Calculation and interpretation of financial measures and ratios: gross profit margin %, markup %, rate of inventory turnover, rate of inventory turnover (days), profit in relation to revenue %, expenses in relation to revenue %, return on capital employed %, current ratio, liquid capital ratio (acid test), trade receivable days, trade payable days, capital gearing
Financial ratios are calculations that turn raw accounting figures into meaningful measures. They tell you how profitable, liquid, efficient, or well-funded a business really is.
Formula
GPM% = (Gross profit ÷ Revenue) × 100 | Markup% = (Gross profit ÷ Cost of sales) × 100 | ROCE% = (Profit from operations ÷ Capital employed) × 100 | Current ratio = Current assets ÷ Current liabilities | Acid test = (Current assets − Inventory) ÷ Current liabilities | Receivable days = (Receivables ÷ Revenue) × 365 | Payable days = (Payables ÷ Cost of sales) × 365 | Gearing% = (Non-current liabilities ÷ Capital employed) × 100
Real World
When Debenhams collapsed in 2019, its acid test ratio had fallen well below 1:1 for several years — meaning it could not cover short-term debts without selling inventory, a warning signal visible in the published ratios long before administration.
Exam Focus
Always state the formula, show the substitution, and give a unit — ratios have no £ sign; percentages and days need their labels to earn method marks.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
How well did you know this?