Chapter 17: Profitability and liquidity ratio analysis

liquidity

the ability of a business to pay its short-term debts

profit margin

this ratio compares operating profit with revenue

profitability

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

gross profit margin

this ratio compares gross profit (profit before deduction of overhead expenses) with revenue

gross profit margin %

gross profit/sales revenue * 100

profit margin %

profit before interest and tax/sales revenue * 100

return on capital employed

this compares operating profit and the capital employed in the business

return on capital employed %

profit before interest and tax/capital employed * 100

capital employed

the total value of all long-term finance invested in the business = non-current liabilities + equity

liquidity

ability of a business to pay its short-term debts

current ratio

current assets/current liabilities

current ratio

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

acid test ratio

this compares the liquid assets of a business with its current liabilities

acid test ratio

current assets - stock/current liabilities