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

The question requires identifying which financial metrics are classified as profitability ratios. Let's define each option: 

• Debt Equity Ratio: This measures a company's financial leverage by comparing total liabilities to shareholder equity. It's used to assess a company's financial structure, not its profitability.
• Return on Investment (ROI): This evaluates the efficiency of an investment or compares the efficiency of several investments. It measures profitability as a percentage of the initial investment cost.
• Price Earning Ratio: This ratio values a company by measuring its current share price relative to its per-share earnings. It's used to assess whether a company's stock price is appropriately valued and relates to profitability.
• Earnings per Share (EPS): Represents the portion of a company's profit allocated to each outstanding share of common stock, indicating how profitable a company is on a per-share basis.

Based on these definitions, Return on Investment (B), Price Earning Ratio (C), and Earnings per Share (D) are profitability ratios.

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

Answer 2

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.