Answers the Question
Are our income streams growing faster than our expenses?
Calculator for Jaws Ratio
What Is the Jaws Ratio?
The jaws ratio is not actually a ratio, and has little to do with mandibles. Nevertheless, it's an important measure that reveals the relative sizes of a firm's income and expense.
Why Is it Important?
- Often large swings in expenses and income can be predicted by locating small changes.
- All things being equal, firms should be concerned when their rate of growth for expenses approach and surpass the rate of growth for their incomes.
Formula(s) to Calculate Jaws Ratio
- JAWS RATIO = INCOME GROWTH RATE - EXPENSE GROWTH RATE
- When income and expense are measured in different orders of magnitude, relatively insignificant changes in income or expense could yield to wild swings in jaws ratio values.
- Firms that invest heavily in research and development may find themselves with poor jaws ratio values, even though R&D will often lead to higher levels of future income.
- Some firms use accounting trickery to present the appearance of hockey-stick growth. Jaws ratios should not always be taken at face value.