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as reported by Saylor Academy (2012), analysts, shareholders, suppliers and other stakeholders often want to evaluate...

as reported by Saylor Academy (2012), analysts, shareholders, suppliers and other stakeholders often want to evaluate profit trends within a company and compare a company’s profits with competitors’ profits. Which of the five common ratios would you use to evaluate a company’s profitability? Pick one. Please explain and cite your response.

  1. Gross margin ratio
  2. Profit margin ratio
  3. Return on assets
  4. Return on common shareholder’s equity
  5. Earnings per share
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Answer #1

Earnings per share

This represents the Net Income available for common shareholders per share outstanding. It is a good representation of the profitability of the company. It is an important term for investors even in the stock market. Higher EPS increases the demand for the stocks and thus their prices since it is a good measure of the per stock profitability after adjusting for extraordinary items.

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