Final answer:
The correct statement about profitability ratios is that they are used as a gauge of a company's operating effectiveness. These ratios help evaluate financial health and operational efficiency, making them crucial for stakeholders like investors and analysts.
Step-by-step explanation:
The correct answer to the question - Which of the following statements about profitability ratios is true? - is (c) they are used as a gauge of a company's operating effectiveness. Profitability ratios are indeed critical indicators that assess a company's ability to generate earnings relative to its revenue, operating costs, or balance sheet assets over time. Those ratios are frequently used by investors and creditors to evaluate a firm's financial health and operational efficiency, as well as its capacity to generate returns on investments or to service debt.
Statement (a) is incorrect because working capital, days sales in receivables, and inventory turnover are more closely related to liquidity ratios and activity ratios, rather than profitability ratios. Statement (b) is partially correct because both short-term and long-term creditors are interested in profitability ratios, but these ratios are not exclusive to short-term creditors' assessments. As for statement (d), it is incorrect because analysts heavily rely on profitability ratios when they calculate ratings for firms and their securities.
Profitability ratios are essential tools for stakeholders to measure a company's financial performance.