Chapter 17: Profitability and liquidity ratio analysis

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liquidity

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14 Terms

1

liquidity

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

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2

profit margin

this ratio compares operating profit with revenue

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3

profitability

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

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4

gross profit margin

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

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5

gross profit margin %

gross profit/sales revenue * 100

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6

profit margin %

profit before interest and tax/sales revenue * 100

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7

return on capital employed

this compares operating profit and the capital employed in the business

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8

return on capital employed %

profit before interest and tax/capital employed * 100

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9

capital employed

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

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10

liquidity

ability of a business to pay its short-term debts

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11

current ratio

current assets/current liabilities

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12

current ratio

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

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13

acid test ratio

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

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14

acid test ratio

current assets - stock/current liabilities

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