3.5 Profitability and liquidity ratio analysis

• Calculate and interpret gross profit margin, profit margin, and return on capital employed (ROCE)

• Profitability ratios evaluate efficiency in turning sales, costs, and capital into profit

• Evaluate possible strategies to improve profitability ratios

• Strategies include raising prices, reducing costs, changing product mix, improving productivity, and better asset use

• Calculate and interpret current ratio and acid test or quick ratio

• Liquidity ratios measure ability to meet short-term liabilities

• Evaluate possible strategies to improve liquidity ratios

• Strategies include tighter credit control, reducing stock, delaying payments, selling assets, and raising finance