Question:
“Higher the ratio, the more favourable it is.” This does not apply to
“Higher the ratio, the more favourable it is.” This does not apply to
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Operating Ratio is a cost ratio — for cost ratios, lower is favourable, unlike profitability/turnover ratios.
Updated On: Sep 24, 2026
- Operating ratio
- Net profit ratio
- Stock Turnover ratio
- All of these
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The Correct Option is A
Solution and Explanation
Step 1: Recall what the Operating Ratio measures:
Operating Ratio = (Operating Cost / Net Sales) × 100, i.e. what fraction of sales revenue is eaten up by operating costs.
Step 2: Determine the direction of ‘good’ for this ratio:
A lower Operating Ratio means operating costs consume a smaller share of sales, leaving more margin — so for this one ratio, lower is better, which is the opposite of the usual ‘higher is better’ rule that applies to profitability ratios like Net Profit Ratio and efficiency ratios like Stock Turnover Ratio.
Final Answer:
The ‘higher is better’ rule does not apply to the Operating ratio.
Operating Ratio = (Operating Cost / Net Sales) × 100, i.e. what fraction of sales revenue is eaten up by operating costs.
Step 2: Determine the direction of ‘good’ for this ratio:
A lower Operating Ratio means operating costs consume a smaller share of sales, leaving more margin — so for this one ratio, lower is better, which is the opposite of the usual ‘higher is better’ rule that applies to profitability ratios like Net Profit Ratio and efficiency ratios like Stock Turnover Ratio.
Final Answer:
The ‘higher is better’ rule does not apply to the Operating ratio.
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