ROE is related to profitability ratios; which of the following is a related measure?

• A. Debt-to-equity ratio
• B. Current ratio
• C. Net margin
• D. Asset turnover

Answer: (C)

ROE measures profitability by showing how much profit is earned for each dollar of shareholders’ equity. Because it’s about profitability, a closely related measure is net margin, which tells you what portion of revenue turns into profit after all expenses. Net margin is calculated as net income divided by net sales, so it directly links earnings to the firm's sales performance. In the DuPont view of ROE, net margin is one of the key components that explain how efficiently a company converts sales into profit, before considering asset use or financing. The other options focus on different areas: debt-to-equity looks at leverage, the current ratio at liquidity, and asset turnover at efficiency. While asset turnover can affect ROE through the overall breakdown, net margin most closely aligns with the profitability aspect that ROE emphasizes.