Which of the following best defines the profit margin ratio?

• A. Net sales divided by total assets
• B. Operating expenses divided by net sales
• C. Net income divided by net sales
• D. Gross profit divided by net sales

Answer: (C)

Verified step by step guidance

1. Understand the concept of the profit margin ratio: It is a financial metric that measures how much net income is generated as a percentage of net sales. This ratio helps assess a company's profitability.
2. Identify the formula for the profit margin ratio: The formula is \( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Net Sales}} \). This indicates the proportion of net sales that translates into net income.
3. Clarify the components of the formula: Net income refers to the company's total earnings after all expenses, taxes, and costs have been deducted. Net sales represent the revenue generated from sales after deducting returns, allowances, and discounts.
4. Compare the given options: Evaluate each option to determine which aligns with the formula for the profit margin ratio. For example, 'Net income divided by net sales' matches the formula, while other options like 'Net sales divided by total assets' or 'Operating expenses divided by net sales' do not represent the profit margin ratio.
5. Conclude the correct definition: Based on the formula and comparison, the correct definition of the profit margin ratio is 'Net income divided by net sales.' This reflects the company's ability to convert sales into profit.