Ratio Analysis

Ratios and explanations

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  • Created by: Eric
  • Created on: 02-11-11 07:35

Gross Profit Margin


Gross Profit x 100


This ratio tells us something about the business's ability consistently to control its cost of goods sold or ability to increase price.

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Return on capital employed ("ROCE")

Net Profit x 100

Net Assets


ROCE is sometimes referred to as the "primary ratio"; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.

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Net Profit Margin

Net Profit x 100


Assuming a constant gross profit margin, the net profit margin tells us something about a company's ability to control overheads.

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Current Ratio

Current Assets / Current Liabilities

A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. Mostly 2:1 is acceptable but a ratio of less than one is often a cause for concern, particularly if it persists for any length of time.

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Acid Test

Acid Test

Current Assets less Stock/

Current Liabilities

This ratio ignores stock and looks at the availability of relatively quick cash to pay bills that need to be paid now. This removes the problem of stock which can take a long time to sell.

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The formulas are incorrect for some  (ROCE =Operating profit / capital employed x 100)

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