IGCSE Accounting ratios and interpretation

What accounting ratios are for

A ratio takes two figures from the financial statements and expresses one as a proportion of the other, turning raw numbers into something you can compare. On its own, a profit of RM40,000 tells you little. Set against sales of RM200,000, it becomes a 20% profit margin you can compare with last year or with another business. The aim of ratio analysis is that judgement, not the arithmetic.

The two families you need

IGCSE ratios fall into two broad groups. Profitability ratios (gross margin, mark-up, profit margin and return on capital employed) ask how well the business turns sales and invested capital into profit. Liquidity and efficiency ratios ask whether the business can pay its debts on time and how quickly cash moves through it. They are the current ratio, the acid-test ratio, inventory turnover and the receivables and payables periods. A business can be profitable yet short of cash, so the two families are read together.

Where the marks are

In the exam, the calculation is usually worth only a mark or two. Most credit comes from interpretation: saying what the figure means for the business, comparing it over time or with another firm, and suggesting why it moved. Ratios also have limits. A single year, different accounting policies or one unusual item can mislead.

Each page above has a "using it in analysis" section so you can practise the interpretation that earns the marks.

If your child can calculate ratios but loses marks on the comments, a teacher can mark their written answers and show what examiners look for. Book a trial class.