated by dividing operating profit by revenue from operations (net sales). The result is then multiplied by 100 to be expressed as a whole number percentage.
Operating Profit includes gross profit and other other operating income minus other operating expenses. It can also be calculated by adding net profit before taxes and non-operating expenses minus non-operating incomes.
Revenue from operations, or net sales, should include cash and credit sales minus sales returns.
Example of Operating Profit Ratio Calculation
Operating Profit Ratio = (Operating Profit / Revenue from operations) x 100
Operating Profit = $1,000,000
Revenue from operations (net sales) = $5,000,000
Operating Profit Ratio = ($1,000,000 (Operating Profit) / $5,000,000 (Net Sales)) x 100 = 20%