Multiple Choice
Which of the following ratios will help you assess the profitability of a company? Select one.
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14. Financial Statement Analysis
Ratios: Profit Margin
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Which of the following companies has the highest profitability based on the profit margin ratio?
A
Company A with a profit margin of 18%
B
Company C with a profit margin of 9%
C
Company B with a profit margin of 12%
D
Company D with a profit margin of 15%
Verified step by step guidance1
Understand the concept of the profit margin ratio: The profit margin ratio measures how much profit a company generates for every dollar of revenue. It is calculated as (Net Income / Revenue) × 100, expressed as a percentage.
Review the profit margin ratios provided for each company: Company A has 18%, Company B has 12%, Company C has 9%, and Company D has 15%.
Compare the profit margin ratios: To determine which company has the highest profitability, compare the percentages directly since they represent the profit margin ratios.
Identify the company with the highest percentage: The company with the largest profit margin ratio has the highest profitability.
Conclude based on the comparison: The company with the highest profit margin ratio is the one that generates the most profit relative to its revenue.
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