Accountancy Part BAccounting Ratios

Which one higher ratio is not favourable?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Operating ratio

The operating ratio shows the cost of operations as a percentage of revenue from operations. The higher it is, the smaller the margin left to cover interest and earn a profit, so a high operating ratio is unfavourable; a low one is a healthy sign.

Option (1) Net profit ratio — Incorrect. A higher net profit ratio means a larger net margin on revenue; it is favourable.

Option (2) Stock turnover ratio — Incorrect. A higher turnover means stock is sold quickly; generally favourable.

Option (3) Gross profit ratio — Incorrect. A higher gross profit ratio is a good sign.

NCERT (2026-27 edition):
Operating Profit Ratio – “… Significance: Operating ratio is computed to express cost of operations excluding financial charges in relation to revenue from operations. A corollary of it is ‘Operating Profit Ratio’. It helps to analyse the performance of business and throws light on the operational efficiency of the business. It is very useful for inter-firm as well as intra-firm comparisons. Lower operating ratio is a very healthy sign.”