How is the Gross Margin Ratio calculated?

The Gross Margin Ratio is calculated by dividing gross profit by net sales, which is precisely what the chosen answer specifies. Gross profit represents the revenue from sales minus the cost of goods sold (COGS), indicating how efficiently a company is producing and selling its products. By focusing on gross profit relative to net sales, this ratio illustrates how well the company manages its production and operational costs in relation to its core revenue-generating activities.

This ratio is particularly important for assessing a company's financial health and operational efficiency, as a higher gross margin indicates a stronger ability to convert sales into profit after covering the direct costs associated with production. Understanding this ratio helps businesses and investors gauge pricing strategy, production efficiency, and overall profitability.

In contrast, the other choices do not align with the definition of the Gross Margin Ratio. While net income divided by sales relates to overall profitability, average total assets divided by net sales is a measure of asset efficiency, and cash dividends divided by earnings per share is focused on shareholder returns rather than operational performance. None of these directly address the relationship between gross profit and net sales, which is central to calculating the Gross Margin Ratio.