Chapter 5.5 Flashcards
(23 cards)
What is profitability?
It shows how well a business turns sales into profit.
Why is profitability important?
It helps investors decide to invest and shows managers how well the business is doing.
What is liquidity?
It shows if a business can pay short-term debts.
How can a business get more liquidity?
By selling assets like inventory or equipment.
What is Gross Profit Margin (GPM)?
(Gross Profit ÷ Sales Revenue) × 100
What does a high GPM mean?
The business keeps more profit from each sale.
How can a business increase its GPM?
Raise prices or lower the cost of goods sold.
What is Net Profit Margin (NPM)?
(Net Profit ÷ Sales Revenue) × 100
How is Net Profit calculated?
Gross Profit − Expenses
How can a business increase its NPM?
By reducing expenses.
What is Return on Capital Employed (ROCE)?
(Net Profit ÷ Capital Employed) × 100
What is capital employed?
The total money used to run the business.
What does a high ROCE mean?
The business is using its capital well to make profits.
What is the Current Ratio formula?
Current Assets ÷ Current Liabilities
What does a ratio of 2 mean?
The business has 2x the assets needed to pay debts.
What is the Acid Test Ratio?
(Current Assets − Inventories) ÷ Current Liabilities
Why remove inventory in the acid test ratio?
Because inventory can take time to sell and may not be quickly turned into cash.
Why do managers use accounts?
To check performance and make better decisions.
Why do shareholders care?
To decide if the business is profitable and worth investing in.
Why do suppliers look at accounts?
To check if the business can pay them back.
Why is the government interested in accounts?
To collect taxes and make sure jobs are secure.
Why do employees look at accounts?
To know if their job is safe.
Why would other businesses look at accounts?
To compare performance or plan takeovers.
