3.5 Profitability & Liquidity Ratio Analysis

Question 1

5 Ratios

Answer 1

Gross profit margin

Net profit margin

Return On Capital Employed

Current

Acid-test/quick

Question 2

Gross Profit Margin (%) (GPM)

Answer 2

Gross Profit/ Sales Revenue x 100

Raising Revenue

• Marketing strategies (which will increase expenses)

Cutting Cost of Goods Sold

• Cheaper suppliers, materials
• Cheaper labour (e.g. outsourcing)
• Increase productivity

Question 3

Net Profit Margin (%) (NPM)

Answer 3

Net Profit/Sales Revenue x 100

Net Profit before tax and interest (From P&L)

Reduce expenses/overheads

• Cheaper rent
• Reduce marketing
• Reduce stationary costs
• First class versus economy class business tickets for EEs
• Less use of aircon

Question 4

Ways they can improve GPM & NPM:

Answer 4

GPM - Raise tuition fee & Reduce teacher salaries

NPM - Reduce marketing expenses, Reduce electricity bill, Change location to somewhere cheaper

Question 5

Liquidity

Answer 5

Current Assets (12 months $ brought in)

Current Liabilities (12 months $ leaving)

Question 6

Current Ratio (CR)

Answer 6

Current Assets/ Current Liabilities

Ideal 1.5 -2

Question 7

Acid-test Ratio (ATR)

Answer 7

(Current Assets – Stock)/Current Liabilities

Ideal 1-1.5

Question 8

Improving Liquidity Ratios

Answer 8

Take out long term loans to inject cash

Selling Fixed Assets for cash (Sell factry and lease it back)

Sell inventories for cash (Discounted)

Question 9

Return on Capital Employed (ROCE) (%)

Answer 9

net profit/capital employed x 100

Capital employment =

Share capital + Long Term Liabilities + Accumulate Retained profit

Net Profit =

Net Profit before tax and interest (P&L)

Question 10

How to increase ROCE

Answer 10

Increase Net Profit by using your capital more efficiently

• Make more money