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Questions and Answers
What does the Gross Profit Margin (GPM) measure?
What does the Gross Profit Margin (GPM) measure?
What does the Acid Test Ratio assess?
What does the Acid Test Ratio assess?
Who uses profitability ratios to assess business success and efficiency?
Who uses profitability ratios to assess business success and efficiency?
What does Return on Capital Employed (ROCE) show?
What does Return on Capital Employed (ROCE) show?
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What is the Current Ratio used to assess?
What is the Current Ratio used to assess?
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Study Notes
Understanding Profitability and Liquidity Ratios
- Profit is the money remaining after all costs and expenses are paid, vital for business operations
- Profitability is a measure of the profit made relative to sales achieved and capital invested, typically measured as a percentage
- Profitability ratios are used by investors, directors, and managers to assess business success and efficiency
- Gross Profit Margin (GPM) measures the efficiency of sales and cost of goods sold, limited as it does not consider other expenses
- Operating Profit Margin (OPM) considers all expenses, indicating the success of managers in making net profit from sales
- Return on Capital Employed (ROCE) shows how efficiently businesses make profit from the capital employed, desired to increase year on year
- Liquidity refers to a business's ability to buy, sell, and raise cash, crucial for paying short-term debts
- The Current Ratio assesses a business's ability to pay debts, with a ratio between 1.0-3.0 considered positive
- The Acid Test Ratio adjusts the Current Ratio to eliminate certain current assets not in cash form, a ratio below 1 is unfavorable
- Stakeholders such as creditors, banks, government, employees, and trade unions use ratio analysis information
- Limitations of ratio analysis include reliance on past accounting data, not accounting for external factors like inflation, and differences in accounting methods
- Ratio analysis is essential for understanding a business's profitability and liquidity, but it should be used in conjunction with other information and factors.
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Description
Test your knowledge of profitability and liquidity ratios with this quiz. Explore key concepts such as gross profit margin, return on capital employed, current ratio, and more. Assess your understanding of how these ratios are used to evaluate business success and efficiency.
