Which metric indicates profitability as a percentage of sales?

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

Answer: (A)

Profitability as a percentage of sales is shown by the net profit margin. It measures how much of every dollar of sales remains as profit after all expenses are accounted for. The ratio is net profit divided by net sales, so it directly expresses the bottom-line profitability relative to sales. Net profit is the amount left after subtracting all costs, taxes, and interest, while net sales reflect sales after returns and allowances. This makes the metric the best way to gauge how efficiently a company converts sales into profit.

Gross margin is related but different: it uses gross profit (sales less cost of goods sold) and shows profitability before operating expenses, so it doesn’t capture the full picture of profitability after all costs. The current ratio and the acid-test (quick ratio) are liquidity measures, not profitability metrics, focusing on a company’s ability to meet short-term obligations.