Which of the following ratios are key components in measuring a company's operating efficiency, specifically as it relates to Return on Assets (ROA)?

• A. Earnings Per Share and Price-to-Earnings Ratio
• B. Net Profit Margin and Total Asset Turnover
• C. Debt-to-Equity Ratio and Times Interest Earned
• D. Current Ratio and Quick Ratio

Answer: (B)

Verified step by step guidance

1. Understand the concept of Return on Assets (ROA): ROA measures how efficiently a company uses its assets to generate profit. The formula for ROA is typically expressed as: $\frac{\mathrm{Net} \mathrm{Income}}{\mathrm{Total} \mathrm{Assets}}$. It combines profitability and asset utilization.
2. Identify the components of ROA: ROA is influenced by two key factors: Net Profit Margin and Total Asset Turnover. Net Profit Margin measures profitability, while Total Asset Turnover assesses how efficiently assets are used to generate revenue.
3. Analyze the options provided: Evaluate each pair of ratios to determine their relevance to ROA. For example, Earnings Per Share and Price-to-Earnings Ratio are related to stock performance, not operating efficiency. Debt-to-Equity Ratio and Times Interest Earned focus on financial leverage and solvency, not asset efficiency. Current Ratio and Quick Ratio measure liquidity, not profitability or asset utilization.
4. Focus on Net Profit Margin and Total Asset Turnover: These two ratios directly contribute to ROA. Net Profit Margin is calculated as $\frac{\mathrm{Net} \mathrm{Income}}{\mathrm{Revenue}}$, and Total Asset Turnover is calculated as $\frac{\mathrm{Revenue}}{\mathrm{Total} \mathrm{Assets}}$. Together, they explain how profitably and efficiently a company uses its assets.
5. Conclude that Net Profit Margin and Total Asset Turnover are the correct answer: These ratios are the key components in measuring a company's operating efficiency as it relates to ROA, aligning with the formula and purpose of ROA.