Accounting Ratios - AQA BUSS3

BUSS3 - Accounting Ratios. A clear and concise guide for anyone sitting or retaking any A2 Business modules.

This pack includes information on:

Profitability Ratios: Measure the relationship between gross/net prfit and revenue, assets
and capital employed. Includes Gross Profit Margin and RoCE.

Activity Ratios: Used to see how efficiently a business is using its resources. Includes Stock
turnover, Debtor/Creditor days and Asset turnover.

Liquidity Ratios: Investigate the short-term financial stability of a firm. Includes Current
ratio and Acid test ratio.

Gearing: Examines the extent to which a business is dependent upon borrowed money. 

Shareholder Ratios: Analyses the return for shareholders. Includes DPS, EPS and Dividend
Yield.

This pack has helpful information such as:

  • Example Questions
  • Example Calculations
  • Revision Links

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Accoun ting Ra tios
Pages 6 2 - 7 6
Ratio Analysis: An examination of accounting data by relating one figure to another. This
gives a meaningful interpretation of the data and the identification of trends.
NOTE: All of these ratios apart from EPS, Gross Profit Margin and Net Profit Margin are in
the formula booklet!
There are 5 different types of ratio:
Profitability Ratios: Measure the relationship between gross/net prfit and revenue, assets
and capital employed. Includes Gross Profit Margin and RoCE.
Activity Ratios: Used to see how efficiently a business is using its resources. Includes Stock
turnover, Debtor/Creditor days and Asset turnover.
Liquidity Ratios: Investigate the short-term financial stability of a firm. Includes Current
ratio and Acid test ratio.
Gearing: Examines the extent to which a business is dependent upon borrowed money.
Shareholder Ratios: Analyses the return for shareholders. Includes DPS, EPS and Dividend
Yield.
Profitability Ratios
Gross Profit Margin: Examines the relationship between gross profit and revenue.
Gross Profit
X 100
Revenue
Example: A firm buys trainers for £20 and sells them for £50. They sell 20 trainers and have a
revenue of £1000 with a gross profit of £600. This gives a Gross Profit Margin of
(£600/1000)*100 = 60%.
This sounds very good but it does not cover overheads and expenses.
To Improve: Raising sales revenue while keeping costs the same or reducing the cost of
sales while maintaining the same level of sales revenue.
Return on Capital Employed: Measures the efficiency with which the firm generates profit
from the funds invested in it.
Operating Profit
X 100
Capital Employed
Example: In 2007, Burberry made an annual operating profit of £157,000,000 from a capital
employed of just £419,300,300. This gives a RoCE of 37.44%.
RoCE can be compared to the money that would be made in a bank through interest. If it is
below current interest rates, it would be a bad investment. Most companies would say a
RoCE of 20% is very good.
To Improve: increasing profit from the same amount of capital invested or maintaining
profit levels but investing less capital.

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Financial Efficiency Ratios
Stock Turnover: Measures the number of times per year a business sells and replaces its
stock. This cannot be used for businesses in the service sector as they do not buy/sell stocks.
Cost of Goods Sold
Average Stock Value
Example: The Carphone Warehouse has sold £830,126 worth of phones and holdes an
average stock of £52,437. This would give a Stock turnover of 15.8. This means they bought
new stock 15.8 times.…read more

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Financial Efficiency Ratios Cont...
Asset Turnover: Measures how many pounds worth of sales a company can generate from
its net assets. Net assets are (non-current assets + net current assets ­ non-current liabilities).
Annual Income
Assets Employed
Example: Burberry has an annual sales revenue of £742.90m with assets employed of
£386.6m. This gives an asset turnover of (742.9/386.6) = 1.92 times. This means that for every
£1 of assets, they returned £1.92 of sales revenue.…read more

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Gearing
Measures the firm's level of debt, giving insight into a firms long-term financial stability. It
shows how reliant a firm is on borrowed money.
Long-Term Loans
X 100
Capital Employed
Example: Tesco have non-current liabilities (long-term loans) of £7,999m and a capital
employed of £19,901m. This gives a Gearing of (19,901/7999) = 40.2%. This means that
40.2% of all money invested into the company is borrowed.…read more

Page 5

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Shareholder Ratios Cont...
Dividend Yield: Directly relates the amount of dividend to the market value of the shares.
Ordinary Share Dividend
X 100
Market Price (in pence)
Again, the higher result, the better for the shareholders. Useful to compare against the
results of competitors.
To Improve: Many factors can effect the share price. A higher Dividend Yield can be
achieved by making greater profits or increasing dividends.…read more

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Ratio Calculation Result
Gross Profit Margin (158/295)*100 53.50%
Net profit Margin (16/295)*100 5.40%
RoCE 16/(500+280) 2.1% (This is dreadful!)
Stock Turnover 137/64 2.14
Stock Turnover (in days) 365/(137/64) 171 days
Gearing (280/(500+280) 35.90%
Current Ratio 140/160 0.88
Acid Test (140-64)/160 0.48
Note: Capital Employed is total equity + non-current liabilities
For more information and analysis of the above answers, see the Out and About mark scheme.
Ratio analysis quiz 1
http://edgecastcdn.net/000031/DLStudent(online)/_TestVersions/AQA_Bus_Stud_A2_Marcouse
/Resources/AQABusA2Marcouse_00260.htm
Ratio analysis quiz 2
http://edgecastcdn.net/000031/DLStudent(online)/_TestVersions/AQA_Bus_Stud_A2_Marcouse
/Resources/AQABusA2Marcouse_00290.htm
Ratio matching quiz
http://edgecastcdn.net/000031/DLStudent(online)/_TestVersions/AQA_Bus_Stud_A2_Marcouse
/Resources/AQABusA2Marcouse_00310.…read more

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