alleryStart learning →Which three ratios are the main profitability ratios?
ACurrent ratio, acid-test ratio and net working capital
BNet profit margin, return on equity and earnings per share
CInventory turnover, debt-to-equity and net worth
DGross sales, net sales and cost of goods sold
Answer & Solution
Correct answer: B. Net profit margin, return on equity and earnings per share
1. Profitability ratios measure how well a firm uses its resources to generate profit and how efficiently it is managed.
2. To measure profitability, profits are related to sales, to equity or to stock value.
3. Those three comparisons give the net profit margin, return on equity and earnings per share.
4. Gross sales and cost of goods sold are line items rather than ratios, so they measure nothing on their own.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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