SG&A Ratio

The SG&A ratio measures the proportion of a company's revenue that goes toward selling, general, and administrative expenses rather than flowing to operating profit. The formula is: SG&A Ratio = SG&A Expenses / Revenue × 100. A lower ratio generally indicates better overhead efficiency and stronger operating leverage, though the "right" ratio varies significantly by industry and business model.

Typical SG&A ratios by industry: Software/SaaS companies 40-60% (heavy sales and marketing investment), pharmaceuticals 25-35% (large sales forces and regulatory compliance), consumer packaged goods 20-30% (advertising and distribution), industrials 15-25% (leaner sales infrastructure), and retail 15-20% (store operations). Capital-light businesses with recurring revenue tend to have higher SG&A ratios initially but better long-term leverage as revenue scales against semi-fixed overhead.

The most valuable application of the SG&A ratio is tracking its trend over time. A declining SG&A ratio over several years demonstrates operating leverage — the company is growing revenue faster than overhead, expanding margins. This is a hallmark of well-managed, scalable businesses. Conversely, a rising SG&A ratio may indicate loss of operating discipline, increased competitive pressure requiring more marketing spend, or diseconomies of scale. Analysts also decompose SG&A into its components when possible — a rising SG&A ratio driven by sales commission increases (tied to revenue growth) is healthy, while one driven by ballooning corporate overhead is concerning. The SG&A ratio is particularly important in M&A analysis — acquirers often target SG&A reduction as a primary synergy source, combining back-office functions and eliminating duplicate overhead.