Interpreting and comparing accounting ratios

South Shop has higher revenue and profit, but North Shop earns more profit for the capital invested.
North's gross profit percentage (40.0%) is higher than South's (35.0%): it may charge higher prices or buy more cheaply.
But South's profit for the year as a percentage of revenue is higher (13.0% against 12.0%), so South keeps its expenses lower in relation to its sales.
North's ROCE (15.0%) is much higher than South's (10.0%): it earns more profit from each £1 invested. South could compare its ROCE with the interest it could earn on savings to judge whether the investment is worthwhile.

North's current ratio is 2.00 : 1 and its liquid ratio 1.20 : 1, so it can pay its short-term debts comfortably.
South's liquid ratio is only 0.40 : 1: without selling inventory it cannot cover its current liabilities. Much of its current assets are inventory, which may be slow to sell.
Improving liquidity: reduce inventory levels, collect debts from customers sooner, or bring in more long-term capital. Improving profitability: raise selling prices, find cheaper suppliers, or cut expenses.

Ratios use past figures. Businesses may use different accounting policies (such as depreciation methods), so comparisons are not exact. They do not show non-financial factors such as location, staff skills or customer loyalty, and a single year may be unusual. Use several ratios together, over several years.