Which ratio measures profitability relative to owners' equity?

Which ratio measures profitability relative to owners' equity?

• A. ROE (Return on Equity)
• B. Debt-to-Asset
• C. Current Ratio
• D. Asset Turnover

Answer: (A)

Profitability relative to owners' equity is captured by Return on Equity. It shows how much profit the business generates for each dollar of the owners’ investment, reflecting how effectively management is using equity to earn earnings. The typical calculation uses net income after tax divided by average owners’ equity over the period, so a higher ROE means higher profitability per unit of equity. Keep in mind that leverage can push ROE higher if debt boosts profits, but this also adds risk. The other ratios don’t measure profits per unit of equity: Debt-to-Asset looks at how much financing comes from debt, the Current Ratio focuses on short-term liquidity, and Asset Turnover assesses how efficiently assets generate sales rather than profits relative to equity.

Profitability relative to owners' equity is captured by Return on Equity. It shows how much profit the business generates for each dollar of the owners’ investment, reflecting how effectively management is using equity to earn earnings. The typical calculation uses net income after tax divided by average owners’ equity over the period, so a higher ROE means higher profitability per unit of equity. Keep in mind that leverage can push ROE higher if debt boosts profits, but this also adds risk. The other ratios don’t measure profits per unit of equity: Debt-to-Asset looks at how much financing comes from debt, the Current Ratio focuses on short-term liquidity, and Asset Turnover assesses how efficiently assets generate sales rather than profits relative to equity.