5.5 - analysis of accounts Flashcards
what is profitability?
profitability is the measurement of profit made relative to either:
- the value of sales achieved
- the capital invested in the business
what are the profitability ratios?
- gross profit margin
- net profit margin
- return on capital employed
what is gross profit margin?
(gross profit/revenue) x100
the higher this % the better. If it increases it would suggest that either:
1. prices have risen
2. costs of sales have reduced
what is net profit margin?
(net profit/revenue)x100
this takes into account all other expenses compared to the GPM.
the higher this result the more successful managers are at making profit from sales. If this increases this may mean managers are more efficient by cutting expenses
what is return on capital employed (ROCE)?
net profit/capital employed)x100
- capital employed is the money invested into the business usually from shareholders and loans.
- the higher the result, the more successful the managers are at gaining shareholders a good return on their investment
what is liquidity?
the ability of a business to pay back its short term debts. E.g. suppliers and overdrafts. If they can’t pay them they will be illiquid
what is acid test ratio?
(current asset – inventories)/current liabilities
the acid test ratio is said to be more realistic than the current ratio as it doesn’t count inventories as a current asset.
what is current ratio/
current assets/current liabilities
which stakeholders are interested in the accounts of a business?
- managers
- shareholders
- creditors(suppliers)
- banks
- government
- employees
why are managers interested in the accounts of a business?
it will help a manager assess whether the business is profitable and has strong liquidity. If not, they can then find solutions
why are shareholders interested in the accounts of a business?
they will want to see the GPM, NPM and ROCE. They want to see if they will get a good return on their investment
why are creditors interested in the accounts of a business?
they will want to see the business liquidity ratios. They will want to see if is a business is able to pay back its debts on time. If the business has a low liquidity ratio, the supplier may not trade with the business
why are banks interested in the accounts of a business?
they will want to see the liquidity ratios. They will not lend to a business that is at risk of being illiquid and can not pay debts
why is the government interested in the accounts of a business?
they will want to see a business Income statement as they will want to see how much corporation tax they will be receiving
why may employees be interested in the accounts of a business?
to see if they business is very profitable If so then they could try to negotiate a pay rise
