3.5 - Profitability and liquidity ratio analysis

Question 1

liquidity ratio that measures a firm’s ability to meet short term debts
ignores stock

Answer 1

acid test ratio (quick ratio)

Question 2

value of all long-term sources of finance. noncurrent liabilities + equity

Answer 2

capital employed

Question 3

short-term liquidity ratio that calculates ability of business to meet its debts within the next twelve months

Answer 3

current ratio

Question 4

profitability ratio that shows value of firm’s gross profit expressed as a percentage of its sales revenue

Answer 4

gross profit margin (GPM)

Question 5

possessions of a business that can be turned into cash quickly without losing their value

Answer 5

liquid assets

Question 6

a situation where a firm can’t pay its short-term debts. current liabilities > current assets

Answer 6

liquidity crisis

Question 7

ability of a firm to pay its short term liabilities, comprised of the current ratio and the acid test (quick) ratio

Answer 7

liquidity ratios

Question 8

ratio that shows the percentage of sales revenue that is turned into profit. proportion of sales revenue left over after all direct/indirect costs have been paid

Answer 8

profit margin

Question 9

profit in relation to other figure to other figures, comprised of gross profit margin (GPM), profit margin, and return on capital employed (ROCE)

Answer 9

profitability ratios

Question 10

quantitative management tools that compares different financial figures to examine and judge the financial performance of a business

Answer 10

ratio analysis

Question 11

profitability ratio that measures financial performance of a firm based on the amount of capital invested

Answer 11

return on capital employed (ROCE)

Question 12

gross profit margin ratio

Answer 12

(gross profit/sales revenue) x 100

Question 13

profit margin ratio

Answer 13

(profit before interesting + tax/sales reveue) x 100

Question 14

is high GPM good or bad

Answer 14

good

Question 15

is high profit margin good or bad

Answer 15

good

Question 16

current ratio equation

Answer 16

current assets/current liabilities

Question 17

what should the current ratio be in between?

Answer 17

1.5-2.0
too low = too many short term debts
too high = cash that could be used but is being wasted

Question 18

acid test ratio (quick ratio) equation

Answer 18

(current assets - stock)/current liabilities

Question 19

what should the acid test ratio (quick ratio) be?

Answer 19

1:1

Question 20

return on capital employed (ROCE) equation

Answer 20

(profit before interest and tax/capital employed) x 100

Question 21

equation for capital employed

Answer 21

non-current liabilities + equity

Question 22

what does a 20% ROCE mean?

Answer 22

for every $100 invested, $20 profit is generated