3.5 Profitability and liquidity ratio analysis (Proftability ratios (Gross…
3.5 Profitability and liquidity ratio analysis
This is a fnancial analysis tool used in the interpretation and assessment of a firm's fnancial statements.
Gross profit margin (GPM)
(gross proft /sales revenue) x 100
This is found by dividing the gross profit by the sales revenue, expressed as a percentage
Net profit margin (NPM)
This is a measure of the profit that remains after deducting all costs from the sales revenue.
(net proft before interest and tax /sales revenue) x 100
These ratios assess the performance of a firm in terms of its proftgenerating ability
These ratios assess how well a frm internally utilizes its assets and liabilities.
Return on capital employed (ROCE)
net proft before interest and tax /capital employed x 100
Capital employed = long-term liabilities + share capital + retained profit
This ratio measures both the effciency and proftability of a firm's invested capital
This ratio makes a comparison of a frm's current assets to its current liabilities.
Current ratio =
current assets/current liabilities
These ratios measure the ability of a frm to pay off its short-term debt obligations
Acid test (quick) ratio
This is a more stringent indicator of how well a frm is able to meet its short-term obligations.
Acid test ratio =
(current assets - stock)/current liabilities