Multiple Choice
Which of the following companies has the highest profitability based on the profit margin ratio?
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14. Financial Statement Analysis
Ratios: Profit Margin
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Which of the following is classified as a profitability ratio?
A
Current Ratio
B
Quick Ratio
C
Profit Margin
D
Debt-to-Equity Ratio
Verified step by step guidance1
Understand the concept of profitability ratios: Profitability ratios measure a company's ability to generate profit relative to its revenue, assets, or equity. They are used to assess the financial health and performance of a business.
Review the options provided: Current Ratio, Quick Ratio, Profit Margin, and Debt-to-Equity Ratio. Note that not all of these are profitability ratios.
Classify each ratio: Current Ratio and Quick Ratio are liquidity ratios, which measure a company's ability to meet short-term obligations. Debt-to-Equity Ratio is a leverage ratio, which evaluates the proportion of debt financing relative to equity financing.
Identify Profit Margin as the profitability ratio: Profit Margin specifically measures the percentage of revenue that remains as profit after all expenses are deducted. It is a key indicator of a company's profitability.
Conclude that Profit Margin is the correct answer: Based on the definitions and classifications, Profit Margin is the only ratio among the options that falls under the category of profitability ratios.
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