3.5 Profitability and liquidity ration analysis

What are the 3 Types of financial rations

profitability, liquidity, efficiency

What are the 3 Profitability ratios

gross profit margin, profit margin, return on capital employed

Define (Gross) profit margin

Percentage of sales that become (gross) profit

Strategies to improve gross profit

increase prices, cheaper materials, change advertising strategies, reducing (in)direct costs

Define return on capital employed

percentage of investments creating profit

Strategies to improve ROCE

reduce long-term loans, paying additional dividends

What are the 2 Liquidity ratios

current ratio, acid test ratio

Define current ratio

ability to pay off short-term debts

Strategies to improve current ratio

reduce bank overdrafts, use more long-term loans, sell long-term assets for cash

Define acid test ratio

ability to pay off short-term loans more accurately

Strategies to improve acid test ratio

sell stock at a discount for cash, increase credit period for debtors to allow for more stock to be purchased