To determine the correct ratio for the cost of goods sold divided by the average inventory, let’s analyze each ratio provided in the options:
1. The return on sales ratio:
- This ratio, also known as the operating profit margin, is calculated by dividing the operating profit by the net sales. It measures how efficiently a company can convert sales into profits. This is not related to cost of goods sold and average inventory.
2. The inventory turnover ratio:
- This ratio measures how many times a company sells and replaces its inventory during a given period. It is calculated by dividing the cost of goods sold (COGS) by the average inventory. This shows how efficiently inventory is managed.
3. The debt to owners' equity ratio:
- This ratio measures the relative proportion of shareholders' equity and debt used to finance a company’s assets. It is calculated by dividing total liabilities by shareholders’ equity. This ratio is not related to inventory management or cost of goods sold.
4. The current ratio:
- This ratio measures a company's ability to pay short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities. This ratio focuses on liquidity, not inventory turnover.
Given these definitions, the ratio that represents the cost of goods sold divided by the average inventory is:
The inventory turnover ratio.
