Analysis and Interpretation uses ratios to judge a business's performance.
Common ratios
Gross margin $= \dfrac{\text{Gross profit}}{\text{Sales}} \times 100\%$ · Current ratio $= \dfrac{\text{Current assets}}{\text{Current liabilities}}$
Profitability ratios (margins, ROCE) show how well profit is made; liquidity ratios (the current ratio) show if debts can be paid.
Remember
- Profitability ratios measure profit; liquidity ratios measure the ability to pay debts.
- Current ratio = current assets ÷ current liabilities.