profitability and liquidity ratio

ratio analysis

analyzing and judging the performance of a business

profitability ratios

level and value of a firms profits. Stakeholders are able to measure the return on their investments

gross profit margin

profitability ratio shows firms gross profit expressed as a percentage of its sales revenue

formula for gross profit margin

GP / SR x 100 = GPM

ways to improve GPM

introduce new products with higher GPM

promotional strategies to persuade more customers to buy product

Net profit margin

measures a firms overall profit as a percentage of its sales revenue

formula for net profit margin

net profit before interest and tax / sales revenue x 100 = NPM

way to improve NPM

reduce excessive and unnecessary day to day expenses

return on capital employed (ROCE)

ratio measures a firm’s efficiency and profitability in relation to its size

formula for ROCE

net profit before interest and tax / capital employed x 100 = ROCE

sum for capital employed

sum of all assets less current liabilities

ways ROCE can be improved

reduce costs of production

increase the level of firms sales revenues

liquidity ratios

financial ratios that look at a firm’s ability to pay its debts

current ratios

short term liquidity ratio which calculates that ability of a business to meet its debts within the next 12 months

formula for current ratio

CR = Current asset / current liability

ways to improve current ratios

use cash balance to pay off short term debts

attract more customers and encourage them to pay by cash

acidic test ratio

measures a firms ability to meet its short term debts

formula for acid test ratio

current asset - stock / current liability = acid test ratio

way to improve acid test ratio

use the same methods to unrobe current ratio