3.5 Profitability and ration analysis Flashcards
Acid test ration
A liquidity ration 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.
Capital employed
The value of all long-term sources of finance for a business.
Current ration
Short-term liquidity ration that calculates the ability of a business to meet its debts within the next twelve months.
Efficiency rations
Indicate how well a firm’s resources have been used.
Gross profit margin (GPM)
Profitability ration that shows the percentage of sales revenue that turns into gross profit.
Liquid assets
The possessions of a business that can be turned into cash quickly without losing their value.
Liquidity crisis
A situation where a firm is unable to pay its short-term debts.
Liquidity rations
The ability of a firm to pay its short-term liabilities.
Net profit margin (NPM)
Shows the percentage of sales revenue that turns into net profit.
Profitability ratios
Examine profit in relation to other figures.
Ration analysis
Quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the final accounts.
Return on capital employed (ROCE)
An efficiency ration (although it also reveals the firm’s profitability) measuring the profit of a business in relation to its sizes (as measured by capital employed)
