WorksheetsIB Business Management - 3.5 Profitability and Liquidity Ratios
Total questions: 25
Worksheet time: 13mins
What does the Gross Profit Margin (GPM) measure?
The percentage of revenue remaining after all expenses
The percentage of sales revenue that remains after deducting Cost of Sales
The ability of a business to meet short-term liabilities
The efficiency of using capital to generate profit
Which formula is used to calculate Gross Profit Margin (GPM)?
(Net profit ÷ Revenue) × 100
(Revenue – Total costs) ÷ Revenue × 100
(Gross profit ÷ Revenue) × 100
(Net profit ÷ Capital employed) × 100
Which of the following strategies can improve Gross Profit Margin?
Reducing Cost of Sales (COS)
Increasing fixed costs
Lowering selling prices
Increasing capital employed
What does the Profit Margin (Net Profit Margin) indicate?
The percentage of revenue that covers fixed costs
The percentage of sales revenue that remains as profit before interest and tax
The liquidity position of a business
The amount of cash available for reinvestment
How is Profit Margin calculated?
(Gross profit ÷ Revenue) × 100
(Profit before interest and tax ÷ Revenue) × 100
(Revenue ÷ Gross profit) × 100
(Operating profit ÷ Total assets) × 100
Which of the following strategies can improve (Net) Profit Margin?
Reducing sales volume
Increasing Cost of Sales
Reducing operating expenses
Increasing variable costs
What does Return on Capital Employed (ROCE) measure?
The profit available after deducting all expenses
The proportion of capital used for liquidity
The efficiency of using capital to generate profit
The ability to cover short-term debts
Which formula is used to calculate ROCE?
(Profit before interest and tax ÷ Revenue) × 100
(Gross profit ÷ Revenue) × 100
(Profit before interest and tax ÷ Capital employed) × 100
(Revenue ÷ Capital employed) × 100
Which of the following strategies can improve ROCE?
A) Increasing Profit before interest and tax
B) Increasing total liabilities
C) Reducing total revenue
D) Reducing the selling price
Which factor is most likely to reduce Gross Profit Margin?
Increasing product prices
Rising cost of raw materials
Decreasing operating expenses
Reducing fixed costs
What does the Current Ratio measure?
A business’s ability to cover current liabilities with current assets
The percentage of total profit that is liquid
The efficiency of capital investment
The ratio of debt to equity
Which formula is used to calculate the Current Ratio?
Current assets ÷ Current liabilities
(Net profit + Revenue) × 100
(Gross profit ÷ Capital employed) × 100
Operating profit ÷ Fixed costs
A company has current assets of $100,000 and current liabilities of $50,000. What is its Current Ratio?
0.5:1
2:1
1:2
3:1
Which of the following actions can improve the Current Ratio?
Increasing non-current liabilities
Increasing fixed costs
Reducing cash balances
Investing in long-term assets
What does the Acid-Test (Quick) Ratio exclude from current assets?
Cash
Debtors
Stock
Non-current assets
Which formula is used to calculate the Acid-Test (Quick) Ratio?
(Current assets – Stock) ÷ Current liabilities
Current liabilities ÷ Current assets
(Net profit + Revenue) × 100
(Non-current Assets ÷ Total assets) × 100
A company has current assets of $200,000, stock worth $50,000, and current liabilities of $100,000. What is its Acid-Test Ratio?
A) 2.5:1
B) 2:1
C) 1.5:1
D) 3:1
Which strategy would improve the Acid-Test Ratio?
Increasing inventory levels
Selling stock at a discount
Increasing fixed costs
Purchasing more raw materials
Which of the following represents a strong liquidity position?
Current Ratio of 0.7:1
Acid-Test Ratio of 0.5:1
Current Ratio of 2:1
Acid-Test Ratio of 0.8:1
What does a Current Ratio lower than 1:1 indicate?
The business is highly liquid
The business has strong profitability
The business may struggle to meet short-term debts
The business is financially stable
Why is the Acid-Test Ratio considered a better measure of liquidity than the Current Ratio?
A) It includes more long-term liabilities
B) It excludes stock, which may not be quickly converted into cash
C) It considers capital employed
D) It measures only cash flow
Which of the following might negatively affect a company’s Current Ratio?
A) Taking on more short-term debt
B) Reducing variable costs
C) Increasing sales revenue
D) Paying off long-term loans
A high Current Ratio (e.g., 5:1) may indicate that a company is:
At risk of bankruptcy
Holding too many unproductive current assets
Unable to pay short-term liabilities
Not generating enough revenue
If a business has gross profit of $100m, expenses of $10m and capital employed of $200m, then what is its ROCE?
A) 45%
B) 50%
C) 55%
D) 220%
Calculate the current ratio using the following information for a business: cash = $100,000, trade creditors = $70,000, debtors = $60,000, overdraft = $50,000, stock = $140,000
40%
2.5:1
250%
2.8:1
