Glossary of Key Terms - Profitability, Liquidity and Efficiency Ratios

This set of flashcards covers key vocabulary terms and definitions related to profitability, liquidity, and efficiency ratio analysis, aiding in the understanding of key financial concepts.

Acid test ratio

Also known as the quick ratio, this short-term liquidity ratio measures an organization’s ability to pay its short-term debts without having to sell any stock (inventories).

Capital employed

The value of all sources of finance for a business, including internal and external finance.

Current ratio

A short-term liquidity ratio used to calculate the ability of an organization to meet its short-term debts (within the next twelve months of the balance sheet date).

Gross profit margin (GPM)

A profitability ratio that measures an organization’s gross profit expressed as a percentage of its sales revenue.

Liquidity

Refers to the ease with which a business can convert its assets into cash without affecting its market value.

Liquidity ratios

Financial ratios that examine an organization’s ability to pay its short-term liabilities and debts, namely the current and acid test ratios.

Profit

The financial surplus after all costs, including expenses, have been paid.

Profit margin ratio

A profitability ratio that measures a firm’s overall profit (after all costs of production have been deducted) as a percentage of its sales revenue.

Ratio analysis

A quantitative management planning and decision-making tool, used to analyse and evaluate the financial performance of a business.

Return on capital employed (ROCE)

A profitability ratio that measures a firm’s efficiency and profitability in relation to its size.

Bankruptcy

A situation when a person or business declares that they can no longer pay back their debts.

Creditor days ratio

The efficiency ratio that measures the average number of days an organization takes to repay its creditors.

Debtor days ratio

The efficiency ratio that measures the average number of days an organization takes to collect debts from its customers.

Efficiency ratio

A financial planning and decision-making tool to measure how well the resources of a business are used in order to generate income.

Gearing ratio

The efficiency ratio that measures the extent to which an organization is financed by external sources of finance.

Insolvency

The situation where a person or a business is unable to meet their bill and other debt obligations.

Stock turnover ratio

The efficiency ratio that measures the number of days it takes a business to sell its stock.