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Unit 5 Business accounting M2 & D2 PASSED
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Unit 5 Business accounting M2 & D2 were marked by assessor and both grades were achieved.
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Reezi Unit 5 M2, D2 Group BM2 - Analyse the performance of a business using suitable ratios.
D2 - Evaluate the financial performance and position of a business using ratios.
Introduction
In this task, I am going to analyse and evaluate the different ratios that can show the
performance of Ricky’s business. I will be working out the many different types of ratios that
come under profitability, liquidity and efficiency. From here I will be stating any sort of
advantages and disadvantages from each working out of the ratio, also giving my own
recommendation to Ricky on how to improve his business in term of using the suitable ratios.
Ratio Analysis
Using ratio analysis does involve to calculate and interpret lots of financial data and results.
By doing this it can allow the Ricky to understand how the company is performing, as it
provides him a clear insight of his financial position. Generally, the different types of ratios is
calculated differently that can be complete by looking at the figures from the balance sheet
and through the profit and loss account, also including the assets and liabilities. The figures
can also be used to compare to other businesses that are in the same market, this can show
how strong the company’s financial position is.
Profitability Ratio
Ratio Formula Calculation Value
Gross profit Gross profit x100 31,400x100 52.3%
Sales 60,000
Net profit Net profit x 100 15,983x100 27%
Sales 60,000
Return on Capital Operating profit 15,983 x100 50.7%
employed Capital employed 31,500
This table shows how I worked out the different ratios that comes under profitability. Firstly,
Ricky has a gross profit percentage of 52.3%, this would mean that for every £10 sale Ricky
makes, he will get £5.23 as his gross profit, this value is not affected by the taxes, interest
rates or depreciation. For a small business like Ricky's 52.3% as his gross profit is very good
as for a small business the average gross profit would be between 25 to 35 percentage. It is
better for Ricky if his gross profit remains high, but if not then lots of problems can arise for
his company.
Secondly, the net profit will be deducted by taxes and depreciation from the total revenue.
Ricky has a net profit percentage 27%, this means for every £10 sale from Ricky’s company,
the net profit made will be £2.70. This means that the other £7.30 would have been used for
production, taxes, labour and other expenses. But, for a small business like Ricky’s a range
between 15 to 25 percentage is very good. Putting this in perspective, a normal grocery
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