Ratio analysis
Calculate ratios on a consistent basis, compare them with relevant prior periods, peers or targets, and interpret them in the context of business activities and accounting policies. Consider profitability, liquidity, efficiency and financing together; investigate movements rather than treating a single favourable ratio as a complete conclusion. Seasonal balances, inflation, estimates and different accounting treatments can limit comparability.
Worked example
A company’s current ratio falls from 2.0:1 to 1.2:1 while its receivables collection period rises. Together the changes warrant investigation of collection and short-term funding, but neither ratio proves a cash crisis on its own.
Common mistake
Comparing ratios built from inconsistent definitions or asserting a cause without evidence from the underlying figures.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |