3.5 Profitability and Liquidity Ratio Analysis

Question 1

Ratio analysis

Answer 1

Financial analysis tool used in the interpretation and assessment of a firm’s financial statements

Question 2

Profitability ratios

Answer 2

Ratios that assess the performance of a firm in terms of its profit generating ability

Question 3

Gross Profit Margin

Answer 3

Profitability ratio that measures how much gross profit is generated as a percentage of the sales revenue

Question 4

Net Profit Margin

Answer 4

Profitability ratio that measures how much net profit is generated as a percentage of the sales revenue

Question 5

Efficiency ratios

Answer 5

Ratios that assess how well a firm internally utilizes its assets and liabilities

Question 6

Return on capital employed

Answer 6

Efficiency ratio that assesses the returns a firm is making from its capital employed

Question 7

Capital employed

Answer 7

The total capital invested in the business

Question 8

Liquidity ratios

Answer 8

Ratios that measure the ability of a firm to pay off its short-term debt obligations

Question 9

Current Ratio

Answer 9

Liquidity ratio that indicates a business’s ability to pay off its current liabilities in comparison to its current assets

Question 10

Acid test (quick ratio)

Answer 10

Liquidity ratio that subtracts stock from the current assets to more accurately determine a business’s ability to pay off current liabilities with the most liquid assets