In: Accounting
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
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