Unit 5 – Business accounting
Pass criteria 5, Merit criteria 2 and Distinction criteria 2
P5 – Perform ratio analysis to measure the profitability, liquidity and efficiency of a given
organisation
M2 – Analyse the performance of a business using suitable ratios
D2 – Evaluate the financial performance and position of a business using ratio analysis
Profitability
Gross profit percentage, net profit percentage and return of capital employed are ways of
calculating profitability. Gross and net profit percentage are both used to see similar things,
for example to see how well the company is profiting from selling goods. Return of capital
employed is generally used by investors to see whether it is financially worthwhile to invest
in a company.
Gross profit percentage of sales
gross profit/sales turnover x 100
For SIGNature Ltd
235400/444000 x 100 = 53%
53% means that the business is doing well as it is above half, the sum means that for
every pound made in sales 53p is made in gross profit. A gross profit percentage of
sales should be around 50% although higher is more desirable.
Net profit percentage of sales
net profit/sales turnover x 100
For SIGNature Ltd
96460/444000 x 100 = 21.7%
This figure of 21.7% could be improved on but it is good because it means that after
all the costs of producing the product SIGNature Ltd is still making 21.7p per £1 of
sales. The figure is especially good because it is the businesses first year meaning
that setting up costs (loans) are also involved and in a few years they will not be.
Return of capital employed
net profit (before interest and tax)/capital employed x 100
For SIGNature Ltd
96460/214160 x 100 = 45%
45% is very good for a company because it means that for every pound that is tied
up in the business you are earning 45p in net profit.
Liquidity
Current ratio
current assets/current liabilities
70160/15500 = 4.53
Current ratio is 4.53:1 which means that for every £4.53 owned SIGNature owes £1.
This ratio is in a way good but in another shows that SIGNature Ltd has too many
assets that should be invested into the company to increase the overall profits that
the company makes, by doing this you will increase efficiency.
Pass criteria 5, Merit criteria 2 and Distinction criteria 2
P5 – Perform ratio analysis to measure the profitability, liquidity and efficiency of a given
organisation
M2 – Analyse the performance of a business using suitable ratios
D2 – Evaluate the financial performance and position of a business using ratio analysis
Profitability
Gross profit percentage, net profit percentage and return of capital employed are ways of
calculating profitability. Gross and net profit percentage are both used to see similar things,
for example to see how well the company is profiting from selling goods. Return of capital
employed is generally used by investors to see whether it is financially worthwhile to invest
in a company.
Gross profit percentage of sales
gross profit/sales turnover x 100
For SIGNature Ltd
235400/444000 x 100 = 53%
53% means that the business is doing well as it is above half, the sum means that for
every pound made in sales 53p is made in gross profit. A gross profit percentage of
sales should be around 50% although higher is more desirable.
Net profit percentage of sales
net profit/sales turnover x 100
For SIGNature Ltd
96460/444000 x 100 = 21.7%
This figure of 21.7% could be improved on but it is good because it means that after
all the costs of producing the product SIGNature Ltd is still making 21.7p per £1 of
sales. The figure is especially good because it is the businesses first year meaning
that setting up costs (loans) are also involved and in a few years they will not be.
Return of capital employed
net profit (before interest and tax)/capital employed x 100
For SIGNature Ltd
96460/214160 x 100 = 45%
45% is very good for a company because it means that for every pound that is tied
up in the business you are earning 45p in net profit.
Liquidity
Current ratio
current assets/current liabilities
70160/15500 = 4.53
Current ratio is 4.53:1 which means that for every £4.53 owned SIGNature owes £1.
This ratio is in a way good but in another shows that SIGNature Ltd has too many
assets that should be invested into the company to increase the overall profits that
the company makes, by doing this you will increase efficiency.
