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Class 12 Exam  >  Class 12 Questions  >  Which of the following is not a profitability... Start Learning for Free
Which of the following is not a profitability ratio?
(i) Earning per share
(ii) Return on investment
(iii) Interest Coverage Ratio
(iv) Gross Profit Ratio
  • a)
    Only (i)
  • b)
    Only (i) and (ii)
  • c)
    Only (iii)
  • d)
    Only (iii) and (iv)
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
Which of the following is not a profitability ratio?(i) Earning per sh...
Profitability Ratios:
Profitability ratios are financial metrics used to assess a company's ability to generate earnings relative to its expenses and other costs incurred during a specific period. These ratios provide insights into a company's profitability and its ability to generate profit for its shareholders. Common profitability ratios include earning per share, return on investment, interest coverage ratio, and gross profit ratio.

Earning per Share (EPS):
- Earning per share (EPS) is a profitability ratio that measures the net profit earned by a company for each outstanding share of common stock.
- It is calculated by dividing the net income available to common shareholders by the average number of outstanding shares.
- EPS indicates how much profit is generated for each share of stock held by shareholders.
- It is an important metric for investors as it helps them understand the profitability and value of their investment.
- Therefore, earning per share (EPS) is a profitability ratio.

Return on Investment (ROI):
- Return on investment (ROI) is a profitability ratio that measures the efficiency and profitability of an investment.
- It is calculated by dividing the net profit from an investment by the initial cost of the investment, and then multiplying it by 100 to express it as a percentage.
- ROI helps investors and businesses evaluate the profitability of an investment relative to its cost.
- Therefore, return on investment (ROI) is a profitability ratio.

Interest Coverage Ratio:
- Interest coverage ratio is a financial metric that measures a company's ability to meet its interest obligations.
- It is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense.
- This ratio indicates how many times a company's earnings can cover its interest expenses.
- It is used by lenders and investors to assess the risk associated with a company's debt obligations.
- Therefore, interest coverage ratio is not a profitability ratio.

Gross Profit Ratio:
- Gross profit ratio is a profitability ratio that measures the proportion of gross profit generated by a company relative to its net sales revenue.
- It is calculated by dividing the gross profit by the net sales revenue and multiplying it by 100 to express it as a percentage.
- This ratio helps assess a company's ability to generate profit from its core operations.
- Therefore, gross profit ratio is a profitability ratio.

Conclusion:
- From the given options, the interest coverage ratio is not a profitability ratio.
- The earning per share, return on investment, and gross profit ratio are all profitability ratios.
- Therefore, the correct answer is option (c) - Only (iii) is not a profitability ratio.
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Community Answer
Which of the following is not a profitability ratio?(i) Earning per sh...
Interest Coverage Ratio is a solvency ratio.
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