Interpretation of accounting ratios

• Prepare a simple comparison of two years’ ratios and comment: better or worse, and why.
• The gap between gross margin and profit margin is expenses as a percentage of revenue: an indicator of efficiency.
• Recommend ways to improve profitability (prices, buying, expenses) and working capital (receivables, inventory, payables, cash).
• Gross profit and profit for the year depend on inventory valuation, inventory turnover, revenue and expenses; profit changes equity.

State, compare, explain

A good comment does three things: states the movement with both figures, says whether it is better or worse, and gives a possible reason. Amira Trading’s 2025 figures (from 6.1) are compared with 2024: revenue $150,000, cost of sales $93,000, expenses $33,000, inventory $10,000 at the start and $12,000 at the end, trade receivables $12,500 on credit sales of $125,000, bank $5,500, current liabilities $10,000.

The gap is the expenses

Gross margin − profit margin = expenses as a percentage of revenue. If the gross margin is steady but the profit margin falls, expenses are rising faster than sales: the business is becoming less efficient at controlling its running costs. If both fall by the same amount, the problem is in buying and selling prices, not in the expenses.

Improving profitability and working capital