Which metric expresses profitability as a percentage of sales?

• A. Net profit / net sales
• B. Gross margin
• C. Acid test
• D. Current ratio

Answer: (A)

Profitability relative to how much you sell is captured by the net profit margin. It shows how much of each dollar of sales ends up as profit after all expenses are accounted for. The metric is calculated by dividing net income (the profit after taxes and interest) by net sales (sales after returns, allowances, and discounts). Expressed as a percentage, it tells you the portion of sales that becomes profit.

This differs from gross margin, which uses gross profit (sales minus cost of goods sold) and ignores operating expenses, so it reflects production profitability rather than overall profitability. The acid test and current ratio are liquidity measures, indicating the ability to meet short-term obligations, not how profitable the business is relative to sales.