Profitability and Liquidity Ratio Analysis

A collection of key financial terms and definitions related to profitability and liquidity ratio analysis.

Acid test ratio

Also known as the quick ratio, it measures an organization’s ability to pay its short-term debts without having to sell any stock.

Capital employed

The value of all sources of finance for a business, including internal and external finance.

Current ratio

A short-term liquidity ratio that calculates the ability of an organization to meet its short-term debts within the next twelve months.

Gross profit margin (GPM)

A profitability ratio that measures an organization’s gross profit as a percentage of its sales revenue.

Liquidity

Refers to the ease of converting assets into cash without affecting market value, indicating a firm's ability to repay short-term liabilities.

Liquidity ratios

Financial ratios that examine an organization’s ability to pay its short-term liabilities and debts, including current and acid test ratios.

Profit

The financial surplus after all costs, including expenses, have been paid.

Profit margin ratio

A profitability ratio that measures a firm’s overall profit as a percentage of its sales revenue after deducting all production costs.

Ratio analysis

A quantitative management tool used to analyse and evaluate the financial performance of a business.

Return on capital employed (ROCE)

A profitability ratio that measures a firm’s efficiency and profitability in relation to its size, as measured by capital employed.

Bankruptcy

The situation when a person or business declares that they can no longer pay back their debts, resulting in collapse.

Creditor days ratio

The efficiency ratio that measures the average number of days an organization takes to repay its creditors.

Debtor days ratio

The efficiency ratio that measures the average number of days an organization takes to collect debts from its customers.

Efficiency ratio

Financial planning and decision-making tool to measure how well a business uses its resources to generate income.

Gearing ratio

The efficiency ratio that measures the extent to which an organization is financed by external sources, expressed as loan capital percentage of total capital.

Insolvency

The situation where an individual or business cannot meet their debts, having liabilities that exceed their assets.

Stock turnover ratio

The efficiency ratio that measures the number of days it takes a business to sell its stock or inventory.