3.5 Profitability and Liquidity Ratios

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10 Terms

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Acid test ratio

Measures ability to pay short-term debts without inventory.

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Capital employed

Total funds used for business operations and returns.

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Current ratio

Calculates ability to meet short-term debts within 12 months.

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Gross profit margin (GPM)

Gross profit as a percentage of sales revenue.

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Liquidity

Ease of converting assets to cash without value loss.

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Liquidity ratios

Financial ratios assessing short-term liability payment ability.

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Profit

Surplus after all costs and expenses are paid.

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Profit margin ratio

Overall profit as a percentage of sales revenue.

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Ratio analysis

Tool for evaluating financial performance using ratios.

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Return on capital employed (ROCE)

Measures efficiency and profitability relative to capital employed.