Accounting Coursework: Ratio Analysis of a FTSE 100 Retailer’s Financial Statements

Introduction

Ratio analysis is one of the most widely used techniques for interpreting a set of published financial statements, because it converts the absolute figures reported in the income statement and the statement of financial position into relative measures that can be compared over time and between organisations. This model coursework demonstrates how an undergraduate accounting student might structure a ratio-based appraisal of a large listed retailer, working from a single company’s accounts and presenting the results in a clear, evidence-led way. The analysis uses illustrative figures for a hypothetical FTSE 100 retailer, referred to throughout as Meridian Retail Group plc, so that the full method can be shown without reproducing or misrepresenting any real company’s reported results. All monetary amounts are stated in pounds sterling millions unless otherwise indicated, and every ratio is calculated from the data set out in the section below.

The piece has two purposes. First, it shows how the main families of ratios — profitability, liquidity, efficiency, gearing and investor measures — are calculated and what each is intended to reveal. Second, it models the interpretive commentary that separates a strong undergraduate submission from a mechanical one: rather than simply reporting a figure, the analysis explains why a ratio has moved, what the movement means for the company’s stakeholders, and where the limitations of the technique lie. Retail is a useful setting for this exercise because retailers typically combine thin operating margins, rapid inventory movement and very low receivables, producing a distinctive ratio profile that rewards careful reading.

Company Context and Data Used

Meridian Retail Group plc is treated here as a mature, multi-channel general retailer operating a large store estate alongside a growing online business. The illustrative accounts cover two consecutive financial years, labelled FY2024 and FY2025, which allows a short trend to be examined rather than a single snapshot. A two-year comparison is the minimum needed for meaningful commentary, because an isolated ratio tells the reader little until it is set against a prior period, a competitor or an industry norm (Atrill and McLaney, 2019). The summarised financial data used for every calculation that follows is set out in Table 1.

Supplementary data used for the investor ratios are as follows: 1,450 million ordinary shares in issue; a year-end share price of 520p in FY2025 and 470p in FY2024; and a declared dividend per share of 18.0p and 16.5p respectively. These items are assumed to be illustrative and are included only to show the method in full.

Profitability Analysis

Profitability ratios measure how effectively the business converts sales and the capital invested in it into profit. Table 2 reports five standard measures.

The gross profit margin rose modestly from 34.6% to 35.0%, calculated as gross profit divided by revenue. For a retailer, the gross margin is driven largely by buying terms, product mix and the level of discounting required to clear stock, so even a small improvement can indicate either tighter cost control with suppliers or a shift towards higher-margin lines. The operating margin improved from 7.2% to 7.5%, showing that the gain was not absorbed entirely by rising overheads such as store occupancy, staff costs and distribution. A margin in this single-digit range is characteristic of volume retail, where competitive pressure keeps prices keen and profit depends on turning a modest percentage over a very large sales base.

ROCE, measured as operating profit over capital employed (total assets less current liabilities), is often regarded as the primary indicator of operating efficiency because it relates profit to the long-term funds tied up in the business (Weetman, 2019). It improved from 12.9% to 13.4%, which suggests that Meridian generated more operating profit from each pound of long-term capital than in the prior year. Return on equity, which isolates the return attributable to shareholders, also edged up to 15.9%. The fact that ROE sits above ROCE is consistent with the company using a degree of debt finance, which can amplify shareholder returns while the business earns more than the cost of its borrowings. Overall, the profitability picture is one of gradual, broad-based improvement rather than a dramatic change.

Liquidity and Working Capital

Liquidity ratios assess whether the company can meet its short-term obligations as they fall due. The two standard measures are shown in Table 3.

The current ratio, current assets divided by current liabilities, is stable at 1.06 in both years, meaning current assets only slightly exceed current liabilities. A general textbook benchmark of around 1.5 to 2.0 is frequently cited, and on that basis Meridian might appear weak (Gowthorpe, 2018). However, applying such a benchmark uncritically to a retailer would be a mistake, and this is an important point of interpretation. The quick ratio, which strips out inventory, falls to just 0.41. For most industries this would signal a liquidity problem, but it is normal for large grocery and general retailers because they sell predominantly for cash or card, hold very low receivables, and finance a large part of their inventory through extended supplier credit. The business therefore collects cash from customers well before it has to pay many of its suppliers.

This structural feature means that the headline ratios must be read alongside the working-capital cycle discussed in the next section, rather than in isolation. A retailer that is trading healthily can operate comfortably on liquidity ratios that would alarm an analyst in a manufacturing or construction setting. The key judgement is not whether the ratios clear a generic threshold, but whether they are stable, consistent with the sector, and supported by reliable operating cash flows.

Efficiency and Asset Utilisation

Efficiency ratios examine how well the company manages its assets and working capital. Table 4 reports the main measures.

The inventory holding period lengthened from 61.3 to 63.9 days, calculated as inventory divided by cost of sales multiplied by 365. A longer holding period can be a warning sign of overstocking or slower-selling ranges, and it is worth noting against the backdrop of only modest revenue growth; a student answer would flag this as an area to monitor. The receivables collection period is unusually short at around ten days, which again reflects the cash-based nature of retail sales. The payables period lengthened to 84.6 days, indicating that the company is taking longer to pay suppliers, which supports liquidity but can strain supplier relationships if pushed too far.

Combining the three working-capital ratios gives the cash conversion cycle (inventory days plus receivables days less payables days), which is negative in both years at roughly −10 days. A negative cycle is a genuine commercial strength: it means suppliers are effectively financing the company’s inventory, and the business receives customer cash before settling its trade liabilities. Asset turnover, revenue divided by total assets, was broadly flat at around 1.36 times, showing that each pound of assets generated about £1.36 of sales. Taken together, the efficiency ratios reveal a business that uses its supplier terms to good effect but should keep a close eye on its slightly rising stock levels.

Gearing and Financial Risk

Gearing ratios measure the extent to which the company is financed by debt rather than equity, and therefore its exposure to financial risk. The relevant figures are shown in Table 5.

Gearing, expressed here as borrowings over the sum of borrowings and equity, fell slightly from 41.2% to 40.2%, and the debt-to-equity ratio improved from 70.1% to 67.2%. This gentle de-gearing is explained by retained profits increasing the equity base faster than borrowings grew. A gearing level of around 40% is moderate for a large retailer and would not normally be considered high-risk, although the analysis should acknowledge that many retailers also carry substantial lease liabilities that increase effective leverage beyond the headline borrowings figure under current reporting standards (Elliott and Elliott, 2022).

Interest cover, operating profit divided by finance costs, is arguably the more important risk measure because it shows how comfortably profits meet the cost of servicing debt. At 7.5 times in FY2025, Meridian’s operating profit covers its interest charge more than seven times over, which provides a reasonable margin of safety even if trading were to weaken. The combination of moderate, falling gearing and comfortable interest cover points to a financially stable company that is not over-reliant on borrowings, which is reassuring for both lenders and shareholders.

Investor Ratios

Investor, or market, ratios relate the company’s performance to its share price and dividend policy, and they matter most to existing and prospective shareholders. Table 6 presents four measures.

Earnings per share, profit for the year divided by the number of ordinary shares, rose from 38.8p to 42.5p, a near 10% increase driven by the growth in profit after tax. EPS is a headline figure for investors and its upward trend is a positive signal. The P/E ratio of 12.2 indicates that the market is willing to pay about twelve times current earnings for the shares; whether this represents fair value depends on comparison with sector peers and on expectations of future growth, which lie beyond a single set of accounts.

Dividend cover, EPS divided by the dividend per share, is steady at around 2.35 times, meaning earnings comfortably cover the distribution and roughly 58% of profit is retained for reinvestment. This suggests a sustainable and prudent dividend policy. The dividend yield of 3.5% would be attractive to income-seeking investors relative to typical savings returns, although yield should always be weighed against the security of the payout and the prospects for capital growth (Watson and Head, 2019).

Discussion and Limitations

Drawing the families of ratios together, Meridian Retail Group plc presents as a stable, moderately profitable retailer with improving margins, conservative financing and an efficient, supplier-funded working-capital model. The main point for ongoing attention is the lengthening inventory period, which, if it continued, could tie up cash and increase the risk of markdowns. A balanced coursework conclusion would therefore be positive but appropriately cautious.

It is essential, however, to recognise the limitations of ratio analysis, and an undergraduate answer that omits this discussion is incomplete. First, ratios are only as reliable as the underlying financial statements, which are prepared on the basis of accounting policies, estimates and judgements that can differ between companies and reduce comparability (Alexander et al., 2020). Second, ratios are backward-looking: they summarise what has happened, not what will happen, and a single year’s figures can be distorted by one-off events. Third, meaningful interpretation requires context — industry benchmarks, competitor data and macroeconomic conditions such as inflation and consumer confidence — none of which is visible from the accounts alone (Palepu, Healy and Peek, 2019). Fourth, a two-year comparison captures a short trend only; three to five years would give a more robust picture. Finally, ratios ignore important qualitative factors such as brand strength, management quality and sustainability performance, which increasingly influence investor decisions. For these reasons, ratio analysis is best treated as a starting point that raises questions for further investigation rather than as a definitive verdict on a company’s health.

Conclusion

This model coursework has demonstrated a structured approach to ratio analysis using two years of illustrative financial statements for a hypothetical FTSE 100 retailer. By calculating and interpreting profitability, liquidity, efficiency, gearing and investor ratios, the analysis has shown not only how each measure is derived but, more importantly, how it should be read in the context of the retail sector. The recurring lesson is that figures must be interpreted rather than merely reported: a quick ratio of 0.41 or a current ratio of 1.06 is a concern in one industry and entirely normal in another. A strong undergraduate submission combines accurate calculation with sector-aware commentary and an honest acknowledgement of the technique’s limitations. Used in that spirit, ratio analysis remains an indispensable tool for turning raw financial data into a reasoned appraisal of corporate performance.

References

• Alexander, D., Britton, A., Jorissen, A., Hoogendoorn, M. and van Mourik, C. (2020) International Financial Reporting and Analysis. 8th edn. Andover: Cengage Learning.
• Arnold, G. and Lewis, D. (2019) Corporate Financial Management. 6th edn. Harlow: Pearson.
• Atrill, P. and McLaney, E. (2019) Accounting and Finance for Non-Specialists. 11th edn. Harlow: Pearson.
• Elliott, B. and Elliott, J. (2022) Financial Accounting and Reporting. 20th edn. Harlow: Pearson.
• Gowthorpe, C. (2018) Business Accounting and Finance. 4th edn. Andover: Cengage Learning.
• Palepu, K.G., Healy, P.M. and Peek, E. (2019) Business Analysis and Valuation: IFRS Edition. 5th edn. Andover: Cengage Learning.
• Robinson, T.R. (2020) International Financial Statement Analysis. 4th edn. Hoboken, NJ: Wiley.
• Watson, D. and Head, A. (2019) Corporate Finance: Principles and Practice. 8th edn. Harlow: Pearson.
• Weetman, P. (2019) Financial and Management Accounting: An Introduction. 8th edn. Harlow: Pearson.