Question

Which of the following are the Profitability Ratios?
(A) Debt Equity Ratio
(B) Return on Investment
(C) Price Earning Ratio
(D) Earning per share

• A. (A), (B) and (D) only
• B. (A), (B) and (C) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Answer 1

The Correct Option is D

Profitability ratios are financial metrics used to assess a company's ability to generate earnings relative to its revenue, assets, equity, or other financial metrics. Let's analyze each of the options to determine which ones are profitability ratios:

Debt Equity Ratio (A):

• The Debt Equity Ratio is a measure of a company's financial leverage, calculated as the ratio of total debt to shareholders' equity. It is not a profitability ratio; rather, it assesses a company's capital structure and risk.
  Therefore, (A) is not a profitability ratio.

Return on Investment (B):

• Return on Investment (ROI) is a profitability ratio that measures the efficiency of an investment or compares the profitability of investments relative to their costs.
  Therefore, (B) is a profitability ratio.

Price Earning Ratio (C):

• The Price Earnings (P/E) Ratio is a valuation ratio that compares a company's market price per share to its earnings per share. While it is not directly a profitability ratio, it provides insights into how much investors are willing to pay for each dollar of earnings, so it is often used to evaluate the profitability and valuation of a company.
  Therefore, (C) can be considered a profitability ratio in some contexts.

Earnings per Share (D):

• Earnings per Share (EPS) is a profitability ratio that measures the portion of a company's profit allocated to each outstanding share of common stock. It is a direct measure of a company's profitability.
  Therefore, (D) is a profitability ratio.

The profitability ratios are (B) Return on Investment, (C) Price Earnings Ratio, and (D) Earnings per Share.

Thus, the correct answer is (D): (B), (C) and (D) only.

Answer 2

Return on Investment (ROI) is a profitability ratio as it measures how efficiently a company generates profits from its investments.
Price Earning Ratio (P/E Ratio) is related to profitability because it shows the relationship between the company’s earnings and its share price.
Earnings per Share (EPS) is a key indicator of profitability as it represents the portion of a company’s profit allocated to each outstanding share.
Debt Equity Ratio, however, is a solvency ratio, not a profitability ratio.