An increasing equipment expense ratio indicates that this investment is becoming more important to your business’s success.
A ratio significantly below 1 indicates equipment expense is an insignificant contributor in producing Gross Profit.
Overview
Equipment Expense Productivity is a Throughput Ratio that measures the importance of your spending on equipment to Gross Profits. This number is obtained by dividing the Gross Profit as the ending output for a period by the total costs incurred for that input in that same period.
Businesses with high equipment expenses are likely to see this expense significantly impact their business profitability. This throughput view is used to determine how impactful your equipment spend is in contributing to your company’s Gross Profit. The higher the ratio, the more critical it is to manage this expense so that you can hold onto more of each dollar sold.
The formula for calculating Equipment Expense Productivity
Output (Gross Profit) / Input (Equipment Expense)
A ratio of 1.6 means that the company is generating 1 dollar and 60 cents of Gross Profit for every dollar invested in equipment. A 3.1 ratio means that $3.10 in Gross Profit is generated for every $1.00 spent on equipment.
Higher Creates Opportunity: an increasing ratio indicates that this investment is becoming more important to your business’s success.
Lower Creates Challenges: a ratio significantly below 1 indicates equipment expense is an insignificant contributor to producing Gross Profit.