# Accounting ratio analysis

*The ratios that matter, what they miss, and how they are dressed up.*

## Production summary

- Modules to record: 1
- Total script: 284 words, about 2 minutes of finished audio
- Voices: Amara (host) and Nadia (practice educator)
- Level: Level 3, managers, analysts and lenders

## Accreditation wording that must appear in the description

- **The CPD Certification Service** (planned): Application scheduled.

> Do not upgrade any of these words in a description or a thumbnail. Aligned is not accredited, and planned is not approved.


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## Profitability, liquidity, efficiency and gearing

**Runtime** about 2 minutes. **Words** 284. **Starts at** 00:00 in the full course recording.

### Learning outcomes to state on camera

- Calculate the core ratios in each family
- Interpret a ratio against the right benchmark
- State the limitation of each ratio
- Spot period end window dressing

### Script


`[CUE 1]` *Four ratio families as four dials on one dashboard.*

**AMARA**  [00:00]
Give me the one ratio to look at if I only have thirty seconds.

**NADIA**  [00:05]
For survival, interest cover. Operating profit divided by interest payable. It tells you whether the business earns enough to service its debt, and it is the first number a lender turns to.


`[CUE 2]` *Same profit figure over two very different capital bases.*

**AMARA**  [00:18]
And everyone tells me the current ratio should be two to one.

**NADIA**  [00:23]
Everyone is repeating a textbook from decades ago. Ask a supermarket. They run far below that and are entirely safe, because they take cash at the till and turn their stock over in days.


`[CUE 3]` *Supermarket versus manufacturer liquidity, side by side.*

**AMARA**  [00:36]
So the rule is wrong.

**NADIA**  [00:38]
The rule is contextless, which is worse than wrong because it sounds authoritative. There are only three comparisons worth making: this business last year, this business against its budget, and this business against its sector.


`[CUE 4]` *Window dressing timeline: payments held across the year end date.*

**AMARA**  [00:52]
You mentioned that ratios can be dressed up.

**NADIA**  [00:56]
Routinely, and mostly legally. Your year end is the thirty first of March. Hold back supplier payments until the first of April and your cash looks healthier and your current ratio improves. Nothing real changed. You just chose which side of a date things landed.


`[CUE 5]` *Trend line across five periods beside a single flattering snapshot.*

**AMARA**  [01:14]
How do I see through that?

**NADIA**  [01:16]
Look at several periods rather than one, and ask what moved in the fortnight either side of the date. A business with a genuinely strong position looks strong in a trend. A dressed up one looks strong exactly once a year.

**AMARA**  [01:32]
Last one. Return on capital employed.

**NADIA**  [01:35]
The most complete profitability measure, because it holds management to what they were given. Operating profit over the capital in the business. Two firms both earning a million tell you nothing until you know one used five million to do it and the other used fifty.

### Sources for the on screen credit

- Financial statement analysis guidance, Chartered Institute of Management Accountants
- FRS 102, the financial reporting standard, Financial Reporting Council
- Company accounts guidance, Companies House

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