Which ratio is a profitability measure that expresses net income as a percentage of revenue?

Which ratio is a profitability measure that expresses net income as a percentage of revenue?

• A. Return on assets
• B. Debt-to-equity ratio
• C. Gross margin
• D. Net profit margin

Answer: (D)

Net profit margin is the ratio that shows how much of every dollar of revenue remains as profit after all expenses, including taxes and interest, have been subtracted. It’s calculated as net income divided by revenue and expressed as a percentage. This directly answers the idea of profitability relative to sales, capturing the overall profitability of the business after all costs. Other ratios don’t fit because they measure different things. Return on assets compares net income to total assets, not to revenue, so it’s about how efficiently assets generate profit. The debt-to-equity ratio looks at financial structure and leverage, not profitability. Gross margin uses gross profit (revenue minus cost of goods sold) divided by revenue, so it ignores other operating expenses and taxes.

Net profit margin is the ratio that shows how much of every dollar of revenue remains as profit after all expenses, including taxes and interest, have been subtracted. It’s calculated as net income divided by revenue and expressed as a percentage. This directly answers the idea of profitability relative to sales, capturing the overall profitability of the business after all costs.

Other ratios don’t fit because they measure different things. Return on assets compares net income to total assets, not to revenue, so it’s about how efficiently assets generate profit. The debt-to-equity ratio looks at financial structure and leverage, not profitability. Gross margin uses gross profit (revenue minus cost of goods sold) divided by revenue, so it ignores other operating expenses and taxes.