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Ratio Analysis - Activity

The aim of this Activity is to look at some financial data from some businesses and to use ratio analysis to anlayse their performance and to assess the value of using ratios in drawing conclusions about business performance.

One of the important aspects of ratio analysis is to know what ratio to use and what the resulting figure tells you. Some ratios can be used on their own; others need to be compared with previous years or other companies to make any sense. The most important thing to remember is that a ratio is not used to demonstrate your mathematical prowess (or lack of it as the case may be) but to provide you with some information. All the ratios used are no more difficult that dividing one number by another or doing a simple bit of multiplication. But make sure that you know what the number means!

Using a calculator

Image: The arithmetic involved in using ratio analysis is easy - you are allowed to use a calculator, but make sure you know what the result on the screen actually means! Copyright: Piet Pens

The Task

Step 1:

Go to the Financial Database in the Company Info section of Biz/ed. (http://www.bized.co.uk/cgi-bin/ratios/ratiodata.pl)


Step 2:

The database has a list of businesses to choose from and the financial accounts for those businesses. Use these accounts to calculate the following ratios for three businesses for at least a two-year period (you can do more if you want).

  • Gross Profit Margin
  • Net Profit Margin
  • ROCE
  • Gearing Ratio
  • Asset Turnover
  • Stock Turnover
  • Debtor Days
  • Current Ratio
  • Acid Test

You can print out the following table and use it to input the data.

RatioCompany1, Year 1Company 2, Year 2
Gross Profit Margin  
Net Profit Margin  
ROCE  
Gearing Ratio  
Asset Turnover  
Stock Turnover  
Debtor Days  
Current Ratio  
Acid Test  

Step 3:

Once you have your completed table, comment on the performance of the business over the two years highlighting the possible reasons for the changes that you identify.


Step 4:

Draw some comparisons between the performance of the businesses you have chosen and offer some explanations for the differences that you might identify.


Step 5:

Select ONE of the businesses you have analysed. Imagine that the Board of Directors is considering some strategic changes in the coming years.

  1. Where would you advise the company to focus its attention given the results of your analysis?
  2. What further information would the Board need before making any firm strategic decisions?

Extension work:

There is a range of questions and activities to work through in the ratio analysis section of Biz/ed that will further develop your understanding. (http://www.bized.co.uk/compfact/ratios/index.htm)