Essay
Business Financial Performance level 3 D2 UNIT 2
- Institution
- PEARSON (PEARSON)
Evaluate the relative significance of selected financial ratios in identifying serious problems of business performance.
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I will be evaluating the relative significance of selected financial ratios in identifying serious problems ofASDAS performance.
Net profit percentage is important because it allows a business to know how well they are doing in terms
of their funds. This ratio will help a business identify their financial performance because when they
work out the percentage e.g. as ASDAS was 20.4% in 2015 they may think this is good however in
comparison to 2014 which they had 99% they will be able to see clearly they made less money in 2015.If
a business is in debt this ratio is helpful because net profit ratio is profit after expenses have been
deducted which shows if a business is in debt they will need to reduce their expenses and increase their
sales to make more money. This ratio helps a business identify any financial problems because it lets
them know if their expenses are too high and if their sales are low and then they can budget better to
improve it. This ratio is important because from the results the business gets from it they will know if
they need to improve or use their profit to make more funds e.g. if the percentage is low the business
will need to make more sales by maybe doing discounts and introducing new products, if the percentage
is high it means the business is doing well and with that money they can invest it to increase their money
or use the money to create new products or open more stores.
Current ratio is important and can help identify serious problems of a business’s performance because
current ratio expresses the amount of current assets to current liabilities and it lets the business know If
they will be able to pay their debt or how simple or hard it will be for example in 2014 ASDA had a
current ratio of 2:9 which means they own £2 in current assets and they owe £9 in current liabilities and
this means ASDA is in a very difficult situation as they owe more than they own. Current ratio lets a
business know how well they are managing because if they owe more than they own it shows they are
managing badly and not paying their debts or not having enough to pay their debts. A business should
own more in current assets than they owe so they will be in a good situation if they lenders required
payment quickly. This ratio can determine if a business wants to keep running because if they owe too
much a business can decide to close down or they will have to close down if they get taken to court
because they did not pay debts.
Quick ratio is important because it lets business know if they will be able to pay their current liabilities
without stock being included in the current assets as stock is the most difficult to turn into money. In
terms of quick ratio it should be higher than 1 however not higher than 2 for ASDA to be n a good
situation, if the ratio is lower than 1 it shows that the business cannot or will find it very difficult to pay
their creditors and if the ratio is over 2 it shows the business has a high amount of money and they can
definitely pay their debts and have money left over which is not being put to use. Stock not being
included as mentioned above is because it is not easy to sell which is why the business must use quick
assets such as cash, cash equivalents and short term investments. If the ratio is above 1 however not
higher than 2 it shows they can pay their debts and they are also putting their extra money use such as
investments.
Gross profit percentage is important because this lets the business know how much profit they have
made when cost of goods sold have been subtracted which is the price of the creation of the product or
service. If it is low it shows the business need to make more sales, lower prices of product and do more
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