What Is the Berry Ratio?
The Berry Ratio is a financial ratio that is used by investors and other assessors of businesses as a means to determine the profitability of a specific company. Devised by American economist Charles Berry, the ratio is determined by dividing a company’s gross profits by its operating expenses. A Berry Ratio of more than one indicates that a company is making enough money to cover its operations, while a ratio of less than one can indicate severe financial instability. This ratio is best used as an indicator of financial strength only if its findings are verified by other measurements of profitability.
All businesses are in search of methods to make themselves more profitable. Profitability allows a company to reinvest its profits to build the business even further. It also obviously means a great deal to the business owners who reap the most rewards from those profits. Everyone from investors to tax officials desires to judge the profitability of a given company, which is why the Berry Ratio is such an important measurement.
Calculating the Berry Ratio requires taking a company’s gross profits from a given time period and dividing that total by the company’s operating expenses over that same period. For example, imagine a company that has $100,000 US Dollars (USD) of gross profit in a given year and $80,000 USD in expenses in that same year. The ratio in this case would be $100,000 USD divided by $80,000 USD, or 1.25. That means the company could cover all of its expenses and still have 25 percent of its profits remaining.
The gross profit takes into account the amount of money that it takes to produce the goods that are sold. Included in operating expenses are all of the expenses necessary to keep a business running, such as payroll or rent payments. If the Berry Ratio is more than one, it means that the company could cover all of its expenses immediately and still have money left over for profit.
As is the case with all ratios, the Berry Ratio is best studied in comparison with ratios from other similar businesses. This is especially true when investors use the ratio as a measurement of financial strength, since companies from different industries may have different financial realities that cause different standards for profitability. Those using this ratio as a method of assessing a company for tax purposes should use it in accord other profitability measurements to ensure that the ratio’s results are accurate.
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