P5
Prepare a set of ratios to measure profitability, liquidity and efficiency for a selected
business.(P5)
Ratios for Pepe’s pizza parlour
Profitability
Measures the profit of a business in relation to another.
Gross profit percentage of sales
Gross Profit/Sales turnover x 100= %
£35,200/69,200*100=51%
51% gross profit means that for every £1 of sales made, 51p is left as gross profit.
Net profit percentage of sales
Net Profit/Sales Turnover x 100=%
£19,000/£69,200*100= 27%
Net profit of 27% means that for every £1 of sales made, 27p is left as net profit.
Return on capital employed (ROCE)
Net profit before interest and tax/Capital employed x 100=%
£19,300/142,800*100= 13%
An ROCE of 13% means that for every £1 invested in the business, 13p is being generated as
profit.
Liquidity
Liquidity ratios measure how solvent a business is i.e. how able is it to meet short term debts.
Current ratio
Current Assets/Current Liabilities= x:x
7800/7000=1.11:1
Expressed as a ratio e.g. 1.11:1 would mean that every £1.11 it owned in assets it owed £1 in
current liabilities.
Prepare a set of ratios to measure profitability, liquidity and efficiency for a selected
business.(P5)
Ratios for Pepe’s pizza parlour
Profitability
Measures the profit of a business in relation to another.
Gross profit percentage of sales
Gross Profit/Sales turnover x 100= %
£35,200/69,200*100=51%
51% gross profit means that for every £1 of sales made, 51p is left as gross profit.
Net profit percentage of sales
Net Profit/Sales Turnover x 100=%
£19,000/£69,200*100= 27%
Net profit of 27% means that for every £1 of sales made, 27p is left as net profit.
Return on capital employed (ROCE)
Net profit before interest and tax/Capital employed x 100=%
£19,300/142,800*100= 13%
An ROCE of 13% means that for every £1 invested in the business, 13p is being generated as
profit.
Liquidity
Liquidity ratios measure how solvent a business is i.e. how able is it to meet short term debts.
Current ratio
Current Assets/Current Liabilities= x:x
7800/7000=1.11:1
Expressed as a ratio e.g. 1.11:1 would mean that every £1.11 it owned in assets it owed £1 in
current liabilities.
