ACCA Performance Management (F5) Certification Practice Exam

Which ratio is used to measure profitability?

1. Asset turnover

2. Gross profit margin

3. Inventory holding period

4. Receivables collection period

The correct answer is: Gross profit margin

The gross profit margin is a key indicator of a company's profitability. It measures the difference between sales revenue and the cost of goods sold, relative to sales revenue, expressed as a percentage. This ratio reflects how efficiently a company is producing and selling its goods, giving insight into both pricing strategy and production costs. A higher gross profit margin indicates a greater amount of profit is made on each dollar of sales, which is essential for covering operating expenses and achieving overall profitability. In contrast, asset turnover focuses on how effectively a company is using its assets to generate sales. While it is also a measure of efficiency, it does not directly assess profitability. The inventory holding period measures how long inventory is held before it is sold, providing insights into operational efficiency but not profitability directly. The receivables collection period assesses how quickly a company collects payments from customers, indicating cash flow efficiency rather than profitability. Hence, the gross profit margin stands out as the primary ratio used to measure profitability directly.