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Introduction to Ratio Analysis


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What is meant by profitability and liquidity?


Equations are omitted for technical reasons - download the original pdf

Profit is what accrues (is added to) capital at the end of an period of activity as a result of a difference between the value of sales and the cost of raw materials, labour and capital that went into the production of the goods sold. [Equation goes here - download the original pdf to see it.] Liquidity is the availability of capital at each and every point of the working capital cycle to ensure the smooth flow of production through the business. LIQUIDITY MEANS ENOUGH CASH AND ENOUGH WORKING CAPITAL TO ENSURE THE DAY-TO-DAY RUNNING OF THE BUSINESS.
Contents of
Introduction to Ratio Analysis

1 What is meant by profitability and liquidity?
2 Why is it desirable to monitor profitability and liquidity in a business?
3 Why is it desirable to monitor profitability and liquidity by examination of the accounts? Are
4 Why do companies wish to monitor their profitability and liquidity?
5 What is a failure of liquidity?
6 Is it possible to know whether you are profitable and liquid by any other means than examining the a
7 Why is just keeping your eye on your bank account not sufficient to ensure full knowledge of liquidi

Related articles: (1) Sources of Finance, (2) Introduction to Ratio Analysis