Analysis of accounts: profitability, liquidity and users

Learning objectives

Say what profitability means, then work out the gross profit margin and the profit margin (each a percentage of revenue) and judge what they show

Work out return on capital employed (ROCE) — profit as a percentage of the capital employed in the business — and judge the result

Say what liquidity means, then work out the current ratio and the acid test ratio and judge whether the business can pay its short-term debts

Explain who reads the accounts and what each reader decides with them: inside the business its owners, managers and employees; outside it suppliers, lenders such as banks and the government

Explain why accounts and ratios alone cannot give a full picture of a business