Which ratio indicates how effectively capital is being utilized to generate profits?

The Return on Capital Employed (ROCE) is the ratio that indicates how effectively capital is being utilized to generate profits. This financial metric measures the return generated from the capital invested in the business, providing insight into how efficiently the company is using its resources to drive earnings. A higher ROCE suggests that the business is using its capital effectively to generate profits, while a lower ROCE indicates that the company may not be using its capital as efficiently.

This ratio is particularly important for assessing operational performance and the effectiveness of management in generating a return on capital invested in the business. Investors and stakeholders often look at ROCE to gauge the overall profitability of a business in relation to the capital it has employed, making it a key metric in financial analysis.

The other options provided serve different purposes in financial analysis. The Net Profit Margin focuses on profitability relative to sales, the Working Capital Ratio helps assess liquidity and short-term financial health, and the Acid Test Ratio offers insight into a company's ability to meet short-term obligations without relying on inventory sales. While all these ratios provide valuable information, they do not specifically measure the efficiency of capital utilization in generating profits like ROCE does.