GCSE Business Studies Unit 2 Developing a Business

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Presentation transcript:

GCSE Business Studies Unit 2 Developing a Business Ratios

Learning Outcomes Students should be able to: interpret and analyse income statement and a statement of financial position for assessing business performance using the following ratios: gross profit percentage net profit percentage inventory turnover return on capital employed working capital ratio (formulae will be given in the examination) Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Ratios The key ratios used in business are: gross profit percentage net profit percentage inventory turnover return on capital employed working capital ratio Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Ratios Ratios can be used to interpret the accounts of a business Ratios are used by owners and managers to assess business: Profitability Performance Liquidity Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Ratios Ratios can be compared to: previous years’ figures with similar companies i.e. same size in same industry targets set by the business owners/managers Images © thinkstockphotos.co.uk

Gross Profit Percentage X 100 Sales Shows how much of the sales is made up from gross profit The higher the percentage figure the better Usually an industry standard Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Net Profit Percentage Net Profit X 100 Sales Shows how much of the sales is made up from net profit The higher the percentage figure the better Usually an industry standard Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Inventory Turnover Cost of Sales Average Inventory How quickly inventory is being sold. It shows the number of times in a year the business is able to sell its inventory Rate varies between industries though firms will want it to be as high as possible Images © thinkstockphotos.co.uk

Return On Capital Employed (ROCE) Net Profit X 100 Total Assets – Current Liabilities Shows the return received on the money invested by the owner The higher the percentage the better Can be compared to bank interest rates or other forms investment Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Working Capital Ratio Current Assets Current Liabilities 2:1 Shows how liquid a business is - measures ability to pay short term debts Expressed as a figure against 1 Ideal is 2:1, in that a business should have twice as many current assets to current liabilities Some businesses may operate as low as 1.5:1 A ratio in excess of 2:1 may indicate that the business is not using its resources efficiently Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Pupil Activity Working individually you have forty minutes to answer the following past paper questions: 2011 Question 3 e – g 2012 Question 3 e – g 2013 Question 3 e – g 2015 Question 3 d – e 2016 Question 3 d – g Images © thinkstockphotos.co.uk

Learning Check Can you: interpret and analyse income statement and a statement of financial position for assessing business performance using the following ratios: gross profit percentage net profit percentage inventory turnover return on capital employed working capital ratio (formulae will be given in the examination) Images © thinkstockphotos.co.uk