prepare and comment on simple statements showing comparison of results for different years

What are Accounting Ratios?

Ratios are like the “speedometer” of a company’s performance. They compare two numbers from the financial statements to give you a quick snapshot of how well the business is doing. Think of them as a recipe that tells you how much of each ingredient (profit, assets, liabilities) you need to make the dish (business) tasty and healthy.

Key Ratios to Know 🧩

• Return on Assets (ROA) – how efficiently a company uses its assets to make profit.
• Current Ratio – measures short‑term liquidity.
• Debt to Equity Ratio – shows how much debt the company relies on compared to shareholders’ money.
• Profit Margin – tells you what portion of sales turns into profit.

Calculating Ratios

Let’s walk through a quick example. Suppose a company has the following figures for 2022 and 2023:

Now, let’s calculate a few ratios.

1. ROA: $ROA = \frac{Net\ Profit}{Total\ Assets}$
   • 2022: $\frac{120}{800} = 0.15$ or 15%
   • 2023: $\frac{150}{850} \approx 0.176$ or 17.6%
2. Current Ratio: $Current\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}$
   • 2022: $\frac{300}{150} = 2.0$
   • 2023: $\frac{350}{180} \approx 1.94$
3. Debt to Equity: $Debt\ to\ Equity = \frac{Total\ Debt}{Equity}$
   • 2022: $\frac{400}{400} = 1.0$
   • 2023: $\frac{420}{430} \approx 0.98$

Interpreting Ratios Over Time 🔍

When you compare ratios from year to year, you’re looking for trends – is the company getting better or worse at what it does?

• ROA: A rise from 15% to 17.6% means the company is using its assets more efficiently to generate profit.
• Current Ratio: A slight drop from 2.0 to 1.94 is still above the safe threshold of 1, so liquidity is fine.
• Debt to Equity: A small decrease from 1.0 to 0.98 shows the company is slightly less reliant on debt.

Remember: a single ratio can be misleading. Always look at a group of ratios together to get the full picture.

Exam Tips for Ratio Questions 📝

1. Read the question carefully – does it ask for a comparison, an explanation, or a calculation?
2. Show your work: write out the formula in LaTeX, plug in the numbers, and simplify.
3. Use the “trend” language: “improved”, “declined”, “remained stable”.
4. Always round to the nearest whole number or one decimal place unless the question specifies otherwise.
5. Check your units: percentages should be expressed as a percent sign, not a decimal.

Good luck, and remember: practice makes the ratios click! 🚀