Multiple Choice
Which of the following is correctly categorized as a liquidity ratio?
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14. Financial Statement Analysis
Introduction to Ratios
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Which of the following is considered a profitability ratio?
A
Return on Equity (ROE)
B
Quick Ratio
C
Debt-to-Equity Ratio
D
Current 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, equity, or other financial metrics. They are key indicators of financial performance.
Review the options provided: Return on Equity (ROE), Quick Ratio, Debt-to-Equity Ratio, and Current Ratio. Determine which of these aligns with the definition of profitability ratios.
Analyze Return on Equity (ROE): ROE is calculated as \( \text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \). It measures how effectively a company uses shareholders' equity to generate profit, making it a profitability ratio.
Evaluate the other options: Quick Ratio, Debt-to-Equity Ratio, and Current Ratio are not profitability ratios. Quick Ratio and Current Ratio are liquidity ratios, while Debt-to-Equity Ratio is a solvency ratio.
Conclude that Return on Equity (ROE) is the correct answer because it directly measures profitability relative to shareholders' equity.
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