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Ratio
Gross profit margin
Formula
(Sales - Cost of goods sold / Sales)
x 100
Norm
Interpretation
Indicates the total margin
available to cover operating
expenses and yield a profit.
A. Liquidity Ratios:
a) Liquid assets to current debt
ratios :
Current Ratio
Quick Ratio
1:1
It is a measure of firms
short-term
solvency.
It
represents the margin of
safety for creditors. The
higher the current ratio, the
greater the margin of safety.
(Larger the amount of current
assets in relation to current
liabilities, the more the firms
ability to meet its current
obligations) It is a test of
quantity.
It indicates rigorous test of a
firms ability to serve short
team liabilities. Thus a firm
Cash Ratio
.5:1
II
.
B. Activity Ratio:
employed
to
evaluate
the
efficiency with which the firm
manages and utilizes its assets.
It
shows
how
rapidly
(efficiency) the inventory is
converted into sales. A high
inventory is indicative of
efficient
management
of
inventory
because
more
quickly the inventory is sold.
A low inventory turnover
implies excessive inventory
levels than warranted by
production
and
sales
activities or a slow moving or
obsolete inventory. Relatively
high inventory turnover may
be the result of a very low
level of inventory, which
results in frequent stock outs.
It indicates the no. of times
average debtors have been
converted into cash during a
year. It measures how rapidly
Purchases / Creditors