Multiple Choice
If Product A has sales revenue of \$50,000 and cost of goods sold of \$35,000, what is the profit margin of Product A?
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14. Financial Statement Analysis
Ratios: Profit Margin
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following ratios is used to measure a firm's profitability?
A
Current Ratio
B
Debt-to-Equity Ratio
C
Inventory Turnover Ratio
D
Profit Margin Ratio
Verified step by step guidance1
Understand the concept of profitability: Profitability measures a firm's ability to generate earnings relative to its revenue, assets, or equity over time. It is a key indicator of financial health.
Identify the Profit Margin Ratio: The Profit Margin Ratio is calculated as the net income divided by net sales. It shows the percentage of revenue that remains as profit after all expenses are deducted.
Compare the given ratios: The Current Ratio measures liquidity, the Debt-to-Equity Ratio measures financial leverage, and the Inventory Turnover Ratio measures operational efficiency. None of these directly measure profitability.
Recognize the Profit Margin Ratio as the correct choice: Among the options provided, only the Profit Margin Ratio directly evaluates a firm's profitability by focusing on the relationship between net income and net sales.
Conclude that the Profit Margin Ratio is the appropriate metric for assessing profitability, as it provides insight into how effectively a firm converts sales into profit.
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