Multiple Choice
Which of the following ratios is used to measure a firm's profitability?
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14. Financial Statement Analysis
Ratios: Profit Margin
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Which of the following ratios measures the proportion of sales that finds its way into profits?
A
Inventory Turnover Ratio
B
Profit Margin Ratio
C
Current Ratio
D
Debt-to-Equity Ratio
Verified step by step guidance1
Understand the question: The problem is asking which ratio measures the proportion of sales that translates into profits. This requires identifying the ratio that directly relates profits to sales.
Review the options: Analyze each ratio provided in the question to determine its purpose and relevance to the proportion of sales turning into profits.
Option 1 - Inventory Turnover Ratio: This ratio measures how efficiently inventory is managed and sold, but it does not directly relate sales to profits.
Option 2 - Current Ratio: This ratio measures a company's ability to pay short-term obligations using current assets, but it does not address the relationship between sales and profits.
Option 3 - Profit Margin Ratio: This ratio is calculated as \( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Sales}} \), and it directly measures the proportion of sales that results in profits. This is the correct answer.
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