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Worked example
Ratio analysis, worked through a retailer
Ratios turn a set of financial statements into a story about a business. Here the main profitability, liquidity and gearing ratios are worked step by step for a retailer.
Updated August 2026 · 8 min read
A set of financial statements is a lot of numbers. Ratio analysis is how you turn those numbers into meaning: is the business profitable, can it pay its bills, and how much does it rely on debt? Each ratio is a simple calculation, but the value is in what it tells you. Let us work the main ones through a retailer.
The scenario
Brightwater Trading is a retailer. From its financial statements we have: revenue of £500,000, cost of sales of £300,000 (so gross profit is £200,000), and operating profit of £80,000. Its current assets are £120,000 (including £40,000 of inventory), its current liabilities are £60,000, its equity is £300,000 and it has long-term debt of £150,000. We will look at three families of ratio: profitability, liquidity and gearing.
Profitability ratios
These show how well the business turns sales into profit. Capital employed here is equity plus long-term debt, £300,000 + £150,000 = £450,000.
So 40p in every pound of sales is gross profit, 16p is left as operating profit after running costs, and the business earns about 17.8p of operating profit for every pound of long-term finance invested in it.
Liquidity ratios
These show whether the business can meet its short-term debts.
A current ratio of 2.0 means the business has £2 of current assets for every £1 of current liabilities. The quick ratio strips out inventory, which is harder to turn into cash quickly, and still leaves £1.33 of ready assets per £1 owed, which is healthy.
Gearing
Gearing shows how much the business relies on debt rather than equity.
A third of the business's long-term finance comes from debt, which is a moderate, fairly comfortable level of gearing.
The number is only half the answer. In an exam and in real life, the marks and the meaning come from interpreting the ratio: what it says about the business, how it compares with last year or with a competitor, and why it might have moved. Always calculate, then explain.
Where this comes up in ACCA
Ratio analysis appears in Financial Accounting (FA) and, more heavily, in the interpretation questions of Financial Reporting (FR), where the marks reward explaining what the ratios mean, not just calculating them. The families above are the core you will use again and again.
The best way to build the habit of calculating and interpreting is to practise on real statements. The free ACCA FR course on Clevernest teaches ratio analysis inside a real business, with instant marking as you go.
Learn ratio analysis free on ClevernestCalculate and interpret the ratios on real financial statements. The whole ACCA FR course, free forever.
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Frequently asked questions
What is ratio analysis?
Ratio analysis is the use of ratios calculated from financial statements to assess a business's performance and position, across profitability, liquidity and gearing among others. Each ratio is a simple calculation, but its value lies in interpreting what it says about the business.
How do you calculate the current ratio?
Divide current assets by current liabilities. In our example £120,000 of current assets divided by £60,000 of current liabilities gives a current ratio of 2.0 to 1, meaning £2 of current assets for every £1 of current liabilities.
What is the difference between the current ratio and the quick ratio?
The current ratio includes all current assets; the quick, or acid-test, ratio strips out inventory, which is harder to turn into cash quickly. In our example the current ratio is 2.0 to 1 and the quick ratio is 1.33 to 1.
What is a good gearing ratio?
There is no single right answer, as it depends on the industry and circumstances, but lower gearing means less reliance on debt and less risk. In our example gearing is 33.3%, meaning a third of long-term finance is debt, which is a moderate, fairly comfortable level.
Where is ratio analysis tested in ACCA?
It appears in Financial Accounting (FA) and much more heavily in Financial Reporting (FR), where interpretation questions reward explaining what the ratios mean and why they have changed, not just calculating them.