Acid test ratio

Also known as the quick ratio, this is a short-term liquidity ratio used to measure an organization’s ability to pay its short-term debts (within the next 12 months of the balance sheet date), without the need to sell any stock (inventories).

Current ratio

A short-term liquidity ratio used to calculate the ability of an organization to meet its short-term debts (within the next twelve months of the balance sheet date).

Gross profit margin (GPM)

A profitability ratio that measures an organization’s gross profit expressed as a percentage of its sales revenue. It is also an indicator of how well a business can manage its direct costs of production.

Liquidity ratios

Financial ratios that examine an organization’s ability to pay its liabilities and debts.

Net profit margin (NPM)

A profitability ratio that measures a firm’s overall profit (after all costs of production have been deducted) as a percentage of its sales revenue. It is also an indicator of how well a business can manage its indirect costs (overhead expenses).

Ratio analysis

A quantitative management planning and decision-making tool, used to analyse and evaluate the financial performance of a business. These can be further categorised as profitability, liquidity and efficiency ratio analysis.

Return on capital employed (ROCE)

A profitability ratio that measures a firm’s efficiency and profitability in relation to its size (as measured by the value of the organization’s capital employed).