Finance Topic 3 - profitability & liquidity ratios

Question 1

How does one calc profit before interest and tax

Answer 1

sales revenue - cost of goods sold - direct costs - indirect costs

Question 2

gross profit?

Answer 2

GP is the difference between a companies sales revenue and cost of goods sold.
Sales R - CGOS

Question 3

gross profit margin?

Answer 3

Sales R - CGOS (aka gross profit) / revenue. multiplied by 100.

Question 4

profit margin?

Answer 4

Profit before interest and tax devided by sales revenue
profit margin shows how much profit YOU get aft all expenses have been payed off. high profit margin means more likely to turn revenue into profit etc etc - express net profit as a % of revenue

Question 5

ROCE?

Answer 5

how efficient is the capital/assets uve invested in and how well they provide ur business w profit.
Profit before I and T, divide it by capital employed which is non-C liabilities +equity

Question 6

how to improve gpm and r there any opp costs?

Answer 6

• sell for higher prices (demand may decrease)
• negotiate for cheaper suppliers (low quality maybe)
  increase worker productivity - that is directly linked to the production of g and s (low motivation)

Question 7

how to improve pm, Any opp costs?

Answer 7

reduce electricity, transport, marketing costs - any indirect costs(however may become inefficient.
- sell for higher prices (demand may decrease)
- negotiate for cheaper suppliers (low quality maybe)
increase worker productivity - that is directly linked to the production of g and s (low motivation)

Question 8

how to improve roce, any opp costs?

Answer 8

-increase price (low demand)
- cheap suppliers (reduce the P before I and T but it could impact the quality)
-reduce ur long term borrowings/loans etc
-increase ur dividends (part of equity may cause shareholder conflict)
decrease retained profit (impact business safety)

Question 9

what is a liquidity ratio and what does it do?

Answer 9

A liquidity ratio is a financial metric used to assess a company’s ability to meet its short-term financial obligations using its liquid assets. It measures the company’s ability to convert its assets into cash quickly to cover its short-term liabilities. Liquidity ratios are important because they indicate the company’s financial health and its ability to withstand financial challenges, such as unexpected expenses or economic downturns.

Question 10

acid test?

Answer 10

how ur able to convert assets into cash w/o looking at stock/inventory.
is a quick way to see if a company has enough liquid assets (like cash or assets that can be quickly turned into cash) to cover its immediate bills and expenses without relying on selling inventory.
CA’s - stock / CL’s
Ideal: 1:1

Question 11

current ratio?

Answer 11

The current ratio compares a company’s current assets to its current liabilities - looks at stock.
CA’s / CL’s
Ideal: 1.5:1
or 2:1

Question 12

improve acid test

Answer 12

sell stock for discounted price (would u have money to buy new stock that is of same price tho?)
Buy items on credit (increase debtors and reduce ur stock)

Question 13

improve current ratio

Answer 13

Reduce CL’s and increase CA’s
CL’s: reduce overdrafts, CONVERT LONG TERM LOANS INTO SHORT TERM LOANS.
CA’s: sell NCA’s
as soon as u sell out u get new stock - JUST IN TIME.