3.5 Profitability & Liquidity Ratio Analysis

Acid Test Ratio (aka Quick Ratio)

a liquidity ratio that measures a firm's ability to meet its short-term debts.

Capital Employed

the value of all long-term sources of finance for a business

Current Ratio

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

Gross Profit Margin (GPM)

a profitability ratio that shows the percentage of sales revenue that turns into gross profit

Liquid assets

the possessions of a business that can be turned into cash quickly without losing their value

Liquidity Crisis

this refers to a situation where a firm is unable to pay its short-term debts

Liquidity Ratios

these look at the ability of a firm to pay its short-term liabilities, such as by comparing working capital to short-term debts

Profit Margin

this shows the percentage of sales revenue that turns into profit (the proportion of sales revenue left over after all direct and indirect costs have been paid)

Profitability Ratios

these examine profit in relation to other figures. These ratios tend to be relevant to profit-seeking businesses rather than for not-for-profit organizations

Ratio Analysis

a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the final accounts (the Balance Sheet and the Profit & Loss Account)

Return on Capital Employed (ROCE)

an efficiency ratio (although it also reveals the firm's profitability)