• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Calculating Business Ratios

Extracts from this document...


D2: You need to look at each ratio and decide if it is good or bad. You need to think about: * How it will impact upon the future performance of the firm. * How it compares to other businesses in a similar market. * What the results would have been if predictions as shown in the cash flow had been true- whether the performance would have been better or worse. Profitability: Profitability is a measure of the profit of a firm in relation to another. It allows for a more comprehensive assessment of the performance of a firm by comparing one figure to another. There are three profitability ratios: * Gross profit percentage of sales: This is calculated using the following formula: Gross profit * 100 = 76692.21 *100 = 53.90261 Sales turnover 142279.22 This ratio looks at gross profit as a percentage of sales turnover, this ratio is often referred to as the gross profit margin. If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality the product. Alternatively, it may try to increase sales without increasing the cost of goods sold. ...read more.


The business made 30p with every £1 which was fine. It cannot be classified as being good for the business as the business can do better in future by making smarter investments. The future just relies on the future investments; it does not depend on the present return on capital employed. Comparing the business in the market Marks and Spencer has 4.43p with every £1 which means that the performance of this business was a lot better than Marks and Spencer. Liquidity: Liquidity ratios means how solvent a business is that is, how able it is to meet short-term debts. There are two liquidity ratios: * Current ratio: This is calculated using the following ratios: Current assets = 20462.09 = 2.075263 Current liabilities 9860 This ratio shows the amount of current assets in relation to current liabilities and is expressed as x: 1. For every £1 in current liabilities they have £2.07 in assets which is very good. If they are demanded to pay the current liabilities immediately they can pay them. The business did very good. They can pay the liabilities so that means in future the business is secure. There are no chances of the business facing any problems in the upcoming future. Comparing the business in the market Marks and Spencer had £2.1 and Tesco had £0.4 which means that the business did very well compare to both of the business. ...read more.


47 days this is very bad. The debtors might not even wait that long. They need to reduce the days. There is no reason for this to be high. 47 days is very bad. It can lead bad consequences to the business in the future which means the debtors might claim the business to pay before that. Comparing the business in the market Marks and Spencer takes 228 which is very bad so while comparing the business in the market the business has not done that bad. * Rate of stock turnover: This is calculated using the following formula: Average stock * 365 = 5000 * 365 = 27.82563 Cost of goods sold 65587.01 This ratio measures the average amount of time an item of stock is held by a business, and is expressed as a number of days. If a business has a stock turnover of seven, this means that on average it holds each item of stock for one week. The rate of stock turnover is very much dependent upon the nature of the firm. For example you could expect a florist to have a much lower stock turnover than a fashion store or a car showroom. This means it will take 27 days to sell stock. That is good. This means the stock won?t go out of date. The less the amount of days are the better it is. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. Accounting case study. I am writing this report to explain the contents thats on ...

    If the business has a healthy current ratio but a poor acid test ratio it may be that the business is holding too much stock. AT = �8,360-�7,400/�1,610 = 0.6: 1 Efficiency. There are three sets of efficiency ratios. Debtors' payment period.

  2. Interpreting financial performance using a range of ratios

    Although financially Whitbread plc may seem to be stable, aspects such as debtors can dramatically affect future profits for the business. Credit collection period Creditors are the opposite to debtors, these are the people/businesses which Whitbread plc owe money to.

  1. A2 Business CourseWork

    There is a number of ways that this can be achieved. Products on sale is pretty obvious, you don't want to stock things people never buy. Also product placement is key to increasing sales. Tesco will invest a lot of time and resources into studying this.

  2. Accounting Ratios. By using ratios Hills System ltd can monitor their businesss performance. ...

    Assets These are resources that are owned by the company. They can be categorized either as fixed assets or current assets depending on how long they will be of value to the business. Fixed Assets Afixed assetan asset of a businessintended for continuing use, rather than a short-term, temporary asset such as stocks.

  1. The maintenance of accurate records supplies the company with the financial data that assists ...

    book; it also shows the transactions that must be entered to update the accounts. The benefit of drawing up a monthly statement is to check for errors and omissions and make adjustments to both the cash book and the bank statement.

  2. Financial Ratio Analysis.

    and the percentage change in profit after tax has increase substantially from 18% in 1999 to 35% in 2001, due to the decline in corporate tax. In conclusion, from the above, the company is going into a liquidity problem due to over trading and expanding too rapidly, although it seems profitable.

  1. Investigating Business Resources

    Issue of Shares Another way to get some funds in to introduce more shares. This is a good way to additions and is vary useful for a strong balance sheet. A short and simple explanation: If a business needs money to invest they give out some shares.

  2. Produce a report evaluating the relative significance of solvency and profitability ratios in identifying ...

    This is because the ratio does not tell the business what factors are playing a part in the business not able to pay their debts. Therefore, it may be hard for the business to find ways to ensure they will be able to pay their debts on time if they are unsure of what factor is causing the issue.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work