Unit 5 – P5,M2 & D2
FOR NOTES AND GUIDLINE PURPOSES ONLY, COPYING THE
WHOLE DOCUMENT WILL BE COPYWRITE.
USE SENSIBLE.
Profitability Ratios
A profitability ratio is a measure of profitability, which is a way to measure a business’
performance. It is the capacity to make a profit, and a profit is what is left over from
income earned after deduction of all costs and expenses related to earning the
income. Under profitability ratios, they consist of the:-
a) Return on Capital Employed ROCE- This is a profitability ratio that measures
how efficiently a company can generate profits from its capital employed. A
higher ROCE indicates more efficient use of capital for the business.
Calculation for this ratio is Net Profit/ Capital Employed *100
b) Gross profit percentage- A measure of an organisation’s profitability that is
expressed as a percentage of gross profit. The higher the percentage, the
more the business maintains on the sales to facilitate its other costs and
responsibilities. Calculation for gross margin is Gross profit/ Sales *100
c) Net profit percentage- is the percentage of revenue remaining after
all operating expenses, interest, taxes etc. A higher profit indicates that the
business is in good state. The formula is Net Profit/ Sales *100
Liquidity Ratios
These ratios measure the ability of an organisation to repay debts that are overdue
at a short term. A high ratio indicates a company with a low risk of default. They are
two types of liquidity ratios that are:-
a) Current ratios- Current ratio measures the relationship between current assets
and current liabilities. To get this ratio you divide Current Assets by Current
Liabilities. A normal ratio will be 2:1 depending on the type of business
b) Acid ratios- it measures current or short term liquidity and position of the
company. Also known as the quick ratio. A normal ratio will be 1:1 depending
also on the type of business. Current assets – Closing Stock/ Current
Liabilities is the calculation.
Solvency Ratios
Solvency ratios measure an organisation’s debts virtual to assets. It also provide a
measurement of how likely if a company can meet its debt obligations. A high
solvency ratio indicates a healthy company while a low ratio indicates the opposite.
1
FOR NOTES AND GUIDLINE PURPOSES ONLY, COPYING THE
WHOLE DOCUMENT WILL BE COPYWRITE.
USE SENSIBLE.
Profitability Ratios
A profitability ratio is a measure of profitability, which is a way to measure a business’
performance. It is the capacity to make a profit, and a profit is what is left over from
income earned after deduction of all costs and expenses related to earning the
income. Under profitability ratios, they consist of the:-
a) Return on Capital Employed ROCE- This is a profitability ratio that measures
how efficiently a company can generate profits from its capital employed. A
higher ROCE indicates more efficient use of capital for the business.
Calculation for this ratio is Net Profit/ Capital Employed *100
b) Gross profit percentage- A measure of an organisation’s profitability that is
expressed as a percentage of gross profit. The higher the percentage, the
more the business maintains on the sales to facilitate its other costs and
responsibilities. Calculation for gross margin is Gross profit/ Sales *100
c) Net profit percentage- is the percentage of revenue remaining after
all operating expenses, interest, taxes etc. A higher profit indicates that the
business is in good state. The formula is Net Profit/ Sales *100
Liquidity Ratios
These ratios measure the ability of an organisation to repay debts that are overdue
at a short term. A high ratio indicates a company with a low risk of default. They are
two types of liquidity ratios that are:-
a) Current ratios- Current ratio measures the relationship between current assets
and current liabilities. To get this ratio you divide Current Assets by Current
Liabilities. A normal ratio will be 2:1 depending on the type of business
b) Acid ratios- it measures current or short term liquidity and position of the
company. Also known as the quick ratio. A normal ratio will be 1:1 depending
also on the type of business. Current assets – Closing Stock/ Current
Liabilities is the calculation.
Solvency Ratios
Solvency ratios measure an organisation’s debts virtual to assets. It also provide a
measurement of how likely if a company can meet its debt obligations. A high
solvency ratio indicates a healthy company while a low ratio indicates the opposite.
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