1. Unit 2 Business Development Finance GCSE Business Studies
RATIOS
Unit 2 Business Development
Finance
GCSE Business Studies

2. Ratios Ratios can be used to interpret the accounts of a business
Ratios are used by:
Owners and managers
Banks
Tax authorities
Employees

3. Ratios There are four main ratios: Net profit percentage
Stock turnover rate
Return on capital employed
Working capital ratio

4. Ratios Net profit percentage = Net Profit x 100 Sales
Shows net profit as a percentage of sales
The higher the percentage the better
Can be compared with:
Previous years
Targets set by the firm
Similar firms

5. Ratios Stock turnover rate Cost of Goods Sold Average Stock
Shows the number of times a business sells the value of its average stock
Rate of stock turnover will depend on the type of business
Typically a firm that sells higher value goods has a lower rate of stock turnover than one that sells lower value goods

6. Ratios Return on capital employed = Net Profit x 100 Capital Employed
Shows the return received on the money invested by the owner
The higher the percentage the better
Can be compared with:
Return from an alternative investment
Previous years
Targets set by the owner/s

7. Ratios Working capital ratio = Current Assets Current Liabilities
Shows the firm’s ability to pay its current debts
An ideal ratio is 2:1, i.e. twice as many current assets as current liabilities
Some firms will have higher or lower ratios than 2:1