GCSE Applied Business Formula Gross Profit Margin Current

GCSE Applied Business Formula Gross Profit Margin: Current Ratio: Current Assets Current Liabilities The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. A ratio of 5 : 1 would imply the firm has £ 5 of assets to cover every £ 1 in liabilities Gross Profit Sales Revenue x 100 This ratio can help businesses to understand how much profit he is making from buying and selling goods The higher the better Enables the firm to assess the impact of its sales and how much it cost to generate (produce) those sales A gross profit margin of 45% means that for every £ 1 of sales, the firm makes 45 p in gross profit Too High? Might suggest that too much of its assets are tied up in unproductive activities – too much stock, for example? Too Low? Risk of not being able to pay your way x 100 Net Profit really provides a more accurate reading on how much profit a business has made as it takes away all of the costs and not just those we had in the buying and selling of our goods. Return on Capital Employed: Operating Profit Capital Employed Current Assets – Stock Current Liabilities The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets. 1: 1 seen as ideal A ratio of 3: 1 therefore would suggest the firm has 3 times as much cash as it owes – very healthy! Net Profit Margin: Net Profit Sales Revenue Acid Test Ratio: x 100 This is the ratio that needs you to use BOTH the Profit & Loss Account and the Balance Sheet. This ratio is all about looking at how much money you get back from investing in a business. • The higher the better • Shows how effective the firm is in using its capital to generate profit • A ROCE of 25% means that it uses every £ 1 of capital to generate 25 p in profit A ratio of 0. 5: 1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world!