What are the profitability ratios
Gross Profit Margin
Net Profit Margin
Return On Investment
How to calculate gross profit margin
gross profit
—————– x 100
sales
how to calculate net profit margin
net profit
————– x 100
sales
What are the liquidity ratios
Current Ratio
Acid Test
how to calculate current ratio
current liabilities
how to do the acid test
current liabilities
return on investment
net profit
————————- x 100
capital employed
How are the liquidity ratios expressed
a ratio to 1
Gearing / debt equity ratio
Ratio
What is capital employed
total finance used by a company
Ideal ratio for current ratio
2:1
Ideal ratio for acid test
1:1
explain the gearing ratio
debt capital is the long term debts
equity capital is equity shares and retained earnings
What does low gearing mean
answer is <1
The business has borrowed less money than the shareholders have invested.
What does high gearing mean
answer is >1
The business has borrowed more money than the shareholders have invested.
