profitability and liquidity

Question 1

ratio analysis

Answer 1

• analysis tool for interpretation and assessment of financial statements
• profitability ratios and liquidity ratios

Question 2

What are the types of profitability ratios?

Answer 2

• gross profit margin (GPM)
• profit margin (PM)
• return on capital employed (ROCE)

Question 3

gross profit margin (GPM)

+strategies for improvement

Answer 3

gross profit margin (GPM) = gross profit(GP) / sales revenue(SR) * 100 [-> because it is a %]
- how much money we make compared to haw much money we have
- essentially all profit before deducting expenses
- is the company feasible [-> megvalósítható/lehetséges]
- strategies for improvement:
increase prices -> SR
cheaper suppliers -> CoS
marketing -> SR
reduce labor costs -> CoS

Question 4

profit margin (PM)

Answer 4

profit margin (PM) = profit before interest and tax / SR * 100 [-> because it is a %]
- it tells us: will the company survive?, viability
- essentially, profit left after substracting all costs from sales revenue
- strategies for improvement:
check indirect costs
negotiate down fixed costs, like rent

Question 5

return on capital employed (ROCE)

Answer 5

• capital employed: non-current liabilities(pl. loans)+ equity (all the money we used in the company to make money)

return on capital employed (ROCE) = profit before interest and tax / capital employed * 100 [-> because it is a %]
- did we use the money correctly
- strategies for improvement:
reduce long term goals
pay additional dividends (reducing retained profit)

Question 6

Two types of costs

Answer 6

• direct: ~ cost of sales (CoS), anything that helps us make money
• indirect: expenses, buying things that don’t directly make money, but have to be payed

Question 7

What are the types of liquidity ratios?

Answer 7

• def: measures the ability to pay off short term debt obligations
• current ratio
• acid test

Question 8

current ratio

Answer 8

current ratio = current assets / current liabilities
- more liabilities than assets = underwater
- high current ratio - bad
too much cash is being held
too many debtors(people to whom you gave money but they haven’t paid back)
too much inventory is being held
- strategies for improvement
reduce bank overdrafting and instead seek long term loans
sell long term assets for cash

Question 9

acid test

Answer 9

acid test = (current assets - stock (inventory) value) / current liabilities
gets rid of stock, since it is “less liquid” than other current assets
- strategies for improvement:
sell stock at a discount
increase credit penied of debtors (accounts receivable)