what is the working ratio 
the working ratio measures a company s ability to recover operating costs from annual revenue it is calculated by taking total annual expenses excluding depreciation and debt related expenses and dividing it by the annual gross income this is the formula for calculating working ratio working ratio tae depreciation debt expenses annual gross income where tae total annual expenses begin aligned text working ratio frac text tae text depreciation text debt expenses text annual gross income textbf where text tae text total annual expenses end aligned working ratio annual gross incometae depreciation debt expenses where tae total annual expenses understanding the working ratiothe working ratio is tasked with gauging a company s financial sustainability all businesses will incur costs to operate and generate sales these costs range from rent equipment and inventory charges to marketing staff wages and insurance those who are unable to consistently clear these expenses and pay their bills aren t running a viable business and probably won t be in business for long the threshold for this ratio is one any number below that indicates that the company is able to recover operating costs lower figures are synonymous with expenses eating up a small chunk of gross income conversely a ratio above one implies that the company isn t breaking even and generating enough money to cover its costs a ratio of one means a company s annual gross income is equal to its total expenditure so anything below that implies the company is able to recover operating costs whereas anything above reflects its inability to do so example of the working ratioxyz inc has been making widgets since the 1900s and is seen in the industry as a somewhat antiquated brand xyz hasn t spent very much money overhauling its machinery over the years and is still using old technology to manufacture its end product management argues that not upgrading to the latest model has saved it money that can be better spent elsewhere the problem is the equipment it uses is power intensive and expensive to run and maintain relative to newer versions this means that continuing to use the old technology actually works out to be more expensive in the long run to make matters worse xyz is also losing market share every year to its more modern competitors sales are falling and costs are rising leading to a progressively higher working ratio recently it rose above one the tipping point and analysts fear it will continue to climb putting the business in danger of reneging on payments unless drastic changes are soon made to slash costs and catch up with the competition limitations of the working ratiothe working ratio is not perfect and cannot be fully relied on to determine a company s financial health and ability to cover expenses with the money it brings in one issue is that it does not take financing costs into consideration this oversight can lead to misleading results particularly as most companies borrow money to fund growth and are required to pay back these loans together with interest punctually the ratio also does not account for projected changes in operating expenses in some industries operating costs have a tendency to fluctuate from year to year and in certain periods can be uncharacteristically low or high for a good reason if the company has cash tucked away to bankroll extra costs and is poised to generate extra revenues off them in the future its current high working ratio shouldn t necessarily be a cause for alarm special considerations