Berry Ratio – Definition

Cite this article as:"Berry Ratio – Definition," in The Business Professor, updated April 17, 2020, last accessed August 3, 2020, https://thebusinessprofessor.com/lesson/berry-ratio-definition/.

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Berry Ratio

The Berry ratio is the ratio of the gross profit of a company to the operating expenses. This ratio compares the gross profit of a company to the operating expenses at a given period.

The formula for calculating the Berry ratio is:

Berry ratio = gross profit / operating expenses

A berry ratio coefficient of 1 and above tells us that the company makes more profit than its operating expenses while a ratio below 1 indicates that the company is operating at a loss; operating expenses are more than gross profits.

A Little More on What is the Berry Ratio

Charles Berry, an American economics professor developed the Berry ratio in 1979, it was thereafter named after him. The Berry ratio helps a business to compare the ratio of gross profit to operating expenses. When calculating this ratio, interests earned by a company and extraneous income are not included as gross profit, likewise is depreciation or amortization regarded as an operating expense.

The Berry ratio gained more recognition in the United States in the 1990s in evaluating or comparing the gross profits to operating expenses so as to determine whether a company is operating at a loss or making more profits. However, the Berry ratio is rarely used in practice as some academics categorize it as one of the most abused (misused) ratios.

Reference for “Berry Ratio”

https://www.investopedia.com › Investing › Financial Analysis

www.mysmp.com › Fundamental Analysis

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3063001_code398344.pdf?…1

Academics research on “Berry Ratio

Is SOA superior? Evidence from SaaS financial statements, Hall, T. W. (2008). Is SOA superior? Evidence from SaaS financial statements. Journal of Software. We use audited financial statements to examine claims that service-oriented architecture (SOA) leads to higher profits relative to traditional software delivery models. Specifically, we examine vendors that rely on the Software-as-a-Service (SaaS) pricing model, and compare their performance to other firms that still use the traditional perpetual license model. We find that, relative to their peers, SaaS firms tend to have lower costs of goods sold as a portion of revenues. Compared to their software firm peers, SaaS firms are also younger, smaller, possess less financial leverage, and have higher costs (sales, general, and administrative) relative to revenues. Pure, per-unit costs of hosted SOA applications do not appear to be lower, however, compared to firms that specialize in retail provision of mass market software. This leads us to conclude that, despite the predictions of the most ardent adherents of SOA and SaaS, traditional vendors with sufficient economies of scale will not be intrinsically threatened by the new model.

The value of corporate financial measures in monitoring downturn and managing turnaround: An exploratory study, Pearce, J. A. (2007). The value of corporate financial measures in monitoring downturn and managing turnaround: An exploratory study. Journal of Managerial Issues, 253-270. This study investigates the turnaround experience of 42 firms and tracks their success through financial ratio analyses. Financial ratios based on company data varied with stages of the turnaround process. Factor analysis reveals distinct patterns underlying the financial ratios in each phase of the turnaround process. Temporal changes in the factors are used in a discriminant analysis for each phase to explain turnaround versus non-turnaround. Financial data from each phase explain nine to 13 percent of the variance in the firms’ ability to achieve turnaround, with company attention to operating efficiency emerging as the key factor.

IMPROVING THE MANAGEMENT OF TURNAROUND WITH CORPORATE FINANCIAL MEASURES., Pearce, J. A., & Doh, J. P. (2002, August). IMPROVING THE MANAGEMENT OF TURNAROUND WITH CORPORATE FINANCIAL MEASURES. In Academy of Management Proceedings (Vol. 2002, No. 1, pp. B1-B6). Briarcliff Manor, NY 10510: Academy of Management. This study investigates the turnaround experience of 42 firms and tracks their success through financial ratio analyses. Activity, leverage, and liquidity ratios of financial data are found to vary with stages of the turnaround process as new theory building efforts predict. Factor analysis discerns distinct patterns underlying the financial ratios in each phase of the turnaround process. Temporal changes in the factors estimate a discriminant function for each phase to explain turnaround versus non-turnaround. Among the useful findings is that financial data from each phase explains an impressive nine to 13 percent of the variance in the firms’ ability to achieve turnaround, with company attention to operating efficiency emerging as the key factor.


The Berry Ratio, Eden, L., & Zakrevska, T. (2018). The Berry Ratio. Forthcoming in PRACTICAL GUIDE TO US TRANSFER PRICING THIRD EDITION, by William H. Byrnes, Esq. and Robert T. Cole (deceased), Release, (12). 

Why is the response of multinationals’ capital-structure choice to tax incentives that low? Some possible explanations, Ruf, M. (2011). Why is the response of multinationals’ capital-structure choice to tax incentives that low? Some possible explanations. FinanzArchiv: Public Finance Analysis67(2), 123-144. This paper evaluates three possible explanations for why empirical studies have found a quite moderate response of multinationals’ capital structure to tax incentives. Firstly, by concentrating on debt decisions by operating subsidiaries, previous studies may have overlooked the importance of holding companies. Secondly, international transfer-pricing guidelines may reduce the tax incentives for debt financing. And thirdly, debt as a tax planning tool may be especially used by large multinationals. Whereas I do not find empirical evidence in favor of the third hypothesis, I do find empirical evidence for the first and the second hypothesis.

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