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Operating expense ratio (OER) is a financial calculation that measures the cost of managing an investment as a percentage of its income or net worth. It is used to assess management efficiency in keeping expenses low and maximizing profitability. OER is calculated differently depending on the type of investment, and it is commonly used in evaluating real estate investment properties and mutual funds.
An operating expense ratio (REA) is a financial calculation that expresses the total cost of managing an investment as a percentage of its income or net worth. The relative cost of overhead is an important quality indicator for investors, because operating expenses ultimately reduce overall profitability. REA is used to assess the efficiency of management to keep expenses low and maximize profitability.
Investments are much like businesses. Just like a business, an investment vehicle has to spend money to make money. The costs to manage a complex investment and keep it viable on a day-to-day basis are considered operating expenses along the same lines as the expenses a business incurs to keep its doors open. An investment is subject to the type of business analysis that seeks to determine whether managers are keeping expenses in check while maximizing profits. Calculating an investment’s operating expense ratio is how investors determine whether potential earnings will ultimately be wasted through inefficient management.
An operating expense ratio is the total amount spent during a fiscal year on operating expenses divided by a measure of investment value. The calculation differs, depending on the type of investment under evaluation. Some types of investments divide operating expenses by annual gross income to determine OERs. Others divide the expenses by the average net dollar value of the investment assets during the year.
For example, one of the most common uses of the operating expense ratio is to evaluate real estate investment properties. The calculation takes all operating expenses for the year, including management fees, property taxes, maintenance, insurance, and utilities, and divides the total by gross property income or the total amount of rent. charged. REA is used to determine whether property managers are doing a good job of keeping costs in check and whether the rental price needs to be increased to achieve a target level of profitability.
Another common use of the operating expense ratio is in the evaluation of mutual funds. With this type of investment, operating expenses are divided by the average value of assets under management to determine the REA. It may seem strange that the calculation uses the value of the assets instead of the income they generate, in the same way as a real estate investment. However, in the financial industry, many mutual fund operating expenses are stated as a percentage of the fund’s value. Therefore, as the fund grows, the costs of certain services increase proportionally, which makes it more relevant to calculate REA as a percentage of the fund’s assets used for administration expenses.
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