Final answer:
The Gross margin ratio is the KPI that would be used to evaluate a company's profitability as it directly relates to the portion of revenue that remains after accounting for the cost of goods sold.
Step-by-step explanation:
When evaluating a company's profitability, the most appropriate key performance indicator (KPI) from the options provided is the Gross margin ratio. This ratio provides insight into the percentage of revenue that exceeds the cost of goods sold, which is a direct indicator of profitability. It is calculated by subtracting the cost of goods sold from net sales and then dividing by net sales.
The other ratios mentioned have different focus areas:
- The Current ratio measures a company's ability to pay short-term obligations.
- The Inventory turnover ratio indicates how quickly a company sells its inventory.
- The Debt to total assets ratio assesses the percentage of a company's assets that are financed through debt.
For a comprehensive analysis of a company's financial health, multiple KPIs may be reviewed, but for profitability specifically, the Gross margin ratio is the most relevant KPI among the ones listed.