How is the profitability ratio calculated?

The profitability ratio is intended to measure a company's ability to generate profit relative to its revenue, and one common way to calculate this ratio is by dividing revenues by net income. This calculation reflects how much income is generated for each dollar of revenue. Essentially, it provides insight into the efficiency of a company in turning its sales into profit, which is crucial for assessing its financial health and operational effectiveness.

In this context, net income is a key indicator of profitability, while revenue indicates the total income generated from sales. Therefore, the resulting ratio is instrumental for investors, managers, and stakeholders in understanding how effectively a company is managing its operations and expenses to achieve profitability.

The other options do not accurately depict the standard approach for determining the profitability ratio. For instance, calculating net income divided by total expenses does not specifically gauge profitability in terms of revenue. Similarly, revenue divided by total assets evaluates asset efficiency, while gross profit divided by sales revenue focuses on the manufacturing or operational aspect, rather than the overall profitability as related to net income.