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Financial ratio analysis is one of the most important tools for assessing a business's strategic position. Ratios turn raw financial data into meaningful indicators that can be compared across time periods, between competitors and against industry benchmarks. This lesson covers profitability ratios and liquidity ratios as required by AQA specification topic 3.7.2.
Absolute figures from financial statements — revenue of £50 million, profit of £5 million — tell us little on their own. Is £5 million a good profit? It depends on the capital employed, the industry average and how it compares with previous years. Ratios provide context by expressing performance relative to a base figure.
Ratios are used by:
Profitability ratios measure how effectively a business generates profit from its resources.
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
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