Ratio Analysis

Ratio Analysis

NCFE Level 1/2 Business and Enterprise ​

Financial ratios offer a way to analyse a company’s performance and financial health

​
Financial ratios are calculated from a company’s financial statements. They provide insights into profitability, liquidity, and efficiency, transforming the raw financial data into meaningful metrics for analysis used by business owners and investors and other stakeholders.

There are TWO main ones
Profitability Ratios
Liquidity or Solvency Ratios

Ratio Analysis

Profitability ratios gauge a company’s ability to generate profits relative to its revenue, assets, equity, or other financial metrics.

​

Profitability Ratios

Multiple Choice

The gross profit ratio formula is

• operating profit / expenses x 100

• gross profit / revenue

• gross profit / revenue x 100

• gross profit / cost of sales x 100

Multiple Choice

Net profit margin is calculated by...

• (Net profit / Revenue) x 100

• Net profit + Revenue

• Net profit / Revenue

• (Expenses - Revenue) x 100

Multiple Choice

Which of the following formulas is referred to as the acid test formula?

• (current assets - closing inventory) : current liabilities

• current assets : current liabilities

• cost of sales : average inventory

Liquidity ratios measure a company’s ability to cover its short-term obligations. Key ratios include:
Current Ratio
Acid Test Ratio

​Liquidity or Solvency Ratios

Open Ended

Clodagh Ltd will report this years profit figures in 8 weeks time

Clodagh Ltds Board of Directors plan to upgrade the business’ printing equipment

New printing equipment is available which would speed up production, improve print quality and reduce ink costs.  The equipment costs £80,000 to purchase.

Clodagh Ltd has:

§A gearing ratio of 45%

§Reduced the prices its charges for signs due to increased competition

§Been profitable for the last 5 years

§Retained Net Profits of £50,000

§Predicted Net Profits for this year of £45,000

§Plans to upgrade the rest of its computer network in another years time at a cost of £75,000

Clodagh Ltd is considering two options to pay for the new pricing equipment:

A bank loan for £80,000 to be repaid over 3 years

Use its retained profits

Evaluate these two options, Recommend to Clodagh Ltds Board of Directors which option should be taken.  Justify you recommendations   (9 Marks)

Multiple Choice

The ideal result for the current ratio is...

• Exactly 1 : 1

• Exactly 1.5 : 1

• Between 1 and 5 : 1

• Between 1.5 and 2 :1

Multiple Choice

What is the ideal value for an acid test ratio?

• 2:1

• 1:1

• 1:4

Multiple Choice

Current ratio is calculated by...

• Current assets + Current liabilities

• Current assets / Current liabilities

• (Current assets - Stock) / Current liabilities

• ((Current assets - Stock) / Current liabilities) x 100

Multiple Choice

When working out the acid test ratio what is missing from current assets?

• Inventories

• Cash in the bank

• Debtors