Question

Which of the following ratios is a favorable indication, if it is low?

• A. Operating ratio
• B. Operating profit ratio
• C. Inventory turnover ratio
• D. Fixed assets turnover ratio

Answer 1

The correct option is A Operating ratio

1. Stock turnover ratio is the relationship between the COGS and the average inventory. It indicates how fast the inventory is sold or used. A high ratio is favorable from the point of view of liquidity and vice versa.
2. Operating profit ratio is the ratio between operating profit and the net sales .Higher the ratio, higher would be the operating profit and it would be more favorable.
3. Fixed assets turnover ratio measures the efficiency with which the firm utilizes its fixed assets for generating its sales. A high ratio means higher efficiency.
4. Operating ratio is the ratio of operating expenses to the net sales. Higher this ratio higher would be the operating expense and lower the operating profit. So a lower ratio is more favorable in terms of business.