Question

Operating ratio is —

• A. Profitability ratio
• B. Activity ratio
• C. Solvency ratio
• D. None of these

Hint:

The lower the operating ratio, the higher the business efficiency — an ideal ratio is around 70–75%.

Answer 1

The Correct Option is A

Step 1: Understanding Operating Ratio.
The operating ratio measures the relationship between operating expenses and net sales.
It indicates the efficiency of business operations and how much of the total revenue is used to cover operational costs.
The formula is:
\[ \text{Operating Ratio} = \frac{\text{Operating Cost}}{\text{Net Sales}} \times 100 \]
Step 2: Relation to Profitability.
A lower operating ratio indicates higher profitability, as it shows that a smaller portion of revenue is spent on operations.
Therefore, it is a type of Profitability Ratio, since it helps assess operational efficiency and profit control.
Step 3: Analysis of options.
- (1) Profitability ratio: Correct — measures how efficiently expenses are managed to generate profit.
- (2) Activity ratio: Incorrect — measures asset utilization, not profitability.
- (3) Solvency ratio: Incorrect — measures long-term financial stability.
- (4) None of these: Incorrect — as (1) fits best.
Step 4: Conclusion.
Thus, the Operating Ratio is a Profitability Ratio.