Which of the following ratios are components of the Return on Investment (ROI) formula, specifically when calculating Return on Assets (ROA)?

• A. Inventory Turnover and Earnings Per Share
• B. Net Profit Margin and Asset Turnover
• C. Debt-to-Equity Ratio and Gross Profit Margin
• D. Current Ratio and Quick Ratio

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of Return on Investment (ROI) and its specific calculation for Return on Assets (ROA). ROI measures the efficiency of an investment, while ROA evaluates how effectively a company uses its assets to generate profit.
2. Step 2: Recall the formula for ROA, which is typically expressed as: ROA = Net Profit Margin × Asset Turnover. Net Profit Margin represents the percentage of revenue that remains as profit after expenses, and Asset Turnover measures how efficiently assets generate revenue.
3. Step 3: Analyze the options provided in the problem. Inventory Turnover and Earnings Per Share are not components of the ROA formula; they measure inventory efficiency and shareholder earnings, respectively.
4. Step 4: Evaluate the correct answer: Net Profit Margin and Asset Turnover. These are the two key components of the ROA formula, as they directly relate to profitability and asset efficiency.
5. Step 5: Confirm that other options, such as Debt-to-Equity Ratio, Gross Profit Margin, Current Ratio, and Quick Ratio, are not relevant to the ROA formula. These ratios measure other aspects of financial performance, such as leverage, liquidity, and gross profitability.