Business – 10.4 Finance and accounting strategy – Accounting data and ratios | e-Consult

Model Answer:

1. Calculations

   Gross profit margin = (Sales – Cost of sales) ÷ Sales × 100	= (1,200 – 720) ÷ 1,200 × 100 = 40 %
   Current ratio = Current assets ÷ Current liabilities	= 350 ÷ 210 ≈ 1.67 : 1
   ROCE = Operating profit ÷ (Total assets – Current liabilities) × 100	= 180 ÷ (800 – 210) × 100 ≈ 28.6 %

2. Strategic implications

   • Gross profit margin 40 %: Indicates strong profitability on core sales. Management may consider expanding the product range or entering new markets, confident that each sale contributes a healthy margin.
   • Current ratio 1.67: Shows adequate short‑term liquidity, reducing the risk of cash‑flow problems. The firm could safely take on additional working‑capital‑intensive projects or negotiate better credit terms with suppliers.
   • ROCE 28.6 %: Well above typical industry benchmarks, signalling efficient use of capital. This may attract investors and justify reinvestment in high‑return projects, such as automation or acquisitions.

3. Potential cautions

   • If the gross margin is driven by high pricing, market entry could be vulnerable to price‑sensitive competitors.
   • A current ratio above 2 might indicate excess cash tied up in inventory; the firm should balance liquidity with asset efficiency.
   • ROCE can be inflated by low equity; reliance on debt could increase financial risk if market conditions change.