Accountancy Part BAccounting Ratios

Every company analyses its earning capacity of the business which is…

Every company analyses its earning capacity of the business which is the outcome of the utilisation of resources employed in the business. To analyse profitability company can use:

A. Dividend Payout Ratio
B. Return on Net Worth
C. Gross Profit Ratio
D. Quick Ratio
E. Inventory Turnover Ratio

Choose the choose answer from the option given below.

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → A, B and C only

Profitability ratios measure the earning capacity of the business:

(A) Dividend Payout Ratio — True. It is listed among the profitability ratios.
(B) Return on Net Worth — True. It relates profit to shareholders’ funds.
(C) Gross Profit Ratio — True. It relates gross profit to revenue from operations.
(D) Quick Ratio — False. It is a liquidity ratio (acid test ratio).
(E) Inventory Turnover Ratio — False. It is an activity (turnover) ratio.

NCERT (2026-27 edition):
Profitability Ratios – “… Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business.”

NCERT (2026-27 edition):
Profitability Ratios – “… The various ratios which are commonly used to analyse the profitability of the business are: 1. Gross profit ratio 2. Operating ratio 3. Operating profit ratio 4. Net profit ratio 5. Return on Investment (ROI) or Return on Capital Employed (ROCE) 6. Return on Net Worth (RONW) 7. Earnings per share 8. Book value per share 9. Dividend payout ratio 10. Price earning ratio.”