3.5 Profitability & liquidity ratio analysis Quiz

Historical comparisons of a business in two different time periods can be analysed with profitability ratios.

• True
• FALSE

The gross profit margin (GPM) is calculated by using the formula: (Gross profit ÷ Sales revenue) × 100.

• True
• FALSE

Answer explanation

False - Return on capital employed

ROCE stands for Rate of Capital Expenditure.

• True
• FALSE

The profit margin is calculated by using the formula: (Profit ÷ Sales revenue) × 100.

• True
• FALSE

Sales turnover is an example of a profitability ratio.

• True
• FALSE

Raising the price of products sold in highly competitive markets does not improve the gross profit margin (GPM) for the business.

• True
• FALSE

The return on financial investments can be analysed by using profitability ratio analysis.

• True
• FALSE

Adopting aggressive promotional strategies that persuade more customers to buy a firm's products can help to improve its gross profit margin (GPM).

• True
• FALSE

Answer explanation

False - Current assets ÷ Current liabilities

The current ratio is calculated by using the formula: Current liabilities ÷ Current assets.

• True
• FALSE

A firm’s financial performance compared with its competitors can be analysed using profitability and liquidity ratios.

• True
• FALSE