The profit margin ratio compares a company's profit to what?

• A. It shows the relationship between net income and total assets.
• B. It shows the profitability relative to equity.
• C. It shows the ratio of operating income to sales.
• D. It is a ratio of a company's profit divided by its revenue.

Answer: (D)

Profit margin ratio shows how much profit the company keeps from each dollar of revenue. It is calculated as net income (profit) divided by revenue (sales). This base reveals how efficiently a company translates sales into actual profit, reflecting pricing, cost control, and overall profitability per unit of sales.

Other measures use different bases: return on assets compares net income to total assets, return on equity compares net income to shareholders’ equity, and operating margin uses operating income relative to revenue. So the description “profit divided by revenue” best captures the profit margin concept. For example, if net income is 20 and revenue is 200, the margin is 10%.