ONE FINAL LOOK AT

GPM, NPM AND ROCE

 A business A student
Business A Business B Student A Student B

GPM 20% 24% PowerPoint

Grade
86% 79%

NPM 14% 12% Overall

project
77% 83%
grade

ROCE 10% 6% Number of

hours 1.5 22.5
working on
assignment
hours hours
 Your job with a partner
1. Discuss which and explain which business is stronger
2. Discuss and explain which student you think is “better”
3. Explain the similarities between the two examples, the
business and the student
4. Explain briefly why it’s not a perfect analogy the
comparison between GPM, NPM and ROCE and
PowerPoint grades, overall grades and Hours worked
on the assignment
My work
1. Which business is stronger?
Business A
They are able to keep 14% (npm) of every money generate in sales as profit after
deducting the expenses and divide the net revenue. The profitability gap between
the bpm and the npm of business A is lower (6%) than business B. This suggests the
overhead expenses of the business is low. The amount of roce in their accounting is
10% (4% higher than B) , which mean a higher portion of income may be re-invested
in the business.
My work
2. Which student is better?
A
Both students got quite a similar score (the rate difference between them is small).
However the amount of time consumed to work on the assignment of student A is
lower yet he/she got the output that nearly the same to student A in both grade
3. Similarities between two examples
• The data are mainly written in percentage
4.
• Because they measured two different aspects
Your job
• Go over the next 3 slides with a partner and try and figure
out what’s going on with liquidity, current ratio and acid
test ratio
• Then read the sections in your textbook to help you with
the two main concepts
Liquidity is the ability of a
business to pay back its
short-term debts.

Illiquid – if a business
cannot pay its suppliers for
materials that are
important to production or
if the business cannot
repay an overdraft
Current ratio

(Current assets / Current liabilities) x 100

What would this number tell us?

how a firm might use current assets on its balance sheet to pay down current debt and
other liabilities.

1.25 is an acceptable result but a really ‘safe’ current ratio would be

between 1.5 and 2. If the current ratio is less than 1, it would mean that
the business could have real cash flow problems.
Acid test ratio

(Current assets - Inventories / Current liabilities) x 100

Current Assets
Inventories
Account receivable
Cash

Current Liabilities
Accounts payable (creditors)
Bank overdraft

Why would we need this different formula that doesn’t include

inventories
Because since selling inventories off quickly, and perhaps at a loss, can be
challenging. Inventories may consume times to liquidate
Read page 288 to 290 about these concepts with
your partner in your textbook
 Current Ratio and Acid Test
Answer these two questions with your partner. Make sure you hand these in.

Current ratio 1.0 – 2018 What can we conclude from

this about this business?
Current ratio 1.5 - 2017
The business is more capable to pay their
liabilities

Current ratio 1.75 – 2018 What can we conclude from

this about this business?
Acid ratio 0.5 - 2018 The business inventory is depended by current
assets.
Pick one of these two companies and calculate their current ratio
and acid test ratio with your partner. Hand this in with your
partner

https://www.nestle.com/sites/default/files/asset
https://www.mitsubishielectric.com/en/in -library/documents/library/documents/financial
vestors/library/statements/statements_0 _statements/2018-financial-statements-en.pdf
2.page
If you get done early

Read page
291 and 292