unit 3.5 profibility ratios

The two way ratios can be compared

• historical comparison

• Inter- firm comparison

The three profitability ratios

• gross profit margin

• Profit margin

• Return on capital employed

Gross profit margin

Shows the value of profit as a percentage of sales revuene

formula given

Profit margin

Shows value of net profit as a percentage of sales revue

Formula given

Return on capital employed

Shows the financial performance of a firm compared to the amount of capital invested

Liquidity ratio

Liquidity - refers to how quickly an asset can be turned to cash

• liquidity ratios look at the ability of a firm to pay its short term liabilities

Current ratio

• current ratio deals with the liquid assets and short term liabilities

• Current ratio= current assets/current liabilities

Ideal benchmark 1.5:1 or 2:1

Quick ratio (acid test)

• similar to current ratio but excluded stock when calculating current assets

• Quick ratio= ( current assets - stock)/ current liabilities

• Ideal benchmark 1:1