A2-L15 — Advanced Ratio Analysis
Understanding how advanced ratio analysis is used to evaluate business performance, financial position, efficiency, and investment potential.
Learning Objectives
By the end of this lesson students should be able to:
• calculate advanced accounting ratios
• interpret ratio results professionally
• compare financial performance over multiple periods
• evaluate business strengths and weaknesses
• answer examination-style interpretation questions
Concept Framework
What is Advanced Ratio Analysis?
Advanced ratio analysis involves calculating and interpreting accounting ratios to assess profitability, liquidity, efficiency, gearing, and investment performance.
Major Ratio Categories
• profitability ratios
• liquidity ratios
• efficiency ratios
• gearing ratios
• investment ratios
CORE RULES
| Ratio | Formula |
|---|---|
| Gross Profit Margin | Gross Profit ÷ Revenue × 100 |
| Profit Margin | Profit for the Year ÷ Revenue × 100 |
| Current Ratio | Current Assets ÷ Current Liabilities |
| Acid Test Ratio | (Current Assets − Inventory) ÷ Current Liabilities |
| ROCE | Profit from Operations ÷ Capital Employed × 100 |
| Gearing Ratio | Non-Current Liabilities ÷ Capital Employed × 100 |
| EPS | Profit Available to Ordinary Shareholders ÷ Number of Shares |
TRANSACTION LOGIC
Advanced ratio analysis focuses not only on calculations but also on interpretation and evaluation.
Students should:
• identify trends
• compare ratios over time
• evaluate business performance
• explain possible causes of changes
• provide balanced conclusions
Ratios should never be interpreted in isolation.
Worked Examples
Example 1 — ROCE
Profit from Operations:
£40,000
Capital Employed:
£200,000
ROCE:
(£40,000 ÷ £200,000) × 100
= 20%
Example 2 — Gearing Ratio
Non-Current Liabilities:
£90,000
Capital Employed:
£300,000
Gearing Ratio:
(£90,000 ÷ £300,000) × 100
= 30%
Example 3 — Ratio Interpretation
Current ratio decreased from:
2 : 1 → 1.1 : 1
Possible interpretation:
Liquidity position has weakened and short-term repayment risk may have increased.
📌 Additional questions are available in the 🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define gearing ratio
Define ROCE
Level 2 – Application Practice
Explain why ratio analysis should be compared over several accounting periods.
Level 3 – Examination Style Question
A company reports:
Profit from Operations:
£50,000Capital Employed:
£250,000Non-Current Liabilities:
£100,000Calculate:
a) ROCE
b) Gearing Ratio(4 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you calculate advanced ratios accurately?
2. Can you interpret business performance logically?
3. Can you evaluate strengths and weaknesses critically?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
a) ROCE:
(£50,000 ÷ £250,000) × 100
= 20%
b) Gearing Ratio:
(£100,000 ÷ £250,000) × 100
= 40%
How This Topic Appears in the Examination
This topic commonly appears as:
• ratio calculations
• interpretation questions
• business evaluation discussions
• stakeholder analysis questions
Examiners assess:
• accuracy of calculations
• logical interpretation
• balanced evaluation and professional judgement
Self-Assessment Checklist
I understand advanced ratio analysis
I can calculate gearing and ROCE accurately
I can interpret ratio trends logically
I can evaluate business performance critically
I can answer examination questions confidently
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GUESS PAPERS
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