Question

Statement I:

The net profit margin is a better indicator of management performance, than gross profit margin, because it includes the effects of costs, many of which are controllable by management.

Statement II:

The higher the EBITDA margin ratio (%), the higher management’s ability to produce profit.

Both statements are correct

Statement 1 is correct; statement 2 is incorrect

Both statements are incorrect

Statement 1 is incorrect; statement 2 is correct

Answer 1

Option (a) is correct.

Both the statements are correct.

As per first statement, net profit margin is better indicator of management performance than gross profit margin. Gross profit merely tells about the profitability calculated by sales and cost of the goods sold. But, Net profit margin is a broader term and it includes the operating expenses also, while calculating it. Most of the operating expenses are always controllable by the management.

Second statement says higher the EBITDA (Earnings before interest,tax ,depreciation and amortization),margin ratio, the higher is the management's ability to produce profit, as it indicates that a company is able to keep its profits to high level because of efficient processes thereby keeping expenses to the lower side.