Sadia Hussain Unit 7
M2 - Analysis
“Accounting ratios, or financial ratios, are comparisons made between one set of figures
from a company’s financial statement with another.” Accounting ratios are part of financial
statement analysis, they are comparisons made with some figures on the financial
statement with another. They are used to interpret the performance of the company and
see whether the company is improving or not. They are often used to compare the
performance of one business with another in the same industry as well as used to compare
to the company’s same ratio in the previous years, to see if the company’s performance is
improving. It can also help to predict if the business is in danger of going bankrupt. There
are many different types of accounting ratios that company’s use to measure the
performance of the company, such as profitability, liquidity, Efficiency and investment
ratios.
Profitability ratios - Gross Profit Percentage
“Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between
gross profit and total net sales revenue. It is a popular tool to evaluate the operational
performance of the business. The ratio is computed by dividing the gross profit figure by net
sales.” The gross profit percentage shows relationship between gross profit and total net
sales revenue. It is calculated by dividing the gross profit by the number of sales and then
showing it as a percentage. The higher the gross profit is the better the company is
performing. If this figure is increasing, the company will be receiving more gross profit for
every pound of sales. If the gross profit decreases, it could be because of the increase in raw
materials, decrease in the price of the products or loss of the stock such as theft. This ratio is
important for potential investors because an investor would want to know how the business
is performing before they make the decision to invest. Investors would want to invest in
companies that are making a high amount of profit for every pound of sales then a low
amount, as it shows that they are performing well and investors know that they will get
their share.
Tesco’s gross profit is calculated by dividing the gross profit, which is 3352, by the number
of sales, which are 57493, shown as a percentage this is 5.83%. This ratio figure can be used
to test the condition of the business by comparing it with the previous year’s figures or by
other companies and comparing it with the industry average. If the ratio figure is increasing
over the years, then this shows that the company is improving, if it decreasing then that
means that the company is making less money over the years and the management need to
figure out why to be able to improve the condition of the business. Tesco’s second years
(2019) gross profit percentage is 6.48%. This is higher than their previous year, which means
their performance is increasing; the company is receiving more gross profit for every pound
of sales. This could be due to an increase in the price of the items, which could have been
affected by the demand, when a product has more demand; companies tend to increase the
price of that product.
Net Profit Percentage
1
