Which of the following best defines the profit margin ratio?

• A. It is calculated as Net Sales divided by Net Income.
• B. It is calculated as Total Assets divided by Net Sales.
• C. It is calculated as Gross Profit divided by Total Assets.
• D. It is calculated as Net Income divided by Net Sales.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the profit margin ratio: It measures how much net income is generated as a percentage of net sales, indicating the efficiency of a company in converting sales into profits.
2. Identify the formula for the profit margin ratio: \( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Net Sales}} \). This formula highlights the relationship between net income and net sales.
3. Clarify the components: Net Income refers to the profit remaining after all expenses, taxes, and costs have been deducted from total revenue. Net Sales refers to the revenue generated from sales after deducting returns, allowances, and discounts.
4. Compare the given options: Evaluate each option to determine which one matches the correct formula for the profit margin ratio. The correct formula is \( \frac{\text{Net Income}}{\text{Net Sales}} \).
5. Conclude that the correct definition of the profit margin ratio is: 'It is calculated as Net Income divided by Net Sales.' This aligns with the standard formula used in financial accounting.