Which of the following represents the equation for profit margin?

The profit margin is a crucial metric used to assess a company's financial health by indicating how much profit is generated per unit of revenue. The correct equation for profit margin is represented by profit before finance costs and tax divided by revenue. This calculation focuses on the earnings generated from operations before accounting for external financing and tax obligations, providing a clearer view of operational performance relative to sales generated.

Profit margin serves as a useful indicator for comparing profitability across firms within the same industry or for tracking a single company’s profitability over time. This choice specifically emphasizes operational performance, essential for management accounting.

In contrast, the other options present different ratios or metrics that do not specifically define profit margin. For instance, profit after tax over total assets assesses overall company profitability relative to its asset base instead of focusing solely on revenues. Net income over equity measures return on equity, indicating how effectively equity investments generate income rather than the margin on sales. Lastly, gross profit over total sales evaluates the basic profitability related to production and sales but does not account for other operating expenses, finance costs, or taxes, thus failing to capture the complete picture of profit margin.