You do not calculate ratios in the exam; you interpret them. Know what each ratio measures, what a rise or fall means, and what a business could do about it.
| Profitability | Gross profit %, profit for the year %, return on equity employed % |
|---|---|
| Liquidity | Current ratio and acid-test ratio |
| Efficiency | Rate of inventory turnover |
| In the exam | Interpreted, never calculated |
Say what the ratio shows, compare it with another year or business, then suggest a cause and a course of action. Remember the limits too: ratios use past figures and leave out things such as staff morale or the economy.
| Ratio | Last year | This year |
|---|---|---|
| Gross profit percentage | 40% | 40% |
| Profit for the year percentage | 12% | 6% |
| Return on equity employed percentage | 15% | 8% |
| Current ratio | 1.8 : 1 | 1.2 : 1 |
| Acid-test ratio | 1.1 : 1 | 0.6 : 1 |
| Rate of inventory turnover | 12 times | 8 times |
| £ million | Last year | This year |
|---|---|---|
| Sales revenue | 5 | 5.6 |
| Cost of sales | 3 | 3.3 |
| Gross profit | 2 | 2.3 |
| Expenses | 1.4 | 1.9 |
| Profit for the year | 0.6 | 0.4 |
No. Calculating ratios and preparing a cash budget or financial statements are not required; interpreting them is.
No. Learn the six ratios on this page by these names.