Ratio Analysis

What Ratio Analysis covers

Ratio Analysis is examined in Unit AS 3, Financial Decision Making. It covers profit margins and return on capital employed, the current ratio, liquidity and gearing, trade receivables and trade payables days, earnings per share and return on equity and using and evaluating ratio analysis.

The 5 subtopics

Each one has its own page. CCEA AS Professional Business Services students sit this topic in the first year.

• Profit margins and return on capital employedGross and net profit margins, return on capital employed, their formulas and worked figures, and comparing ROCE with interest rates.Open →
• The current ratio, liquidity and gearingThe current and acid test ratios, healthy liquidity levels, gearing and its formula, worked calculations, high and low gearing, and interest rate risk.Open →
• Trade receivables and trade payables daysTrade receivables and payables days with worked calculations, credit terms, reducing receivables days, stretching payables, lock-up and invoice factoring.Open →
• Earnings per share and return on equityEarnings per share and return on equity with worked calculations, the effect of share issues and gearing, dividend per share, and why these ratios suit companies.Open →
• Using and evaluating ratio analysisRatio analysis and financial key performance indicators, the groups of ratios, trend analysis, inter-firm comparison and benchmarks, window dressing and the limitations of ratios.Open →

What you need to know

Answer each one before you reveal it.

Take Ratio Analysis further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Gross profit margin vs Net profit margin

  Gross profit margin: the share of each pound of sales left after direct costs only. Net profit margin: the share of each pound of sales left after direct costs and all overheads.

• Current ratio vs Acid test ratio

  Current ratio: short-term assets including inventory divided by short-term liabilities. Acid test ratio: short-term assets excluding inventory divided by short-term liabilities.

• Gearing vs Liquidity

  Gearing: the proportion of long-term capital that comes from borrowing. Liquidity: the ability to pay short-term debts as they fall due.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What does a profitability ratio measure?

   Model answer

   A profitability ratio measures how well a business turns its revenue or capital into profit. Profitability ratios are also called performance ratios.

2. 2

   State the formula for the gross profit margin.

   Model answer

   The gross profit margin equals gross profit divided by sales revenue, multiplied by 100. The margin is expressed as a percentage.

3. 3

   A sole trader has gross profit of £108,000 on sales revenue of £180,000. Calculate the gross profit margin.

   Model answer

   The gross profit margin is 60%. The working is 108,000 ÷ 180,000 × 100 = 60%.

4. 4

   State the formula for the net profit margin.

   Model answer

   The net profit margin equals net profit divided by sales revenue, multiplied by 100. The result shows the profit left from each £1 of sales after all costs.

5. 5

   An accountancy practice has net profit of £38,000 on sales revenue of £180,000. Calculate the net profit margin.

   Model answer

   The net profit margin is 21.1%. The working is 38,000 ÷ 180,000 × 100 = 21.1%.

6. 6

   What does the gap between a firm's gross and net profit margins show?

   Model answer

   The gap shows how much of each pound of sales is taken by expenses. A widening gap means overheads are rising faster than sales.

What is inside Levo

Six ways to work the same material.

Ratio Analysis revision questions

Is Ratio Analysis examined at AS in CCEA Professional Business Services?

Yes. It sits in AS 3, which you take in the first year, so it is on the AS paper as well as counting towards the full A level.

What does Ratio Analysis cover in CCEA AS-Level Professional Business Services?

5 subtopics: profit margins and return on capital employed, the current ratio, liquidity and gearing, trade receivables and trade payables days, earnings per share and return on equity and using and evaluating ratio analysis. Each one has its own page with questions and model answers.

How is Ratio Analysis organised?

By the CCEA 3210 specification, subtopic by subtopic, so it matches the order you are taught it in.