3.3 Efficiency Ratio / Ratio Analysis Flashcards
(8 cards)
1
Q
Financial ratios
A
Used to asses profitability, liquidity, efficiency and solvency by comparing items in the financial statements
2
Q
Profitability ratios
A
Gross profit margin (%)
Net profit margin (%)
3
Q
Liquidity ratios
A
Current ratio
Acid test ratio
4
Q
Limitations of ratio analysis
A
- based on historical data
- doesn’t account for qualitative factors (e.g. brand image, staff morals)
- different policies can affect comparison
- inflation can affect comparison over time
- industry variations
5
Q
Gross profit margin - defention and formula
A
How efficiently business manages direct costs of production
(Gross profit / Sales revenue) x 100
6
Q
Net profit margin - defention and formula
A
How efficiently business diverts sales into actual profit after all expenses (excluding interest and tax)
(Net profit before interest and tax / Sales revenue) x 100
7
Q
Current ratio
A
- Ideal is between 1.5 to 2.1
- too low suggest liquidity issues
- too high means insufficient asset usage
Current assets / Current liabilities
8
Q
Acid test ratio
A
Ideal is 1:1
(Current assets - stock) / current liabilities
