How is the profit margin calculated?

The calculation of the profit margin is derived from the relationship between net income and revenue, making the option that states "Net income divided by revenue" the correct choice. Profit margin is a key financial metric that indicates how much profit a company makes for every dollar of revenue generated.

To further clarify, profit margin reflects a company's operational efficiency and pricing strategy. When you divide net income by total revenue, you obtain a percentage that reveals what portion of the revenue is retained as profit after all expenses, taxes, and costs have been deducted. A higher profit margin signifies better financial health and profitability.

In contrast, the other options represent different financial ratios or metrics that do not pertain to profit margin. For example, dividing net income by total assets gives a return on assets ratio, which measures how efficiently a company uses its assets to generate profit, while total revenue divided by total liabilities pertains to financial leverage and solvency, not profitability. Lastly, net revenue divided by total equity reflects return on equity, a measure of the profitability relative to shareholders' equity rather than overall revenue. Thus, understanding the distinction and correct application of these formulas is crucial for evaluating a company's financial performance.