1. RATIO ANALYSIS
3 types
Profitability – is the organisation earning more than it spends.
Liquidity – is there enough money to cover all bills.
Efficiency – is the firm making the best use of its resources.

2. PROFITABILITY RATIOS Gross Profit Percentage
Formula – Gross Profit/Sales x 100
Purpose – to show how many pence of Gross Profit is made from every £1 of sales.

3. Net Profit Percentage
Formula – Net Profit/Sales x 100
Purpose – to show how many pence of Net Profit is made from every £1 of sales.

4. Profit Mark-Up
Formula – Gross Profit/Cost of Goods Sold x 100
Purpose – to work out the percentage added to costs to work out selling price.

5. LIQUIDITY RATIOS Current Ratio (Working Capital Ratio)
Formula – Current Assets/Current Liabilities
Purpose – to show whether the firm can covers its short term debts with is short term assets.

6. Acid Test Ratio
Formula – Current Assets less Stock/Current Liabilities
Purpose – The same as Current Ratio but with stock taken out.

7. EFFICIENCY RATIO Return on Capital Employed
Formula – Net Profit/Capital Employed x 100
Purpose – to work out the percentage return investors will get on their investment in the firm.

8. Formula – Cost of Goods Sold/Average Stock
Rate of Stock Turnover
Formula – Cost of Goods Sold/Average Stock
Average stock = opening stock + closing stock/2
Purpose – to work out how many times in a financial period a firm buys and sells its stock

9. USES OF RATIO ANALYSIS
Compare current performance with previous years.
Compare performance with a similar firm
Identify differences in performance to help with decisions for the future
Highlight trends over a period of time.

10. LIMITATIONS OF RATIO ANALYSIS
Information gained from the accounts is historical – it only relates to the previous trading period.
Comparisons with other organisations must be of a similar size and nature.
Findings do not take into account other PESTEC factors.

11. Does not take into account product development or declining products.
Findings do not take into account staff morale or turnover.