Which group of financial ratios would help Teresa measure her company's profitability?

Enhance your understanding of company resources, capabilities, and competitive positioning. Engage with interactive multiple-choice questions, gain insights through hints and detailed explanations. Prepare effectively for your exam!

The correct choice centers around analyzing different financial ratios that specifically measure a company's profitability. The operating profit margin, return on equity, and return on assets all provide insights into how well the company is converting revenue into profit and how effectively it is utilizing its resources.

Operating profit margin assesses the percentage of revenue that remains after paying for variable costs of production, which directly reflects the company's operational efficiency and pricing strategy. Return on equity (ROE) indicates how effectively management is using shareholders' equity to generate profit, and a higher ROE is generally favorable. Meanwhile, return on assets (ROA) measures how efficiently a company uses its assets to produce profit, offering a clear view of asset utilization.

In contrast, the other groups of ratios listed do not primarily focus on profitability. For instance, times interest earned, current ratio, and acid-test ratio are more related to a company's solvency and liquidity rather than profitability. The total debt to assets and debt to equity ratios are geared towards understanding a company's leverage and financial risk. Lastly, while dividend yield and price to earnings ratios provide valuable information, they deal more with stock market performance rather than direct profitability measures. Therefore, option A is the most suitable for evaluating a company's profitability.

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy