DECA Retail Merchandising Practice Exam

Which of the following is an indicator of how profitable a company is relative to its total assets?

1. Gross Profit Margin %

2. Return on Investment %

3. Net Profit Margin %

4. Return on Assets (ROA)

The correct answer is: Return on Assets (ROA)

The concept of Return on Assets (ROA) is pivotal in assessing a company’s profitability in relation to its total assets. ROA is calculated by dividing net income by total assets, providing insight into how effectively a company is using its assets to generate earnings. A higher ROA indicates that the company is more efficient in utilizing its assets to produce profit, highlighting operational efficiency and effective asset management. While other metrics like Gross Profit Margin and Net Profit Margin are valuable for understanding profitability, they do not specifically take total assets into account. Gross Profit Margin focuses on the relationship between sales and the cost of goods sold, while Net Profit Margin relates net income to total sales revenue. Return on Investment measures the efficiency of an investment, but it may not directly correlate to total assets as ROA does. Therefore, ROA stands out as the most effective indicator of profitability concerning total assets.