Unit 3.5 Flashcards
GO to haiku unit 4 - 3.5 for practice
What is Gross profit margin (GPM)
Represents how effectively the business ’adds value’ to the inputs
How to calculate GPM
Gross Profit/Sales Revenue x 100
Always a %
What is Net Profit Margin (NPM)
Measures overall profitability
How to calculate NPM
Net Profit/Sales Revenue x 100
Always a %
What is ROCE
Return on Capital Employed
How well are the firm’s financial resources being turned into profit
How to calculate ROCE
ROCE = net profit/capital employed x 100
Capital employed are sources of finance aimed at growing a business.
Sum of:
Share capital
Long Term Liabilities (i.e. loans)
Accumulate Retained profit
Ways to improvce the GPM
Raising Revenue
- Marketing strategies (which will increases expenses)
- Alternative revenue streams
- Changing the price (be careful here)
Cutting Cost of Goods Sold
- Cheaper suppliers, materials
- Cheaper labour (e.g. outsourcing)
- Increase productivity (e.g. automation)
- But impact on brand image
Ways to improve NPM
Reduce expenses/overheads
- Cheaper rent
- Reduce marketing
- Reduce stationary costs
- First class versus economy class business tickets for EEs
- Less use of aircon
What is liquidity ratio?
Liquidity ratios assess how easily firms can pay short term liabilities (debt)
how to calculate current ratios?
Current Assets/Current Liabilities
Ideally between 1 - 1.5
Current Assets = Cash coming in in the next 12 months (Stock, Cash, Debtors)
Current Liabilities = Cash going out in the next 12 months (Overdraft, Short term borrowing, Creditors)
How to calculate acid test ratio
(Current Assets – Stock)/Current Liabilities
Ideally between 1.5 - 2
How to improve liquidity ratios
Hold more cash
-E.g. don’t invest in new machinery immediately
Take out long term loans to inject cash
-E.g. Long Term loans to pay overdraft and creditors
Selling Fixed Assets for cash
-E.g. sell your factory
Sale of inventories for cash
- May have to sell at a discount
- Reduces Revenue and GPM
- Doesn’t improve Current Ratio
