The firm's ________ indicates how much the firm's profits contribute to ROE.

Question

Quizplus · Accepted Answer

Profit margin is the measure of the firm's profitability, i.e., how much profit is earned relative to sales revenue. It is calculated by dividing the net income by the total revenue generated. Therefore, profit margin indicates the percentage of each dollar of sales that the firm keeps as profit, or in other words, how efficiently the firm is managing its expenses. As a result, profit margin has a direct impact on ROE, as it indicates how much profit is generated from each dollar invested by shareholders. Higher profit margin leads to higher profitability, which, in turn, contributes to higher ROE.

The Firm's ________ Indicates How Much the Firm's Profits Contribute