Question

Which of the following best describes the use of profitability ratios?

A. It shows the relative amount of funds in the business supplied by creditors and shareholders.

B. It indicates a company's ability to pay short-term debts.

C. It indicates management's ability to generate a financial return on sales or investment.

D. It shows the profit margins for the last six months.

E. It indicates the future profits from the current customer base.

Answer 1

Profitability ratios indicate management's ability to generate a financial return on sales or investment.

Step-by-step explanation:

The use of profitability ratios is best described by option C, which states that it indicates management's ability to generate a financial return on sales or investment. Profitability ratios are financial metrics that measure a company's ability to generate profits relative to its sales or investments. These ratios provide insight into a company's profitability and can be used to evaluate its financial performance and compare it to industry benchmarks.

For example, one common profitability ratio is the return on assets (ROA), which measures a company's ability to generate earnings from its assets. Another ratio, the return on equity (ROE), shows how effectively a company is using its shareholders' equity to generate profits.