A good ratio analysis calculates each ratio correctly, compares it with a benchmark such as last year or the industry, and explains what drives the change. Here is an illustrative example for a fictional company, showing the calculation and the interpretation markers expect.
Data (illustrative): revenue £500,000; gross profit £200,000; operating profit £75,000; capital employed £400,000; current assets £150,000, including inventory £50,000; current liabilities £100,000.
| Ratio | Calculation | Result |
|---|
| Gross margin | 200,000 ÷ 500,000 × 100 | 40% |
| Operating margin | 75,000 ÷ 500,000 × 100 | 15% |
| ROCE | 75,000 ÷ 400,000 × 100 | 18.75% |
| Current ratio | 150,000 ÷ 100,000 | 1.5 : 1 |
| Quick ratio | (150,000 − 50,000) ÷ 100,000 | 1.0 : 1 |
Interpretation: the company converts 15% of sales into operating profit and earns 18.75% on capital employed. Its quick ratio of 1.0 means it can just meet current liabilities without selling inventory. Each judgement should be compared with last year and competitors before reaching a conclusion.