Certified Financial Management Specialist Practice Exam

Which of the following is an example of a profitability ratio?

1. Current ratio

2. Return on investment

3. Debt-to-equity ratio

4. Quick ratio

The correct answer is: Return on investment

The return on investment (ROI) is a key example of a profitability ratio because it measures the efficiency of an investment or compares the profitability of several investments. Specifically, ROI is calculated by taking the net profit from an investment, dividing it by the cost of the investment, and then multiplying by 100 to get a percentage. This figure provides insight into how effectively a business is generating profit relative to its investment costs, making it a crucial indicator of financial performance and profitability. In contrast, the other options are not considered profitability ratios. The current ratio and quick ratio are both liquidity ratios that assess a company's ability to meet short-term obligations. The debt-to-equity ratio, meanwhile, is a leverage ratio that evaluates a company's financial structure by comparing its total liabilities to shareholders' equity, helping to understand the risk level associated with the company's financing. Thus, while important, these ratios do not provide a direct measure of profitability like return on investment does.