3.5 Ratio Analysis

Question 1

Split these 6 ratios into profitability ratios, and liquidity ratios:
* return on capital employed (ROCE)
* gross profit margin
* acid test ratio.
* current ratio
* operating profit margin
* markup

Answer 1

Profitability ratios:
* gross profit margin
* operating profit margin
* markup

Liquidity Ratios:
* return on capital employed (ROCE)
* current ratio
* acid test ratio.

Question 2

Define profitability ratio:

Answer 2

Measures a company’s ability to generate earnings relative to its revenue during a specific period of time.

Question 3

Define liquidity ratio:

Answer 3

Measure a company’s ability to pay its short-term debt obligations. (whether it has enough liquid assets that can be quickly turned into cash to cover its liabilities)