Coursework Sample: Ratio Analysis of a Company’s Published Accounts

Model Answer

Introduction

This report uses ratio analysis to assess the financial performance and position of Bramwell Retail plc, a UK mid-cap high-street retailer, comparing the years ended 31 March 2025 and 31 March 2024. Ratio analysis expresses relationships between figures in the financial statements, allowing profitability, liquidity, efficiency and gearing to be assessed on a comparable basis over time (Atrill and McLaney, 2021). Different stakeholders use these ratios for different purposes: shareholders and prospective investors are primarily concerned with profitability and return measures such as ROCE and earnings per share; lenders and trade suppliers focus more heavily on liquidity and gearing as indicators of the company’s ability to meet its obligations; and internal management uses the full set of ratios, particularly the efficiency measures, to identify operational areas requiring attention. The summarised income statement and statement of financial position below form the basis of every ratio calculated in this report; each ratio is shown with its formula and full workings so that the arithmetic can be independently verified.

Financial Statements Summary

Table 1 and Table 2 present the summarised income statement and statement of financial position used throughout this analysis. All figures are stated in £000 unless otherwise indicated. Even before any ratio is calculated, the statements suggest a broadly positive year: revenue grew by 10.5% (from £7,600k to £8,400k), the balance sheet grew by a similar proportion, and retained earnings increased by £430k, indicating that Bramwell distributed a portion of profit as dividends while retaining the majority to fund continued asset growth. The ratios calculated below test and quantify this initial impression more rigorously.

Profitability Ratios

Gross profit margin is calculated as (gross profit ÷ revenue) × 100. For 2025 this gives (£2,940k ÷ £8,400k) × 100 = 35.0%, and for 2024, (£2,600k ÷ £7,600k) × 100 = 34.2%. The 0.8 percentage-point improvement suggests Bramwell either negotiated better buying terms with suppliers or reduced discounting on cost of sales during 2025.

Operating profit margin, (operating profit ÷ revenue) × 100, rose from (£928k ÷ £7,600k) × 100 = 12.2% in 2024 to (£1,176k ÷ £8,400k) × 100 = 14.0% in 2025, indicating that overhead costs grew more slowly than revenue: operating expenses increased by only 5.5% (from £1,672k to £1,764k) against 10.5% revenue growth, a sign of improving operating leverage.

Net profit margin, (profit for the year ÷ revenue) × 100, improved from (£651k ÷ £7,600k) × 100 = 8.6% to (£840k ÷ £8,400k) × 100 = 10.0%, confirming that the profitability improvement flowed through to the bottom line despite a rise in finance costs from £114k to £126k.

Return on capital employed (ROCE) is calculated as (operating profit ÷ capital employed) × 100, where capital employed equals total equity plus non-current liabilities. For 2025, capital employed is £4,190k + £1,400k = £5,590k, giving ROCE of (£1,176k ÷ £5,590k) × 100 = 21.0%. For 2024, capital employed is £3,760k + £1,300k = £5,060k, giving ROCE of (£928k ÷ £5,060k) × 100 = 18.3%. The 2.7 percentage-point rise indicates that Bramwell is generating a meaningfully higher operating return on the capital invested in the business, a result that would be strengthened further by comparison against the company’s cost of capital and sector-average ROCE, neither of which is available from the summarised statements alone.

Liquidity Ratios

The current ratio, current assets ÷ current liabilities, is (£980k + £1,050k + £210k) ÷ £850k = £2,240k ÷ £850k = 2.64 : 1 for 2025, compared with (£860k + £980k + £140k) ÷ £770k = £1,980k ÷ £770k = 2.57 : 1 for 2024. Both years comfortably exceed the conventional benchmark of 1.5–2.0 : 1 for a retailer, indicating no short-term liquidity concern, though a ratio this far above benchmark can also suggest current assets, particularly cash, are not being deployed as productively as they might be.

The quick (acid-test) ratio strips inventory from current assets on the basis that stock is the least liquid current asset: (£2,240k − £980k) ÷ £850k = £1,260k ÷ £850k = 1.48 : 1 for 2025, against (£1,980k − £860k) ÷ £770k = £1,120k ÷ £770k = 1.45 : 1 for 2024. Both figures remain comfortably above the commonly cited 1.0 : 1 threshold, reinforcing that Bramwell could meet its short-term obligations even excluding inventory realisation.

Efficiency Ratios

Inventory holding period, (inventory ÷ cost of sales) × 365, is (£980k ÷ £5,460k) × 365 = 65.5 days for 2025, up from (£860k ÷ £5,000k) × 365 = 62.8 days in 2024, meaning stock is taking slightly longer to sell through.

Receivables collection period, (trade receivables ÷ revenue) × 365, improved from (£980k ÷ £7,600k) × 365 = 47.1 days in 2024 to (£1,050k ÷ £8,400k) × 365 = 45.6 days in 2025 — customers are, on average, paying 1.5 days faster.

Payables payment period, (trade payables ÷ cost of sales) × 365, fell from (£650k ÷ £5,000k) × 365 = 47.5 days to (£700k ÷ £5,460k) × 365 = 46.8 days, meaning Bramwell is settling supplier invoices marginally sooner.

Combining these three measures, the cash conversion cycle (inventory days + receivables days − payables days) lengthened slightly from 62.8 + 47.1 − 47.5 = 62.4 days in 2024 to 65.5 + 45.6 − 46.8 = 64.3 days in 2025. This is a modest deterioration of 1.9 days and is driven almost entirely by the slower inventory turnover identified above, which management should investigate — a longer holding period on a growing revenue base may reflect deliberate stock-building ahead of expected demand, or early signs of slower-moving lines. Either explanation is plausible from the summarised figures alone, and distinguishing between them would require Bramwell’s internal stock-ageing reports broken down by product category, which fall outside the published financial statements. What can be said with confidence is that the direction of travel — a lengthening rather than shortening cycle — is the one efficiency trend running counter to the otherwise positive story told by the profitability and gearing ratios, and is therefore the most useful starting point for management’s next internal review.

Gearing and Investor Ratios

The gearing ratio, long-term borrowings ÷ (long-term borrowings + total equity) × 100, is £1,400k ÷ (£1,400k + £4,190k) × 100 = £1,400k ÷ £5,590k × 100 = 25.0% for 2025, compared with £1,300k ÷ (£1,300k + £3,760k) × 100 = £1,300k ÷ £5,060k × 100 = 25.7% for 2024. Gearing has therefore fallen slightly, as retained earnings growth has outpaced the growth in long-term borrowings, marginally reducing financial risk to shareholders.

Interest cover, operating profit ÷ finance costs, rose from £928k ÷ £114k = 8.14 times in 2024 to £1,176k ÷ £126k = 9.33 times in 2025, comfortably above the conventional minimum comfort level of around 3–4 times, indicating finance costs are well covered by trading profit even after allowing for the modest rise in borrowing cost.

Earnings per share is calculated as profit for the year ÷ number of ordinary shares in issue. With 2,000,000 shares in issue throughout both years, EPS rose from £651,000 ÷ 2,000,000 = 32.6p in 2024 to £840,000 ÷ 2,000,000 = 42.0p in 2025, a 28.8% increase that mirrors the improvement in net profit margin and ROCE identified above. From an investor perspective, an EPS increase of this size, combined with falling gearing and rising interest cover, is a broadly reassuring signal: the company is growing profit without taking on disproportionate additional financial risk, which typically supports a stable or improving dividend policy even though the dividend itself is not shown separately in the summarised statements provided.

Evaluation and Limitations of Ratio Analysis

Taken together, the ratios point to a consistent, broadly positive trend across profitability, gearing and investor returns, with only a modest efficiency deterioration driven by slower inventory turnover. However, ratio analysis calculated solely from two years of a single company’s published accounts has recognised limitations. First, historic cost accounting means asset values, particularly non-current assets, may not reflect current market value, distorting ROCE (Elliott and Elliott, 2019). Second, without sector-average or named-competitor ratios for comparison, it is difficult to judge whether Bramwell’s 2.64 : 1 current ratio, for example, represents good working capital management or an inefficient build-up of idle current assets relative to peers. Third, accounting policy choices — such as depreciation method or inventory valuation basis — can materially affect reported ratios between companies even where underlying trading performance is similar, so cross-company comparisons require the same set of adjustments to be applied consistently. Finally, ratios calculated from a single year-end position, such as the current and quick ratios, can be affected by seasonality; a retailer’s year-end position shortly before or after a peak trading period may not represent its liquidity for the rest of the year.

Ratio analysis is also, by definition, backward-looking and purely financial: it cannot capture non-financial drivers of future performance such as customer satisfaction, staff retention, brand reputation or the quality of the store estate, all of which influence a retailer’s longer-term prospects but do not appear directly in any of the ratios above. A rounded assessment of Bramwell Retail plc would therefore combine this quantitative ratio analysis with qualitative evidence — for example, the narrative sections of the annual report, store-level performance data, and independent sector commentary — rather than relying on the financial statements in isolation.

Conclusion

Bramwell Retail plc’s ratio analysis for the two years ended 31 March 2025 shows improving profitability at every level (gross, operating and net margin), a stronger ROCE, adequate and broadly stable liquidity, slightly reduced gearing, well-covered finance costs, and a meaningful rise in earnings per share. The principal area for management attention is the modest lengthening of the cash conversion cycle, driven by slower inventory turnover, which merits further investigation using product-line-level data not available from the summarised financial statements alone. Overall, the two-year trend is consistent with a retailer improving its underlying trading efficiency and returns while maintaining a conservative capital structure.

For Bramwell’s management, the clearest practical implication is that the inventory-turnover trend, rather than profitability or capital structure, should be the focus of the next internal review: a return to the 2024 holding period of around 62.8 days, achieved without compromising product availability, would shorten the cash conversion cycle by roughly three days and free up a modest amount of working capital currently tied up in stock. Read together, the ratios calculated above connect into a single coherent narrative — improved trading profitability and a more conservative capital structure, only partially offset by a small, clearly identifiable weakness in inventory efficiency — rather than standing as a series of isolated, unconnected calculations.

References

Atrill, P. and McLaney, E. (2021) Accounting and Finance for Non-Specialists. 12th edn. Harlow: Pearson Education.

Alexander, D. and Nobes, C. (2020) Financial Accounting: An International Introduction. 7th edn. Harlow: Pearson Education.

Companies Act 2006. London: The Stationery Office.

Elliott, B. and Elliott, J. (2019) Financial Accounting and Reporting. 19th edn. Harlow: Pearson Education.

Financial Reporting Council (2018) The UK Corporate Governance Code. London: FRC.

International Accounting Standards Board (2018) Conceptual Framework for Financial Reporting. London: IFRS Foundation.

Melville, A. (2019) International Financial Reporting: A Practical Guide. 7th edn. Harlow: Pearson Education.

Weetman, P. (2019) Financial and Management Accounting: An Introduction. 8th edn. Harlow: Pearson Education.