IB Business Management Unit 3.5 - Profitability and ratio analysis

acid-test ratio

a liquidity ratio that measures a firm's ability to meet its short-term debt; it ignores stock because not all inventories can be easily turned into cash in a short time frame

capital employed

the value of all long-term sources of finance for a business e.g. bank loans, shares and reserves

current ratio

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

efficiency ratios

an indicator of how well a firms resources have been used, such as the amount of profit generated from the available capital used in the business

gross profit margin (GPM)

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

liquid assets

the positions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock and debtors

liquidity crisis

refers to a situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets

liquidity ratios

indicate the ability of a firm to pay its short-term liabilities, such as by comparing working capital to short-term debt

net profit margin (NPM)

the percentage of sales revenue that turns into net profit, i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid

profitability ratios

examine profit in relation to other figures, e.g. the GPM and NPM ratios; 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 the business; requires the application of figures found in the final accounts

return on capital employed (ROCE)

an efficiency ratio measuring the profit of the business in relation to its size (as measured by capital employed)