Multiple Choice
Which of the following statements about the profit margin ratio is typically true?
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14. Financial Statement Analysis
Ratios: Profit Margin
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Which of the following is NOT a profitability ratio?
A
Current Ratio
B
Profit Margin
C
Return on Equity (ROE)
D
Return on Assets (ROA)
Verified step by step guidance1
Step 1: Understand the concept of profitability ratios. Profitability ratios measure a company's ability to generate profit relative to revenue, assets, or equity. Common examples include Profit Margin, Return on Equity (ROE), and Return on Assets (ROA).
Step 2: Review the definition of the Current Ratio. The Current Ratio is a liquidity ratio, not a profitability ratio. It measures a company's ability to pay short-term obligations with its current assets. The formula is: .
Step 3: Compare the listed options. Identify which ratios are profitability ratios (Profit Margin, ROE, ROA) and which are not (Current Ratio).
Step 4: Recognize that the Current Ratio does not measure profitability but rather liquidity, making it the correct answer to the question.
Step 5: Conclude that the Current Ratio is NOT a profitability ratio, while Profit Margin, ROE, and ROA are all profitability ratios.
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