Term
| What are the three types of ratios? |
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Definition
Profitability ratios
Liquidity ratios
Financial efficiency ratios |
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Term
| What are the profitability ratios? |
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Definition
Gross profit margin
Net profit margin
Return on capital employed (ROCE) |
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Term
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Definition
| The ability of a firm to meet its short term debts |
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Term
Formula for gross/net profit margin
+what is it |
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Definition
(gross or net profit/sales revenue) times 100
shows how many cents are earned for each dollar of sales |
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Term
| What are some strategies to increase the gross/net profit margin? (3) |
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Definition
-reducing direct costs
-increasing price
-net profit- reduce overhead costs |
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Term
| Formula for return on capital employed |
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Definition
| (net profit/capital employed) times 100 |
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Term
| Strategies for increasing ROCE (2) |
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Definition
-increase net profit without increasing the capital employed
-cut costs; increase prices
-decrease the capital employed while maintaining the net profit
-sell assets that don't contribute |
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Term
| What are the two liquidity ratios? |
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Definition
Current ratio
Acid test ratio |
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Term
| Formula for current ratio |
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Definition
| current assets/current liabilities |
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Term
Formula for acid test ratio
+Why is it stricter/more efficient? |
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Definition
liquid assets/current liabilities
liquid assets= current assets-inventories
it doesn't include stocks, which cannot be quickly converted to cash |
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Term
| Strategies for improving liquidity ratios (3) |
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Definition
both:
-sell off fixed assets for cash
-increase loans
acid test ratio:
-sell off the inventories |
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