Berry Ratio

Berry ratio definition

The Berry ratio is one of the leading indicators of a company’s profitability, and is used to make determinations about transfer pricing for various corporations and businesses. The Berry ratio is named for its inventor, Dr. Charles Berry, who first developed the theory during his work on a noted court case that took place in 1979. In E. I. DuPont de Nemours and Co. v. United States, Berry helped to calculate what the proper “arm’s length,” or objective, compensation for one of DuPont’s Swiss distribution subsidiaries should be. In order to derive accurate information about the profitability of the subsidiary, Berry developed the Berry ratio, which divided the gross profit by the operating expenses of the company and compared the result to the same figures from an unrelated, control company that engaged in basically similar work. This allowed an objective and unbiased assessment of the company’s proposed compensation scheme.

Berry ratio formula

Basically, the Berry ratio examined the gross profit of the company and divided that by the current operating expenses to derive a general indication of the company’s profitability and financial health. The Berry ratio formula is as follows:

• Berry ratio = gross profit / operating expenses

Companies must achieve a result of one in order to demonstrate a profit; scores under one indicate that the company is operating at a loss. Higher numerical results are preferable, while lower results typically indicate a company in financial difficulty. The Berry ratio formula allows analysts to compare two separate companies on an even playing field, ensuring that the profitability of each is fairly compared.

Berry ratio transfer pricing

One of the most common uses for the Berry ratio is to determine the comparative profitability of two or more different companies that engage in the same basic business. Because the Berry ratio compares the profitability of companies objectively, it can be used to ensure that compensation and other transactions are handled fairly among interrelated companies. Berry ratio transfer pricing provides a benchmark for the standard compensation or payment; this allows the company to comply with transfer pricing rules while using an easily determined standard for comparison.