3.5 Profitability And Liquitidy Ratio Analysis

Question 1

Acid Test Ratio (Quick Ratio)

Answer 1

Liquidity Ratio that measures a firm’s ability to meet its short-term debts. It ignores stock because not all inventories can be easily turned into cash in a short time frame.

Question 2

Capital Employed

Answer 2

The value of all long-term sources of finance for a business, namely noncurrent liabilities plus equity.

Question 3

Current Ratio

Answer 3

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

Question 4

Gross Profit Marfin (GPM)

Answer 4

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

Question 5

Loquid Assets

Answer 5

The possessions of a business that can be turned into cash quickly without losing their value i.e. cash, stocks and debtors.

Question 6

Liquidity Crisis

Answer 6

A situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets

Question 7

Liquidity Ratios

Answer 7

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

Question 8

Profit Margin

Answer 8

Ratio that shows the percentage of sales revenue that turns into profit, i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid.

Question 9

Profitability Ratios

Answer 9

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

Question 10

Ratio Analysis

Answer 10

Quantitative management tool that compares different financial figures to examine and judge the financial performance of a business.

Question 11

Return on Capital Employed (ROCE)

Answer 11

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