Profitability and Liquidity Ratio Analysis

Profitability Ratios

Measure profit in relation to other variables such as sales turnover or capital employed.

Gross Profit Margin (GPM)

A measure showing a firm's gross profit as a percentage of its sales revenue, calculated as GPM = (Gross profit / Sales revenue) × 100.

Profitability Ratios

Measure profit in relation to other variables such as sales turnover or capital employed.

Gross Profit Margin (GPM)

A measure showing a firm's gross profit as a percentage of its sales revenue, calculated as GPM = (Gross profit / Sales revenue) × 100.

Significance of GPM

A higher GPM indicates more gross profit available to cover expenses.

Profit Margin

Shows the percentage of sales turnover that is turned into overall profit, calculated as Profit margin = (Profit before interest and tax / Sales revenue) × 100.

Return on Capital Employed (ROCE)

Measures a firm's profitability based on the capital invested, calculated as ROCE = (Profit before interest and tax / Capital employed) × 100.

Current Ratio

Compares a firm's liquid assets to its current liabilities, assessed as Current ratio = Current assets / Current liabilities.

Acid Test Ratio (Quick Ratio)

Excludes stock from current assets to assess liquidity, calculated as Acid test ratio = (Current assets - Stock) / Current liabilities.

Capital Employed

The sum of noncurrent liabilities and equity, indicating total internal and external financing sources.

Liquidity Ratios

Assess a firm's ability to pay short-term liabilities.

Cost Reduction Strategies

Methods businesses use to decrease expenses and improve profitability.

Limitations of Ratio Analysis

Ratios reflect historical performance, may not capture future potential, and can be affected by external factors.

Qualitative Factors

Non-numerical elements like staff morale and customer satisfaction that impact overall performance but are not captured in ratio analysis.