Overhead Ratio

What is the 'Overhead Ratio'

A comparison of operating expenses and total income that is not directly related to the production of a good or service. A firm's operating expenses are expenditures that result from normal, day-to-day business operations. Operating expenses include advertising, office rent, professional fees, utilities, insurance, machinery maintenance, depreciation or plants or machinery, etc.

Overhead ratio = Operating Expenses / (taxable net interest income + operating income)

BREAKING DOWN 'Overhead Ratio'

Overhead ratio is a metric that allows companies to evaluate expenses as a percentage of income. In general, a company strives to achieve the lowest operating expenses possible without sacrificing its goods and/or services or competitiveness within the industry. Cutting expenses has a positive effect on the overhead ratio; however, a company must balance these cuts with maintaining the quality of business.

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