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3.5 Profitability & Liquidity Ratio Analysis - Coggle Diagram
3.5 Profitability & Liquidity Ratio Analysis
Profitability Ratios
Profit is Absolute Measure BUT Profitability is Relative Measure
Measured with profitability ratios
Formulas: IMAGE 1
P R O F I T A B I L I T Y
how profitable business is
measure overall performance
used to assess current performance of business, comparing to:
Past Records
Other similar businesses
Average PR of sector business operates in
GPM
GP = Sales Rev. - Cost of Goods Sold
Profit before indirect expenses accounted
Always % shown represents sales by GP
GPM Evaluation
GPM rising possibly because:
Increase in products selling price
Increase in sales volume
Reduction in Production Costs
GPM falling possibly because:
Increase in Production Costs
Decrease in price
Loss of stock - wasn't sold
Higher GPM the better
PM
Gross Profit - Indirect Costs = Profit
Shows % of sales represented by net profit
Higher PM the better
PM Evaluation
PM falling possibly because:
Increase in Production Cost = GP Decreases
1 more item...
PM rising possibly because:
Increase in Products Selling Price = Inc. Sales Rev.
1 more item...
HOW TO IMPROVE BOTH GPM & PM (Ways -> Limitations)
Increase selling price
Quantity sold may dec. -> no changes on sales rev. Depends price elasticity of product
Dec. cost of goods sold (so inc. GP)
Dec. Overhead/ Expenses (only PM)
Liquidity Ratios
Ratio Analysis
Efficiency Ratios
Organisation making best use of its resources?
Liquidity Ratios
Organisation have enough £ pay bills?
Profitability Ratios
Organisation earning more than paying out?
Why Ratio Analysis is Useful???
Compare current years performance with prev. years
Compare performance with competitors
Interpret info. to how to improve in future
Use info. for forecasting/budgeting
Provide info. to access finance sources
Assist in decision-making process