Profit

What is Ratio Analysis?

A quantitative financial analysis tool for judging the financial performance of a business based on financial statements.

What do Profitability Ratios examine?

An organisation's profit-making ability.

What is the formula for Gross Profit Margin?

Gross profit margin = (gross profit ÷ revenue) × 100.

How can a business improve its Gross Profit Margin?

By adjusting pricing, increasing promotion, or reducing the cost of sales.

What does Profit Margin measure?

The percentage of net profit before interest and tax in relation to revenue.

What is the formula for Return on Capital Employed (ROCE)?

ROCE = (profit before interest & tax ÷ capital employed) × 100.

What are Liquidity Ratios used for?

To examine an organisation's ability to pay for its current liabilities.

What does the Current Ratio compare?

An organisation’s current assets to current liabilities.

What is the formula for Acid Test (Quick) Ratio?

Acid test ratio = (current assets – stock) ÷ current liabilities.

What does a Gearing Ratio indicate?

The extent of an organisation's reliance on loan capital.

What is the importance of Cash Flow in a business?

It refers to the movement of money that is essential for daily operations.

What does Net Cash Flow represent?

The difference between cash inflows and cash outflows.

What is the Payback Period (PBP)?

The length of time required for an investment to recover its initial cost in terms of profit.

How is Average Rate of Return (ARR) calculated?

ARR = (total returns – capital costs) ÷ years of use ÷ capital costs × 100.

What does Net Present Value (NPV) measure?

The difference between present values of future cash flows and the original cost of investment.

What are the key differences between PBP, ARR, and NPV?

PBP measures time until payoff, ARR focuses on rate of return percentage, and NPV indicates monetary value considering time and cash value.

What is Bankruptcy?

A legal process declared by the courts when an individual or business entity is unable to repay its debts.

What is the role of Cash Flow Forecast?

It shows predicted movement of cash in and out of the business per time period.

What is the definition of Overtrading?

When a business expands too quickly without sufficient resources, leading to cash flow issues.

Define Liquid Assets.

Possessions of a business that can be quickly converted into cash without losing value.

What strategies can improve the Current Ratio?

Increase current assets by selling non-current assets, or decrease current liabilities by shifting to long-term financing.

What happens during a Liquidity Crisis?

A firm is unable to pay its short-term debts, indicating current liabilities exceed current assets.

What is the Opening Balance in cash flow management?

The amount of cash at the beginning of the trading period.