What does a profitability ratio indicate?

• A. How well a company makes money.
• B. How fast a company turns over inventory.
• C. How much cash a company generates from operations.
• D. The liquidity of the company’s assets.

Answer: (A)

Profitability ratios show how effectively a company turns revenue into profit and uses its assets and equity to generate earnings. They indicate how well the business makes money. For example, net profit margin reveals how much profit remains from each dollar of sales, while return on assets shows how efficiently assets generate profits, and return on equity measures earnings generated for shareholders. The other concepts describe different aspects: inventory turnover looks at how quickly inventory is sold, cash from operations is about actual cash produced from core activities, and liquidity assesses the ability to meet short-term obligations, not profitability.