Analysis & Communication
Ratio Analysis
Questions test your ability to calculate profitability, liquidity, and efficiency ratios from given financial statements, interpret their meaning, and comment on performance — often by comparing two years or two businesses. Calculation alone is rarely enough; always explain what the ratio means.
Always show the formula and substitute the figures — even if your final answer is wrong, method marks are available. When interpreting, say what changed, by how much, and what it suggests about the business. Common mistake: calculating correctly but failing to comment — interpretation marks are often worth as much as calculation marks.
Key Concepts to Revise
Profitability Ratios
Gross profit margin, profit margin, return on capital employed (ROCE). All measure how effectively the business generates profit.
Liquidity Ratios
Current ratio (current assets ÷ current liabilities) and quick ratio (exclude inventory). Measure ability to meet short-term obligations.
Efficiency Ratios
Inventory turnover, trade receivables days, trade payables days. Measure how well the business manages its working capital cycle.
Interpretation
Always compare — to a previous year, a competitor, or an ideal. State the direction of change, the likely cause, and the implication for the business.