Question

How does the Profit Margin compare or contrast to the Gross Margin Ratio? Which is the more relevant ratio - please explain.

How does the Return on Equity ratio compare to the Return on Assets ratio? Which is the more relevant ratio - please explain.

Answer 1

Profit margin is expressed as percentage of net profit to the revenue. It is expressed in Percentage terms.

Gross profit margin is expressed as percentage terms of contribution or gross profit yo revenue.

Profit margin is more relevant ratio as it is net profit expressed in % terms to revenue while gross profit is computed only after deducting direct expenses rather than all the expenses unlike profit margin.

Return on equity and Return on assets both the rayos are expressed as a % of Return to Total equity and Total Assets. If Return on equity is strong then management is giving more wealth to equity . If Return on assets is strong then the debt levels are reasonable.