Canadian Securities Course (CSC) Level 2 Practice Exam

Which ratio is a key indicator of a company's efficiency in running a business according to the text?

1. Return on common equity

2. Net profit margin

3. Operating performance ratio

4. Inventory turnover

The correct answer is: Net profit margin

The net profit margin is a key indicator of a company's efficiency in running its business because it reflects how much profit a company retains from its revenues after accounting for all expenses. A high net profit margin indicates that a company is good at converting revenue into profit, thus demonstrating its effectiveness in controlling costs and generating a profit from sales. While other ratios, such as return on common equity, operating performance ratio, and inventory turnover, are certainly useful in assessing different aspects of a company's performance, they do not capture overall efficiency in quite the same way. For instance, return on common equity measures profitability relative to shareholder equity, and inventory turnover assesses how quickly inventory is sold and replaced but does not directly indicate overall efficiency in terms of profitability from total revenues. Therefore, the net profit margin stands out as a direct reflection of how well a company is managing its expenses in relation to its sales.