What Is the Berry Ratio?

The Berry ratio compares a company's gross profit to its 澳洲幸运5官方开奖结果体彩网:operating expenses. This ratio is used as an indicator of a company's profit in a given period. A ratio coefficient of 🐼1 or more indicates that the company is making a profit above🃏 all variable expenses, whereas a coefficient below 1 indicates that the firm is losing money.

Formula and Calculation of the Berry Ratio

T🔯o calculate the Berry ratio, you take gross profit, or gross margin, and divide it by operating expenses. The formula is ജas follows:

$\textbf{Berry Ratio}=\frac{\textbf{Gross Margin}}{\textbf{Operating Expenses}}$Berry Ratio=Operating ExpensesGross Margin​

澳洲幸运5官方开奖结果体彩网:Gross margin is calculated as net sales or revenue minus the 澳洲幸运5官方开奖结果体彩网:cost of goods sold. It indicates the amount of revenue a company retains after taking into account the direct costs to produce the goods or services that geneꦺrated that revenue.

Operating expenses are the expenses that a company incurs during its normal course of business. This includes items s🏅uch as rent, payroll, inventory, and equipment.

What the Berry Ratio Can Tell You

The Berry ratio is named after Dr. Charles Berry, an American economics professor who developed the method as part of expert testimony during a 1979 澳洲幸运5官方开奖结果体彩网:transfer pricing court case between DuPont and the United States.

The DuPont case involved a distributor who also performed related marketing services. Berry analyzed the performance of the distribution business. As part of his analysis, Berry compared the ratio of gross profit to operating expenses to the ratios of third-party companies that were comparable in nature.

In this manner, Berry managed to assess the return that the DuPont distributor earned on its value-adding distribution activities, though highlighting the assumption that the costs of these activities were part of the distributor’s operating expenses. 

Since the early 1990s, the Berry ratio has been recognized in U.S. transfer pricing regulations. However, in practic🃏e, it has been little used. Most likely that is due to its𓃲 long-time status as an unspecified method—considered by some as somewhat “shady”—and having been cited by some academics as being one of the most misused transfer pricing analysis ratios.

A company's 澳洲幸运5官方开奖结果体彩网:financial health is difficult and near impossible to gauge with just one financial ratio. All compa♏nies should be evaluated using multiple data points to gauge their true financial profile.

Example of How to Use the Berry Ratio

Company ABC makes widgets. It sells its widgets for $10. In the first quarter of the year, ABC sold 1,000 widgets, bringing in revenue of $10,000. Now, the cost of creating these widgets includes the 澳洲幸运5官方开奖结果体彩网:raw materials 𝐆needed to make them, which amounts to $3 per widget. For 1,000 widgets, the cost of goods sold for the quarter is $3,000.

Company ABC has a gross margin of $7,000 ($10,000-$3,000) for all of the widgets it sold in the first quarter. Company ABC's operating expenses for the period totaled $1,500, which includes rent, employee wages, and inventory costs. The Berry ratio for this period would be gross margins ($7,000)/operating expenses ($1,500) = 4.7. This is significantly higher than 1, indicating that Company ABC is performing well in regards to profitability.

What Is a Good Berry Ratio?

A good Berry ratio, one that indicates financial strength, is 1 or above. The higher theဣ Berry ratio, the stronger the profitability of the 𝓀company.