Question

Profitability ratio is generally shown in

• A. Simple ratio
• B. Percentage
• C. Times
• D. None of these

Hint:

Remember the general rule for ratio formats:
{Profitability/Margins} $\rightarrow$ Percentage (%)
{Turnover/Activity} $\rightarrow$ Times
{Liquidity/Solvency} $\rightarrow$ Simple Ratio (Proportion)

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks for the common format used to express profitability ratios. Profitability ratios measure a company's ability to generate earnings relative to its revenue, assets, or equity.
Step 2: Analysis of Ratio Formats:
Different types of financial ratios are expressed in different formats for clarity and comparability.

(A) Simple ratio (e.g., 2:1): This format is typically used for balance sheet ratios, especially liquidity ratios like the Current Ratio.

(B) Percentage (e.g., 25%): This format is used to show a part relative to a whole. It is standard for all margin and return ratios. Examples include:
Gross Profit Margin = (Gross Profit / Sales) $\times$ 100
Net Profit Margin = (Net Profit / Sales) $\times$ 100
Return on Equity (ROE) = (Net Income / Equity) $\times$ 100

(C) Times (e.g., 5 times): This format is used for activity or turnover ratios, which measure how many times an asset is "turned over" or utilized during a period. Examples include Inventory Turnover Ratio and Debtors Turnover Ratio.

Step 3: Final Answer:
As shown by the standard formulas and industry practice, profitability ratios are almost always expressed as a percentage to indicate the return or margin on sales, assets, or equity. Therefore, (B) is the correct answer.