Ratios and Analysis Intepretation Flashcards
What is the purpose of ratios
The purpose of ratios is to evaluate profitability, liquidity and leverage
What is liquidity
The ability businesses have to pay all debts on the day they fall due, requires a comparison of current assents with current liabilities
What is leverage
The comparison of internally generated debt of the buisness with externally owed debt.
What is the profit ratio
Percentage of profit that is contianed in each dollar of sales
The higher it is the better
What does increasing profit ratio mean
Selling a great porportion of high profit items
Cost of sales may have decreased
Expenses may have decreased
What does gross profit ratio mean
Gross Profit ratio is a measure of the level of profit available, after subtracting the cost of sales expense, to cover the remaining expense of a business
What does decreasing profit ratio mean
Selling a higher porportion of low profit itmes
Cost of sales may have increased
Expenses may have increased
What does leverage exhibit
Extent to which a business has funded its operation from borrowed funds rather than equity
Ways to improve leverage
Paying off debt
Contributing additional capital
Cutbacks on inventory purchases
Delaying a major capital investment
Actions to improve profitability
Locating cheaper suppliers
Increasing prices
Cutting operating costs such as wages and utilities
