Profit margin is a ratio that:
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A. B. C. D.A
Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.
The correct answer is A. Profit margin shows the return on net sales.
Profit margin is a financial ratio that measures the profitability of a company by indicating how much profit it generates from its sales revenue. It represents the portion of each dollar of sales revenue that is converted into profit.
To calculate the profit margin, you divide the net income (or profit) by the net sales (or revenue) and multiply the result by 100 to express it as a percentage. The formula is as follows:
Profit Margin = (Net Income / Net Sales) * 100
The profit margin ratio reflects the efficiency and effectiveness of a company's operations and its ability to generate profits relative to its sales. It is an important metric for assessing a company's profitability and financial performance.
Answer option A correctly states that profit margin shows the return on net sales. It indicates how much profit a company is able to generate from each dollar of sales it makes. A higher profit margin suggests that the company is more efficient in converting its sales revenue into profits, while a lower profit margin indicates lower profitability or higher costs.
Answer option B is incorrect because profit margin is not calculated as net sales divided by operating expenses. Operating expenses are not directly used in the calculation of profit margin but are considered separately in assessing a company's profitability.
Answer option C is incorrect because profit margin does not yield the company's financial position at a point in time. Financial position refers to the company's overall financial health, including its assets, liabilities, and equity, which are not directly captured by the profit margin ratio.
Answer option D is incorrect because profit margin does not compare total assets to net sales. The comparison of total assets to net sales is typically captured by other financial ratios, such as asset turnover or return on assets, rather than the profit margin ratio.