SL/HL 3.5 Profitability and Liquidity Ratio Analysis

Liquid assets

Current assets - stocks

Capital employed I

(Non-current assets + current assets) - current liabilities

Acid test ratio

A liquidity ratio that measures a firm's ability top meet its short-term debts. This ratio ignores stocks when calculating because some stocks (e.g. Ferrari cars or Airbus jets) cannot be quickly and easily turned into cash.

Gross profit margin

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

Current ratio

A short-term liquidity ratio that calculates the ability of a firm to meet its debts within the next 12 months.

Return on capital employed

An efficiency ratio (reveals a firm's *profitability*) that measures the profit of a business in relation to its size. The higher the ROCE figure, the better it is for business as it shows more profit being generated from the amount of money invested in the firm.

Liquidity ratios

Measures the ability of a firm to meet its short-term debts (e.g., current ratio & acid test ratio)

Capital employed II

Non-current liabilities + shareholders equity

Liquid assets

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

Liquidity cirisis

Refers to a situation where a firm is unable to pay its short-term debts; i.e., current liabilities exceed current assets and, therefore, the acid test ratio is less than 1:1.

Gross profit

Sales revenue - cost of goods sold

Net profit

The amount left after operating expenses are subtracted from the gross profit

Share price

The quoted price of one share on the stock exchange.

Dividends

The share of the profits paid to shareholders as a return for investing in the company.