Calculate and interpret the profitability and efficiency ratios of a company for two years.

How to lay out the answer. Follow the frame, then write it in your own words.

1 · Set out a ratio table. Ratio, formula, this year, last year.
2 · Profitability ratios.
- Gross, operating and net profit margins.
- ROCE and ROE.
3 · Efficiency ratios.
- Asset turnover.
- Inventory, receivables and payables days.
4 · Show the working. Formula, figures, answer to one decimal place.
5 · Interpret each change. What changed, the likely reason, the effect on the business.
6 · Advise management. E.g. tighten credit control, review pricing, clear slow-moving stock.
7 · Note the limitations. Year-end figures, inflation, different accounting policies.

Scoring tip: Comments earn as many marks as calculations; never leave a ratio without a sentence on what it means.