Ratios:how do I know when is positive or negative?

Londina
Londina MAAT, AAT Licensed Accountant Posts: 814
I have now this dilemma, as my book only shows the formulas and little predictable examples.

If this year is LOWER than last year, it's a positive or negative for the following?

GROSS and NET Profit Margin
ROCE
ASSET TURNOVER
CURRENT RATIO

How can I give interpratation and suggestions if even I don't know myself it the ratio is good or bad?:eek:

Comments

  • lork
    lork Registered Posts: 97 💫 🐯 💫
    Which book are you using? There should be a definition of what each ratio is telling you, in order for you to understand them.

    Whether it is good or bad to be lower this year depends on the ratio. For example, in the case of gross or net profit - is making less profit this year (therefore a lower gross/net profit percentage) than last year a good thing or a bad thing?

    With the gearing ratio (I know you didn't mention it) is it a positive or negative to be less financed by debt (therefore lower gearing ratio) this year compared to last?

    Obviously lower profit is a negative, but having a lower gearing ratio is positive.
  • Londina
    Londina MAAT, AAT Licensed Accountant Posts: 814
    it's the Kaplan book for MAC.

    Example for the gross profit margin, the explation is "the gross profit margin looks at the profitability of the pure trading activities of the business:" and then gives the formula.

    That's it, not a long constructive examples like the questions in the exams to do, the stuff in the book are much easier.
    I've been doing today the question of ratio for Mac June 2008 and didn't know where to start to explain!
  • lork
    lork Registered Posts: 97 💫 🐯 💫
    I didn't do MAC, as I'm doing the NVQ route, but I found the Kaplan books to be completely useless for PEV & PCR. For DFS, I switched to BPP and they are much better.

    Taking your example, "the gross profit margin looks at the profitability of the pure trading activities of the business", to be profitable, ie, making a profit, is a good thing. Therefore, if the gross profit margin is lower this year than last, the business is less profitable.

    Try googling some of the other ratios, as you might find a better explanation elsewhere.
  • Londina
    Londina MAAT, AAT Licensed Accountant Posts: 814
    lork wrote: »
    I didn't do MAC, as I'm doing the NVQ route, but I found the Kaplan books to be completely useless for PEV & PCR. For DFS, I switched to BPP and they are much better.

    what about taxation book? that one is useless too, plenty of errors...and DFS drive me crazy the fact that stuff is not in logical order, chapter of chargeable gain after the calculation of tax liability?:thumbdown:
    I'd like to see things in the same order as the calculation required!
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