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Profitability Ratio Quiz

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Questions and Answers

What is the gross profit ratio?

The ratio of operating expenses to revenue from operations

The ratio of gross profit to net revenue from operations (correct)

The ratio of operating expenses and cost of revenue from operations to revenue from operations

The ratio of net profit to net revenue from operations

What does a higher net profit ratio indicate?

A company is controlling its costs and operating more efficiently

A company is effectively managing its production costs and pricing strategies

A company is efficient in managing its expenses and generating profits from its operations (correct)

A company is effectively utilizing its capital to generate profits

What is the formula for calculating the operating ratio?

(Gross Profit / Net Revenue from Operations) x 100

(Net Profit before Interest and Tax / Capital Employed) x 100

(Net Profit / Net Revenue from Operations) x 100

(Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations x 100 (correct)

What does the return on investment ratio measure?

<p>The returns generated from the capital invested in the business</p> Signup and view all the answers

Why is it important to compare a company's profitability ratios with industry benchmarks and historical data?

<p>To gain a better understanding of its financial performance</p> Signup and view all the answers

Study Notes

Profitability Ratios

The gross profit ratio measures the difference between revenue and cost of goods sold, indicating profitability of a company's products or services.

Net Profit Ratio

A higher net profit ratio indicates a company's ability to convert its sales into profit, reflecting its efficiency in managing expenses and generating earnings.

Operating Ratio

The operating ratio is calculated by dividing the cost of goods sold and operating expenses by net sales, revealing the proportion of sales that goes towards meeting operational costs.

Return on Investment (ROI) Ratio

The return on investment ratio measures the rate of return on investments, comparing the gain generated by an investment to its cost, helping investors evaluate the profitability of their investments.

Importance of Comparing Profitability Ratios

Comparing a company's profitability ratios with industry benchmarks and historical data is crucial to understand its performance in relation to its peers and its own past performance, enabling informed decision-making.

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Description

Test your knowledge on profitability ratios with this quiz! Learn about the different types of profitability ratios, including the gross profit ratio, net profit ratio, and return on investment ratio. See how well you understand these financial metrics and how they can provide insights into a company's profitability and efficiency. Sharpen your skills in finance and accounting with this quiz!