Which formula represents the Profit Margin Ratio?

The Profit Margin Ratio is an important financial metric that indicates the percentage of profit a company makes for each dollar of revenue generated from sales. It reflects how effectively a company manages its expenses relative to its total sales.

The formula represented by the correct choice, net income divided by sales, accurately captures this relationship. Net income is the total profit after all expenses, taxes, and costs have been subtracted from total revenue. By dividing net income by sales, you derive a percentage that represents the profit earned for every dollar of sales, providing insight into the company’s profitability. This ratio is crucial for stakeholders and investors, as it helps assess how efficiently a company is allocating its resources to generate profit.

Other options, while related to profitability and financial performance, do not accurately define the Profit Margin Ratio. For instance, gross profit to net sales speaks to gross margin rather than profit margin, which focuses solely on the profit after all expenses are considered. The net income to average total assets ratio is indicative of return on assets, not profit margin. Lastly, the cash dividends per share to earnings per share ratio reflects dividend policy and payout rather than profitability itself.