3.5 Profitability/Liquidity Analysis

Question 1

Gross Profit Margin

Answer 1

Shows percentage of sales revenue turned into gross profit

Question 2

Return on Capital Employed (Invested)

Answer 2

Measures performance by comparing the capital invested to profit before interest and tax. Capital employed/invested is the value of all sources available to a business at a point in time.

Question 3

Profit Margin

Answer 3

Shows the percentage of sales revenue turned into profit before interest and tax

Question 4

Liquidity

Answer 4

Refers to the ability for business’ to convert their short term assets to cash

Question 5

Liquidity Assets

Answer 5

Refers to cash on hand, cash on bank deposit and assets that can be quickly converted to cash

Question 6

Current Ratio

Answer 6

Compares a firm’s current assets to its current liabilities to determine its ability to pay off short-term debts/liabilities

Question 7

Quick Ratio/Acid Test

Answer 7

Similar to the current ratio, MINUS the stock

Question 8

Solvency

Answer 8

Ability to pay off debts as they fall due

Question 9

Liquidity Ratios

Answer 9

Measures the ability of a business to pay off short-term debts as they fall due