3.5

Question 1

Ratio Analysis

Answer 1

• To compare current year’s performance with previous years
• To compare business performance with similar sized organisations
• To measure an organisation’s profitability and help control expenses
• Highlight wether business can pay its short term debts

Question 2

Gross Profit Margin

Answer 2

Measures the % profit earned on trading (buying and selling stock).
Decrease:
-> the price of goods purchased had increased
-> goods have been stolen
-> there is wastage in production process

Increase:
-> the cost of materials has decreased
-> cheaper supplier has been found
-> improved efficiency in the production process

Question 3

Net Profit Margin

Answer 3

Measures % of overall profit after the business has paid all expenses.
Decrease:
-> expenses have increased since previous years
-> the gross profit margin has decreased

Increase:
-> expenses have decreased
-> gross profit margin has increased

Question 4

Return on Capital Employed

Answer 4

Measures % return on capital invested in business by owners or shareholders (measures efficiency).
The return should be compared to the previous years and similar businesses.

Question 5

Current Ratio

Answer 5

Shows the ability of a business to pay its short-term debts. Means the business has enough liquid funds to pay and still continue in business.
Ratio of 2:1 is IDEAL

Question 6

Acid Test Ratio

Answer 6

Shows the ability of a business to pay its debts in a crisis situation. Stock is removed from the ratio as stock would need to be sold first to get the cash and it takes time.
Ratio of 1:1 is IDEAL