Scribd
Upload
222 views49 pages

3.5.2 Ratio Analysis

This document provides an overview of ratio analysis for Edexcel A2 Business, including definitions and calculations of key financial ratios such as the current ratio, acid test ratio, gearing ratio, and return on capital employed (ROCE). It also gives examples of interpreting ratios using data from 2009-2010 and limitations to consider when using ratio analysis. Sample exam questions are presented at the end to illustrate how ratio analysis knowledge and skills could be applied.

Uploaded by

Abder Alami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
222 views49 pages

3.5.2 Ratio Analysis

This document provides an overview of ratio analysis for Edexcel A2 Business, including definitions and calculations of key financial ratios such as the current ratio, acid test ratio, gearing ratio, and return on capital employed (ROCE). It also gives examples of interpreting ratios using data from 2009-2010 and limitations to consider when using ratio analysis. Sample exam questions are presented at the end to illustrate how ratio analysis knowledge and skills could be applied.

Uploaded by

Abder Alami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 49

Edexcel A2 Business

3.5.2 Ratio Analysis

Revisionstation
Worksheet
Calculators will be needed for this topic
From Edexcel

a) Calculate:
• Gearing ratio
• Return on capital employed (ROCE)
b) Interpret ratios to make business decisions
c) The limitations of ratio analysis
Starter (online timer here)
• You have 5 mins to learn as much of these as possible (Go!)
Can you now fill in the grid? How much did
you remember?
Ratios defined
• A ratio measures a company's ability to meet financial obligations.
Calculations and interpretation
Current Ratio formula

Current Assets
__________________________________

Current Liabilities

Notes

• Current Assets and Current Liabilities are both found on the statement
of financial position (balance sheet)
• The answer should be expressed as a ratio to 1, so for example 3:1
Current Ratio explained

• This is also known as the working capital ratio


• The ideal is around 1.5:1 and 2:1
• Below 1.5:1 the business might not have enough working capital to
cover all their bills
• They may be over borrowing or over trading and will have cash flow
problems
• Above 2:1 and the money in the business is tied up and not being
used efficiently
Current Ratio – calculate from this data
Current Ratio answer

2009 2010
Current Assets 11 298 929 13 073 604

Current Liabilities 10 589 293 10 686 214

Current Ratio 1.06:1 1.22:1


Move shape to Move shape to
reveal answer reveal answer
Acid test ratio formula

Current Assets - Inventory


__________________________________

Current Liabilities

Notes

• Inventory is also known as stock and will be found on the statement


of financial position (balance sheet)
• This is also expressed as a ratio to 1 e.g. 4:1
Acid test ratio explained

• The acid test ratio is also known as the quick ratio and is the most
commonly used ratio to judge the financial health of a business
• Stock is excluded because it may perish or be obsolete or not worth
the stated value
• A result of less than 1:1 means that the current assets do not meet
their current liabilities and they will struggle to pay their bills
Acid test ratio – calculate from this data
Acid test ratio answer
2009 2010
Current Assets 11 298 929 13 073 604

Current Liabilities 10 589 293 10 686 214

Stock 1 459 394 1 422 373

Acid test Ratio 0.92:1


Move shape to 1.09:1
Move shape to
reveal answer reveal answer
Gearing ratio formula

Non-current Liabilities
__________________________________
X 100
Capital Employed

Notes
• Non-current liabilities are also known as long-term liabilities and are
found with capital employed on the statement of financial position
(balance sheet)
• The answer should be expressed as a percentage %
Gearing ratio explained

• The gearing ratio looks at the long-term finance of the business and
where it comes from
• A result of over 50% means the business is highly geared, most of the
money comes from loans, this is very risky for a potential investor
• A result of less than 50% means the business is low geared and most
of the money comes from the owners, a better risk for an investment
Gearing ratio – calculate from this data
Gearing ratio answer

2009 2010

Long Term Liabilities 7 872 007 8 732 630

Capital Employed 18 472 744 19 663 073

Gearing Ratio 42.66% 44.4%


Move shape to Move shape to
reveal answer reveal answer
ROCE ratio formula

Operating Profit
__________________________________
X 100
Capital Employed
Notes

• ROCE means return on capital employed


• Operating profit figure comes from the statement of comprehensive income (profit and loss)
• Capital employed figure comes from the statement of financial position (balance sheet) it
can be found by adding non-current liabilities and total equity figures together
• X100 means the answer must be expressed as a percentage with a % sign
ROCE ratio explained

• Return on Capital employed is a measure of the profitability of the


business
• If you were considering investing in a business you might calculate the
ROCE % and then compare this against a bank savings plan (less risky)
of 5%
• The higher the ROCE figure the better
• Demonstrates how hard the business made the money invested work
ROCE ratio – calculate from this data
ROCE ratio answer

2009 2010
Operating Profit or loss (461 011) 147 516

Capital Employed 18 472 744 19 663 073

ROCE ratio -2.5% 0.75%


Move shape to Move shape to
reveal answer reveal answer
Ratio limitations
Ratio limitations
• The balance sheet is just a snapshot of
the business on one day, if the ratios are
based on this figure, then it’s a ratio of
just one day in the business and as
markets are dynamic figures could change
• The ratios are only as good as the
information provided in the balance sheet
and the profit and loss
• The ratios need comparison like a pair of
shoes you need two to be comfortable.
For example 45% on its own means
nothing but a rise from 45% to 87%
means something
Ratio limitations continued
• Ratios must be seen in an industry
context. In some supermarkets the
current ratio is very low as the stock
is sold so fast , so a low current ratio
or acid ratio would not be a worry
• Keep in context – were poor ratios in
a time of world recession e.g. 2008?
• During a recession, for example, it
may be useful to compare the
business performance with a
competitor
Sample Edexcel A2 questions
Case study for question 1
Sample question 1

Knowledge Application
1 3
Answer sample question 1
Case
study for
question
2
Sample question 2

Knowledge Application Application Application


4 4 6 6
Answer sample question 2
Answer sample question 2
How to
level
question
2
Case study
for
question 3
Sample question 3

Knowledge Application
2 2
Answer sample question 3
Case study for question 4
Sample question 4

Knowledge Application
2 2
Answer sample question 4
Case study for question 5 and question 6
Sample question 5

Knowledge Application
2 2
Answer sample question 5
Sample question 6

Analysis Application
2 2
Answer sample question 6
Glossary

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy