Profitability, Efficiency and Liquidity Ratio Analysis
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What is meant by ratio analysis?
What are the main purposes of carrying out financial ratio analysis?
When conducting ratio analysis, why is it important to compare like-with-like?
What are profitability ratios? What are efficiency ratios?
What do the GPM and NPM ratios tell us about a firm's profitability?
How might a business raise its GPM and NPM ratios?
What are liquidity ratios?
Why do many businesses prefer to use the acid test ratio rather than the current ratio?
What are the uses and limitations of ratio analysis?
How might changes in the external business environment affect the financial performance of a business?
In finance you may find different terminology that mean the same.
In some of the videos you will find:
Operating Income = EBIT (earnings before interest & tax) = Net profit before interest & taxes
Net Income = Net profit after interest & taxes
Operating Margins = Net Profit Margins
Profitability Ratios
Profitability ratios assess the performance of a firm in terms of its profit generating .
GPM is a ratio analysis used to “assess a company's financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold".(Investopedia definition)
NPM is a ratio analysis used to “illustrate how much of each dollar in revenue collected by a company translates into profit.” (Investopedia definition)
Efficiency Ratios
Efficiency ratios assess how well a firm internally utilizes its invested capital
Return on capital employed (ROCE) measures both the efficiency and profitability of a firm’s invested capital. It assesses the returns a firm is making from its capital employed.
1. Capital employed is found by adding long-term liabilities (loan capital) to its share capital and retained profit. (Long-term liabilities + Shareholder's Equity)
2. ROCE is an efficiency ratio found by the following formula:
Liquidity Ratios
Liquidity ratios look at the firm's ability to pay its short term liabilities.
Businesses need sufficient levels of liquid assets to help in meeting their day-to-day bills. Liquidity is a measure o how quickly an asset can be converted into cash.
Have a look at the video to understand more about the important concept of liquidity.
