Which ratio is used to evaluate profitability?

Financial ratios are vital tools for analyzing a company's financial health and performance, categorized into liquidity, solvency, profitability, and efficiency. Profitability ratios specifically measure a company's ability to generate earnings relative to its revenue, assets, or equity, indicating how effectively management is converting sales into profits.

Return on Equity (ROE) is the correct answer because it is a key profitability ratio. ROE measures the net income earned for each dollar of shareholders' equity, indicating how efficiently a company is using the investments made by its shareholders to generate profits. A higher ROE generally signifies better financial performance and effective management of shareholder capital.

• The Quick ratio is a liquidity ratio, assessing a company's ability to meet short-term obligations with its most liquid assets (excluding inventory). It does not evaluate profitability.
• The Debt ratio is a solvency ratio, indicating the proportion of a company's assets financed by debt. It measures financial risk, not the company's ability to generate profits.
• Inventory turnover is an efficiency ratio, measuring how many times a company sells and replaces its inventory over a period. While it reflects operational efficiency, it is not a direct measure of overall profitability.