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Simple English definitions for legal terms
expense ratio
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A quick definition of expense ratio:
Expense Ratio: The expense ratio is a way to measure how much money is spent compared to how much money is earned. It is calculated by dividing the total expenses by the total income. This helps people understand how much it costs to run a business or manage an investment. For example, if a company spends $100 to earn $1,000, the expense ratio would be 10%.
A more thorough explanation:
Expense ratio is a term used in accounting to describe the proportion or ratio of expenses to income. It is calculated by dividing the total expenses of a company by its total income.
If a company has total expenses of $50,000 and total income of $100,000, its expense ratio would be 50% ($50,000 ÷ $100,000).
Another example could be a household budget. If a family has a total income of $5,000 per month and their total expenses are $4,000 per month, their expense ratio would be 80% ($4,000 ÷ $5,000).
The expense ratio is an important metric for businesses and individuals to track as it helps to determine the financial health of the entity. A high expense ratio may indicate that a company or household is spending too much money relative to their income, while a low expense ratio may indicate that they are managing their finances well.