Which ratio is primarily used to assess profitability by comparing profits to revenue?

• A. Debt to equity ratio
• B. Profit margin ratio
• C. Asset turnover ratio
• D. Times interest earned ratio

Answer: (B)

When assessing profitability relative to revenue, the measure that fits is the margin that shows how much of each revenue dollar becomes profit after all expenses. This is the net profit margin, calculated as net income divided by revenue. It directly indicates how efficiently a company converts sales into actual profit—a higher percentage means more profit retained from each dollar of revenue, reflecting effective pricing, cost control, and overall efficiency.

Other ratios focus on different ideas: debt-to-equity looks at leverage, asset turnover gauges how efficiently assets generate revenue, and times interest earned measures the ability to cover interest payments rather than overall profitability per revenue dollar.