ask 1

Example 1: Gross Profit Ratio

Description: The profit made by a business before operating expenses are deducted, divided by sales revenue. It is expressed as a percentage.

Purpose: Measures the profit made by a business before its operating expenses (indirect expenses) are deducted.

Example 2: Operating Profit Ratio

Description: The profit made by a business before interest (finance costs) and tax are deducted, divided by sales revenue. It is expressed as a percentage.

Purpose: Measures the profit made by a business after deducting cost of goods (direct expenses) and operating expenses (indirect expenses).

Task 1

Explain the meaning and purpose of each of the ratios stated below. Follow the format used in the two examples given above (ie gross profit ratio and operating profit ratio).

1. Current ratio
2. Acid test ratio
3. Interest cover
4. Gearing ratio