Question

In: Accounting

Which of the following common profitability ratios indicates the ability of a company to generate income...

Which of the following common profitability ratios indicates the ability of a company to generate income from the funds invested by its common stockholders?

a.) Return on stockholders' equity

b.) Profit margin

c.) Gross profit margin

d.) Return on assets

Solutions

Expert Solution

answer : a) return on shareholders equity

explanation

return on equity is a measure of profitability of the business organization in relation to the funds invested by the shareholders . it indicates the ability of the business to generate the income from the funds invested by the shareholders .

return on shareholders equity is calculated by using the following formula

shareholders equity = net income / average shareholders equity*100

profit margin is incorrect because it explains about the overall profitability of the organization and it is calculated as follows : profit margin= net income /sales *100

gross profit margin is incorrect because it explains about the gross profit generated from the sales before deducting the operating expenses . gross profit ratio = gross profit /sales *100

return on assets is incorrect because it explains about the return generated from the net assets invested .formula is as follows

return on assets = net income /average assets *100


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