IB Business Management 3.5 Profitability and Liquidity Ratio Analysis Key Definitions

The Acid Test Ratio, also known as the Quick Ratio, measures a company's ability to meet short-term liabilities using its most liquid assets (excluding inventory).

Capital Employed represents the total capital investment used to generate profits. It reflects the long-term funds deployed in the business.

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations using its current assets.

The Gross Profit Ratio is a profitability ratio that measures the percentage of gross profit to net sales. It indicates how efficiently a company produces and sells its goods.

Liquidity refers to a business's ability to convert assets into cash quickly to meet short-term obligations.

Liquidity Ratios measure a company's ability to meet short-term financial obligations.

The Profit Margin measures the percentage of net profit relative to net sales. It reflects a company's ability to generate profit after accounting for all expenses, including taxes and interest.

A measure of how well a business turns revenue into profit.

Ratio Analysis is a financial analysis tool that evaluates a company's financial performance using various ratios. It helps in assessing profitability, liquidity, efficiency, and solvency.

ROCE is a key profitability ratio that measures how efficiently a company generates profit from its capital employed.

$$\text{ROCE} = \frac{\text{Profit before interest and tax}}{\text{Capital employed}} \times 100$$

A higher ROCE indicates efficient use of capital in generating profits.