# .M, L; Jlk

Topics: Financial ratios, Profit, Gross profit margin Pages: 2 (435 words) Published: March 27, 2013
Charlie and Lola: Ratios Activity

Two of my friends have been having an argument about who owns the best business. They have asked me to judge which business is the best. I said that it depends upon what they mean by “the best” – do they mean which is the most profitable, or do they mean which one is the most stable (in other words, can meet its debts on time – always a difficulty for a small business)?

I don’t want to upset either friend, so I told them I would ask you to judge…..

Here are some extracts from their accounts

Criteria 1: Profitability
(a) Working on your own, you should calculate the performance ratios for both businesses: i. Net profit margin
ii. Gross profit margin
iii. Expenses: sales

(b) Write a sentence explaining the results of each ratio for each business Explain which business is better and why

(c) Working in pairs or threes, draw a graph of these three ratios comparing the two businesses

(d) On a piece of A3 paper large enough for others to read explain which business has the better net profit margin and why by looking at all 3 ratios

Criteria 2: Liquidity

(e) Working on your own, you should calculate the performance ratios for both businesses: iv. Current Ratio
v. Liquid/Acid Test Ratio
vi. Stock turnover (in days)
vii. Debtor Collection Period

(f) Write a sentence explaining the results of each ratio for each business Explain which business is better and why

(g) Working in pairs or threes, draw a graph of these four ratios comparing the two businesses

(h) On a piece of A3 paper large enough for others to read explain which business is better able to meet short term debts with short term assets and why Criteria 3: Other ratios (if you have time)

Working on your own, you should calculate the Return on Capital Employed for both businesses: * Write a sentence explaining which business is better and why Conclusion

One of the...