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Learning Objective $04-10$ Identify and calculate the common ratios used to assess profitability.

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Activity and profitability ratios provide information about a company$$s profitability. Activity ratios include the receivables turnover ratio, the inventory turnover ratio, and the asset turnover ratio. Profitability ratios include the profit margin on sales, the return on assets, and the return on equity. DuPont analysis explains return on equity as determined by profit margin, asset turnover, and the extent to which assets are financed with equity versus debt.

Profitability Ratios

Knowledge Check $01$

Which of the following computations are correctly stated?

Note: Select all that apply.

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Return on assets $=$ Average total assets $$ Net income

Return on assets $=$ Average total assets $$ Net income

Equity multiplier $=$ Average total equity $$ Average total assets

Equity multiplier $=$ Average total equity $$ Average total assets

Return on equity $=($Net income $$ Average total assets$)$ Equity multiplier

Return on equity $=($Net income $$ Average total assets$)$ Equity multiplier

Return on equity $=$ Profit margin $$ Asset turnover $$ Equity multiplier

Return on equity $=$ Profit margin $$ Asset turnover $$ Equity multiplier