One of the most important standards or tests of efficiency in all lines of business is the percentage of total expense of running the business, including manufacturing, selling, and administration, to the gross sales - more commonly known as the "operating ratio." It is clear that the difference between 100% which represents gross sales and the operating ratio is the percentage of gross profit on sales. The lower this percentage of gross profit - or, in other words, the higher the operating ratio - the more unstable, other things being equal, is the business as a money maker; for a high operating ratio means that even a slight variation in expenses may be suffix cient to transform a profit into a loss. On the other hand, a phenomenally low operating ratio indicates a business which is earning excessive profits and is therefore peculiarly subject to competitive attack.

The term was first applied, and is still most generally used, in connection with steam railroads. The ratio here is low, usually not more than 70%; sometimes it climbs to 80% and 90%, and sometimes falls as low as 55%. This low ratio is offset by high fixed charges. In 1906 the ratio of the Chicago, Rock Island and Pacific Railway went up to 89%, and in 1907 to 87%. The ratio for electric railways decreased from an average of 60.1% in 1907, to 58.7% in 1912. The lowest figure was 57.5% in 1902. However, the operating expenses for 1912 included over $7,000,000 charged for depreciation, compared with no similar charge for the earlier years. Some recent ratios of industrial companies are the following:

Westinghouse Air Brake Company..........

61%

American Piano Company..........

64%

Sears-Roebuck Company..........

89%

American Steel Foundry Company..........

90%

F. W. Woolworth Company.........

91%

Wells-Fargo Express Company...........

93%

American Express Company.........

94%

Kresge Company........

94%

Adams Express Company...........

97%

Companies which manufacture specialties that enjoy a ready market and are protected by patents or otherwise from effective competition, may properly have a light operating ratio and an unusually large percentage of profit on sales. This is presumably the case with the Westinghouse Air Brake Company and perhaps with the American Piano Company. Normally, a manufacturing concern will have a ratio not far from 90%, as shown in the above list by the American Steel Foundry Company. Trading companies, such as Sears-Roebuck, the Kresge Company, and the F. W. Woolworth Company, run as high or even a little higher. The three express companies, and particularly the Adams Express, are running on a dangerously close margin, due to the persistent rise in expenses and reduction in revenue during recent years. Formerly a ratio of 87 to 93% was about normal.