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What does the net profit margin measure, and which direction is better?
AProfit per share of stock, and lower is better
BDebt per dollar of equity, and higher is better
CShare of each sales dollar left, and higher is better
DSales per dollar of assets, and lower is better
Answer & Solution
Correct answer: C. Share of each sales dollar left, and higher is better
1. The net profit margin is the ratio of net profit to net sales, also called return on sales.
2. It measures the percentage of each sales dollar remaining after all expenses, including taxes, have been deducted.
3. Higher net profit margins are better than lower ones, and the ratio is often used to measure earning power.
4. Profit per share is earnings per share, and debt per dollar of equity is the debt-to-equity ratio, so both name a different measure.
_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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