Ratio analysis

Question 1

What is Gross profit margin ?

Answer 1

Measures what % of a company’s revenue is Gross profit

Question 2

What is Net profit margin ?

Answer 2

Measures what % of a company’s revenue is net profit

Question 3

How to calculate GPM ?

Answer 3

Gross profit / Revenue X100

Question 4

How to calculate gross profit ?

Answer 4

Revenue - cost of producing it

Question 5

How to calculate NPM ?

Answer 5

Net profit / Revenue X100

Question 6

How to calculate Net profit ?

Answer 6

Gross profit - Other expenses

Question 7

What is liquidity ?

Answer 7

The amount of cash avaliable in the business to meet daily requirements / meet debts as they are due

Question 8

What is the equation for current ratio ?

Answer 8

Current assets/Current liablilties

Question 9

What is an ideal ratio

Answer 9

1:1 , for every one pound in short term asset you have one pound in short term debt

Question 10

Why is a ratio below 1:1 bad ?

Answer 10

It is a dangerous level of cash to meet debts

Question 11

What is the equation for acid test ratio ?

Answer 11

Current assets ( less stock ) / current liabilities

Question 12

What is return on capital ( ROCE ) ?

Answer 12

Expresses profit as a % of capital invested

Higher % = Higher performance

Question 13

What is the formula for ROCE ?

Answer 13

Net profit / Capital employed