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Chapter 17 - Coggle Diagram
Chapter 17
Liquidity Ratio
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Interested stakeholders:
- creditors
- suppliers
- investors
Current ratio
- Measures the ability of a firm to pay its bills over a period of two or three months without requiring the sale of stock.
- Can provide a more accurate indicator of liquidity than the current ratio, as stocks can take time to sell
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Acid test ratio
Description
This ratio measures the ability of a business to meet its liabilities or debts over the next year or so.
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Typical figure: 1:6:1; however it varies according to the type of business and the state of the market.
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Profitability ratio
to evaluate a company’s ability to generate earnings relative to its expenses and other relevant costs.
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Interested stakeholders:
- shareholders
- creditors
- managers
- employees
Gross profit margin
This is calculate the percentage of a business’s revenue.
* Gross profit: profit before the deduction of expense
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Profit margin
a percentage of a business’s sales revenue that is net profit. It calculate the product’s selling price that is profit from operations after most costs have been deducted
Calculation: Profit margin = profit before tax and interest x 100/sales revenue
- Profit before tax and interest = sales revenue - (cost of sales + expense)
Ratio analysis
Allows stakeholders to evaluate a business’ performance through key financial statements (P&L or balance sheet)
COMPARES 2 PIECES OF FINANCIAL POSITION -> make more informed judgements about a business’ performance