profitability & liquidity

• What is the focus of the lesson on profitability and liquidity?

  The difference between liquidity and profitability
• How are cash and profit distinct?

  Cash is actual money; profit is revenue minus expenses
• What does cash refer to in a business context?

  Actual money available for operational needs
• What is profit in a business?

  Revenue minus expenses
• Why do cash and profit matter for a business?

  Cash ensures operations; profit supports growth
• What does liquidity measure in a business?

  Access to cash for settling short-term debts
• What is profitability concerned with?

  Efficiency in generating profit relative to sales
• How can profitability be calculated?

  Using a profitability ratio
• What does a profitability ratio indicate?

  Profit percentage relative to revenue
• What does a 50% profitability ratio mean?

  50p profit for every £1 of revenue
• What are the two methods of calculating profitability ratios?

  Gross profit margin and net profit margin
• What does gross profit margin highlight?

  The value of each sale to a business
• How is gross profit margin calculated?

  $\text{Gross Profit Margin} =$$\frac{\text{Gross Profit}}{\text{Revenue}} \times 100$
• What does a lower than expected net profit margin indicate?

  Time to scrutinize operating expenses
• What is a liquidity ratio?

  A method of calculating a business's liquidity
• How is a liquidity ratio expressed?

  As a proportion of one
• What does a liquidity ratio of 2:1 mean?

  Current assets are double current liabilities
• What are the two types of liquidity ratios?

  Current ratio and liquid capital ratio
• What does the current ratio measure?

  Ability to pay off current liabilities with current assets
• How is the current ratio calculated?

  $\text{Current Ratio} =$$\frac{\text{Current Assets}}{\text{Current Liabilities}}$
• What does a higher current ratio indicate?

  A favorable ability to pay current liabilities
• What does a current ratio of less than 1:1 indicate?

  Inability to pay current liabilities
• How does the liquid capital ratio differ from the current ratio?

  It considers only the most liquid assets
• How is the liquid capital ratio calculated?

  $\text{Liquid Capital Ratio} =$$\frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$
• What does a liquid capital ratio of less than 1:1 indicate?

  Likely inability to pay current liabilities
• What are the key definitions in this lesson?

  • Cash: Actual money available
  • Profit: Revenue minus expenses
  • Liquidity: Access to cash for short-term debts
  • Profitability: Efficiency in generating profit
• What are the types of profitability ratios?

  • Gross profit margin
  • Net profit margin
• What are the types of liquidity ratios?

  • Current ratio
  • Liquid capital ratio
• What are the differences between liquidity and profitability?

  • Liquidity: Access to cash for debts
  • Profitability: Efficiency in generating profit
• What are the implications of different profitability and liquidity ratios?

  • Higher ratios indicate better financial health
  • Lower ratios may require operational adjustments