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Chapter 3.5 (Profitability ratios (Strategies to improve the profit margin…
Chapter 3.5
Profitability ratios
gross profit margin; indicator of how affective managers have added value to the cost of sales
net profit margin; indicator of management effectiveness at converting revenue into net profits
Strategies to improve the profit margin ratios
reduce direct cost
cheaper materials, cut labour costs, cut wage costs
increase price
reduce overhead cost
ROCE; primary efficiency ratio
Strategies increase
raise price,reduce variable costs per unit
Potential limitations
demand could be price elastic, only long-term, not effective for short run
Liquidity ratios
Current ratio
Acid test ratio
quick ratio, a stricter test
Strategies to improve
sell off fixed assets for cash
sell off inventories for cash (only improve acid test ratio)
increase loans to injest cash into the business and increase working capital