RATIO ANALYSIS

• What is ratio analysis?

  a mathematical approach to investigating accounts by comparing two related figures
• What do profitability ratios do?

  measure the performance of the businesses and focus on profit, revenue and the amount invested in the business
• What do liquidity ratios do?

  measure how easily a business can pay its short-term debts, such as wages or suppliers
• What is the gross profit margin/mark up?

  gross profit expressed as a percentage of turnover
• What is the equation for gross profit?

  gross profit margin = gross profit / revenue x100
• What is the operating profit margin?

  operating profit expressed as a percentage of turnover
• What is the equation of operating profit?

  operating profit margin= operating profit / revenue x100
• What is mark-up?

  the profit made per item sold
• What is the equation for mark-up?

  Mark-up=

  profit per item / cost per item x100
• What is liquidity?

  the ease and speed with which assets can be converted into cash
• What would a lack of liquidity mean?

  that a business collapses
• Which two ratios can be used to assess the liquidity of a business?

  • acid test ratio
  • current ratio
• What does current ratio do?

  assess the firms liquidity by dividing current liabilities into current assets
• What is the equation for current ratio?

  current ratio= current assets / current liabilities
• What does the acid test ratio do?

  assesses the firms liquidity by excluding stocks from current assets
• What is the equation for acid test ratio?

  acid test ratio= current assets - inventory / current liabilities
• What is the return on capital employed?

  the profit of a business as a percentage of the total amount of money used to generate it
• What is the equation for the return of capital employed?

  ROCE= operating profit / capital employed x100