Unit 3 - Chapter 17: Profitability and Liquidity Ratio Analysis

Profitability

A relative measure of a business’s ability to make a profit from sales or a capital investment

Liquidity

The ability of a business to pay its short-term debts (measure of working capital)

Return on capital employed (ROCE)

compares operating profit and the capital employed in the business

ROCE = ____

((profit before interest and tax)/capital employed) x 100%

Capital employed

total value of all long-term finance invested in the business

capital employed = _____

non-current liabilities + shareholders’ equity or (non-current assets + current assets) - current liabilities

Current ratio

this compares the current assets with the current liabilities of the business

current ratio = _____

current assets/current liabilities

Acid test ratio

compares the liquid assets of a business w/ its current liabilities

acid test ratio = ______

(current assets - stock)/current liabilities

Profit margin

ratio that compares operating profit with revenue

profit margin = _____

(profit before interest and tax/sales revenue) x 100%

Gross profit margin ratio

Assess how successful the mgmt of a business has been at converting revenue into gross profit

gross profit margin ratio = ______

(gross profit/sales revenue) x 100%