TCE Business Studies — Level 3
Financial Ratios — Flashcards & Quiz
Financial ratios turn raw accounting numbers into comparable measures of performance. For TCE Business Studies Level 3 you should calculate and interpret ratios across four groups — liquidity, profitability, efficiency and gearing — and use them to judge a business's financial health. Strong answers move beyond the number to the story: why the ratio changed, whether it matters for stakeholders, and what management should do about it.
Key Points
- Liquidity: current ratio = current assets / current liabilities (healthy ~2:1). Quick ratio excludes inventory.
- Profitability: gross profit margin = GP/sales; net profit margin = NPAT/sales; ROE = NPAT/equity.
- Efficiency: inventory turnover = COGS/avg inventory; debtor days = (debtors/sales) x 365.
- Gearing: debt/equity ratio = total debt/equity. Higher gearing = more risk but potentially higher ROE.
- Benchmark ratios against industry averages and prior years — a single number means little in isolation.
- Trend analysis over 3-5 years shows whether performance is improving or deteriorating.
Common Mistakes to Avoid
- Calculating the ratio correctly then failing to interpret it — markers want analysis, not arithmetic.
- Comparing ratios across different industries without noting that benchmarks vary widely.
- Confusing gross profit margin (after COGS) with net profit margin (after all expenses).
- Assuming high current ratio is always good — excess working capital may signal poor asset use.
- Ignoring why a ratio changed (revenue, cost or balance sheet change).
Exam Strategy
TCE finance ratio questions usually give financial statements and ask you to calculate, interpret and recommend. Method: (1) calculate the required ratios and show workings, (2) compare to benchmarks and trend, (3) explain the story behind the change, (4) evaluate implications for stakeholders, (5) recommend specific management actions. Always link the number to a business decision — ratios are tools, not the answer.
Sample Flashcards
Q1: What is the current ratio and what does it measure?
Current Assets ÷ Current Liabilities. Measures short-term liquidity — the ability to pay debts due within 12 months. Ideal: 1.5–2.0.
Q2: What is the gross profit margin?
Gross Profit ÷ Revenue × 100. Shows the percentage of revenue remaining after cost of goods sold (COGS).
Q3: What is the net profit margin?
Net Profit ÷ Revenue × 100. Shows the percentage of revenue that becomes actual profit after ALL expenses.
Q4: What is the debt-to-equity ratio?
Total Liabilities ÷ Total Equity. Measures financial leverage — how much of the business is funded by debt vs owners' funds.
Q5: What is return on equity (ROE)?
Net Profit ÷ Total Equity × 100. Measures how effectively a business uses owner's investment to generate profit.
Sample Quiz Questions
Q1: A current ratio below 1.0 indicates potential liquidity problems.
Answer: TRUE
Below 1.0 means current liabilities exceed current assets — the business may struggle to pay short-term debts.
Q2: A higher net profit margin is always better than a higher gross profit margin.
Answer: FALSE
They measure different things. Net margin accounts for all expenses; gross margin only accounts for COGS.
Q3: A high debt-to-equity ratio means the business is heavily leveraged.
Answer: TRUE
High D/E indicates greater reliance on debt financing relative to equity.
Revision Tip
Ratio formulas and interpretation rules are recurring TCE recall — drill them with Revizi flashcards then rehearse interpreting statement changes for exam-speed analysis.
Last updated: March 2026 · 5 flashcards · 4 quiz questions