What does the mark-up ratio indicate?

The mark-up ratio is a critical metric that measures the profit margin based on the cost of goods sold. By indicating how much more a company charges for its products compared to the cost of producing those products, the mark-up ratio provides insight into pricing strategy and profitability. When a business sets its selling price above the cost, the difference—expressed as a ratio—reflects the total profit made concerning the cost involved in acquiring or producing those goods. This is essential for understanding the financial health of a business and its ability to cover costs while generating profit through sales.

In contrast, liquidity status refers to a company's ability to meet its short-term obligations, which is not what the mark-up ratio assesses. The measurement of profit after all business expenses have been paid relates more to net profit margins, which differ from mark-up calculations. Lastly, return on capital employed focuses on the efficiency and profitability of capital investments rather than specifically on the profit derived from the cost of goods sold. Thus, the mark-up ratio distinctly highlights the relationship between the cost of goods and selling price, confirming its correctness as the option that indicates total profit made on the cost of goods.