Financial Analysis

Appraising Business Performance

Using multiple ratios together

No single ratio gives a complete picture. Performance must be assessed across all four categories:

Structuring a comparison answer

When comparing two businesses or two years:

1. State which business/year has the better ratio
2. Quantify the difference with figures
3. Explain what the ratio means in context
4. Suggest how to improve if required
5. Conclude with an overall judgement, weighting the evidence

Example: "Tao Almeida has a better gross profit margin than Primoz Thomas by 3% (59% vs 56%). This means for every £1 of sales, TA earns 3p more gross profit, possibly due to lower cost of sales or a higher selling price. Thomas could improve by renegotiating with suppliers or increasing prices, though this risks losing customers."

Common pitfalls

• Do not say "increased/decreased" for year-on-year changes — say improved/deteriorated
• Do not say "higher/lower" when comparing businesses — say better/worse
• Always relate the ratio to the context of the business (type, size, industry)
• Do not recommend splitting an investment between two companies — make a definitive recommendation

The per-£1 summary table

A useful tool for profitability analysis is to express all items per £1 of revenue:

This shows that for every £1 of sales, 90p covers costs and 10p is profit.