3.5 Profitability and Liquidity Ratio Analysis Flashcards
Ratio analysis
Financial analysis tool used in the interpretation and assessment of a firm’s financial statements
Profitability ratios
Ratios that assess the performance of a firm in terms of its profit generating ability
Gross Profit Margin
Profitability ratio that measures how much gross profit is generated as a percentage of the sales revenue
Net Profit Margin
Profitability ratio that measures how much net profit is generated as a percentage of the sales revenue
Efficiency ratios
Ratios that assess how well a firm internally utilizes its assets and liabilities
Return on capital employed
Efficiency ratio that assesses the returns a firm is making from its capital employed
Capital employed
The total capital invested in the business
Liquidity ratios
Ratios that measure the ability of a firm to pay off its short-term debt obligations
Current Ratio
Liquidity ratio that indicates a business’s ability to pay off its current liabilities in comparison to its current assets
Acid test (quick ratio)
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