Study notes

Value and Limitations of Ratio Analysis

• Levels: AS, A Level
• Exam boards: AQA, Edexcel, OCR, IB, Other, Pre-U

Ratio analysis is widely used in practice in business. Teams of investment analysts pour over the historical and forecast financial information of quoted companies using ratio analysis as part of their toolkit of methods for assessing financial performance. Venture capitalists and bankers regularly use ratios to support their analysis when they consider investing in, or loaning to businesses.

The main strength of ratio analysis is that it encourages a systematic approach to analysing performance.

However, it is also important to remember some of the drawbacks of ratio analysis

• Ratios deal mainly in numbers – they don't address issues like product quality, customer service, employee morale and so on (though those factors play an important role in financial performance)
• Ratios largely look at the past, not the future. However, investment analysts will make assumptions about future performance using ratios
• Ratios are most useful when they are used to compare performance over a long period of time or against comparable businesses and an industry – this information is not always available
• Financial information can be "massaged" in several ways to make the figures used for ratios more attractive. For example, many businesses delay payments to trade creditors at the end of the financial year to make the cash balance higher than normal and the creditor days figure higher too.
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• Quantitative Skills in A Level Business - Ratios

Student videos
• Financial Ratios - Uses and Users (Revision Quiz)

Revision quizzes
• Financial Ratios - Liquidity (Revision Quiz)

Revision quizzes
• Financial Ratios - Gearing (Revision Quiz)

Revision quizzes
• Business Maths - Calculating Percentage Changes

Student videos
• Financial Ratios - Explained

Student videos

Study notes
• Profitability Ratios

Student videos
• Ratio Analysis - Limitations

Student videos
• Ratio Analysis - Introduction

Student videos

Topic Teaching Resources

Individual teaching resources for delivering specific topics, including teaching instructions.

• Profit Mystery in Seaburn

This is a card based activity that can be used to either introduce the concept of profit and loss or consolidate the understanding of profit and loss after some initial...

£5.00 (+VAT)

Profit Mystery in Seaburn
• The Accountant

The accountant is a teaching and learning activity that is used to consolidate income statements and ratio analysis.

£5.00 (+VAT)

The Accountant
• The Pie Factory

In this short business simulation, students become the directors of a business producing pies and are in competition with several other firms. Their aim is to compete for new custom...

£5.00 (+VAT)

The Pie Factory

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• Revising Ratios - Video Playlist

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• The turnaround at Thomas Cook - but gearing still too high

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• Lack of Bargaining Power is Squeezing Small Business Suppliers

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• BUSS3 A* Evaluation - High Gearing is Good – Sometimes!

30th January 2015

• Strategy: Retrenchment for the Co-op Group to Reduce Gearing

4th August 2014

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