3.5 Profitability and liquidity ratio analysis!

Return on capital employed (ROCE)

an efficiency ratio (although it also reveals the firm's profitability) measuring the profit of a business in relation to its size (as measured by capital employed).

Current ratio

"a short-term liquidity ratio that calculates

Gross profit margin (GPM)

a profitability ratio that shows the percentage of sales revenue that turns into gross profit

Acid test ratio

a liquidity ratio that measures a firm's ability to meet its short-term debts. It ignores stock because not all inventories can be easily turned into cash in a short time frame.

Ratio analysis

a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the final accounts (the balance sheet and the profit and loss account).

Profitability ratios

examine profit in relation to other figures, e.g. the GPM and NPM ratios. These ratios tend to be relevant to profit-seeking businesses rather than for not-for-profit organizations.

Efficiency ratios

indicate how well a firm's resources have been used, such as the amount of profit generated from the available capital used in the business.

Liquidity ratios

look at the ability of a firm to pay its short- term liabilities, such as by comparing working capital to short- term debts.

Liquidity crisis

refers to a situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets.

Net profit margin (NPM)

shows the percentage of sales revenue that turns into net profit, i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid.

Liquid assets

the possessions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock and debtors.

Capital employed

the value of all long-term sources of finance for a business, e.g. bank loans, share capital and reserves.