ZIMSEC A Level · Accounting · Form 5, Form 6
Profitability
- Gross margin = gross profit ÷ revenue × 100.
- Profit margin = profit for the year ÷ revenue × 100.
- Return on capital employed (ROCE) = profit before interest and tax ÷ capital employed × 100 (capital employed = equity + non-current liabilities).
Liquidity
- Current ratio = current assets ÷ current liabilities (about 1.5–2 is often considered healthy).
- Liquid (acid test) ratio = (current assets − inventory) ÷ current liabilities.
Efficiency
- Inventory turnover = cost of sales ÷ average inventory (times per year).
- Trade receivables collection period = trade receivables ÷ credit sales × 365 days.
- Trade payables payment period = trade payables ÷ credit purchases × 365 days.
Gearing and investment
- Gearing = non-current liabilities ÷ capital employed × 100. High gearing means higher risk.
- Earnings per share = profit attributable to ordinary shareholders ÷ number of ordinary shares.
- Price/earnings ratio = market price ÷ EPS. Dividend yield = dividend per share ÷ market price × 100.
Worked example: Current assets US$90 000 (inventory US$40 000); current liabilities US$50 000. Find the current and liquid ratios.
Current ratio = 90 000 ÷ 50 000 = 1.8 : 1
Liquid ratio = 50 000 ÷ 50 000 = 1.0 : 1
Limitations
Based on historical data, affected by different accounting policies and inflation, may be distorted at the year end, and ignore non-financial factors.
Exam tip: Always interpret a ratio – compare it with last year, a competitor or the industry, and give a reason for the change.
Check yourself
- Revenue US$200 000; gross profit US$70 000. Find the gross margin.
- Receivables US$30 000; credit sales US$365 000. Find the collection period.
- What does high gearing indicate?
Show answers
- 35%
- 30 days
- The business relies heavily on borrowed funds, increasing risk and interest commitments.
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