GCSE-readyInterpreting financial statements and ratios
Ratios turn a business's accounts into a story: is it more profitable than last year, can it pay its bills, and how does it compare with rivals? You do not have to prepare the statements, but you must read and use them.
Two years of figures
| £ | 2024 | 2025 |
|---|---|---|
| Revenue | 400 000 | 500 000 |
| Cost of sales | 240 000 | 320 000 |
| Gross profit | 160 000 | 180 000 |
| Other operating expenses | 100 000 | 120 000 |
| Operating profit | 60 000 | 60 000 |
| Capital employed | 500 000 | 560 000 |
| Current assets | 90 000 | 96 000 |
| of which inventory | 30 000 | 48 000 |
| Current liabilities | 50 000 | 64 000 |
The ratios
| Ratio | Formula | 2024 | 2025 |
|---|---|---|---|
| Gross profit margin | gross profit × 100 ÷ revenue | 40% | 36% |
| Operating profit margin | operating profit × 100 ÷ revenue | 15% | 12% |
| ROCE | operating profit × 100 ÷ capital employed | 12% | 10.7% |
| Current ratio | current assets ÷ current liabilities | 1.80 : 1 | 1.50 : 1 |
| Acid test ratio | (current assets − inventory) ÷ current liabilities | 1.20 : 1 | 0.75 : 1 |
What the ratios show
Operating profit stayed at £60 000 and ROCE fell from 12% to 10.7%, because more capital was used to earn the same profit.
Liquidity weakened: the acid test fell from 1.20 to 0.75, as more cash is tied up in inventory. A figure below 1 means it would struggle to pay current liabilities without selling stock.
Decisions: look for cheaper suppliers, review prices, and cut inventory to free up cash.
Markup and using ratios well
Ratios are most useful when compared: with previous years (trends) and with similar businesses. But they use past data, they do not show qualitative factors such as staff morale or brand image, and one-off events can distort a single year.
Calculate Harbour Outdoor's 2025 operating profit margin.
- Operating profit = 180 000 − 120 000 = 60 000
- 60 000 × 100 ÷ 500 000 = 12%
Answer: 12%
Gross profit margin, operating profit margin and ROCE measure profitability; the current and acid test ratios measure liquidity. Compare ratios over time and with rivals, then use them to suggest decisions, remembering their limitations.
- Gross profit
- Gross profit = sales revenue − cost of sales.
- Gross profit margin
- Gross profit margin (%) = (gross profit ÷ sales revenue) × 100.
- Profit
- Total revenue minus total costs, when revenue is higher. If costs are higher, the result is a loss.
- Operating profit
- Gross profit minus other operating expenses.
- Liquidity
- The ability of a business to pay its short-term debts as they fall due.
- Revenue
- Revenue = price × quantity sold. Example: 400 items at £5 = £2,000.
All GCSE and International GCSE Business key terms and definitions →
Try two quick questions
See if it has sunk in. Answers are marked straight away.
2 more questions
Try each one, then tap to check.
Revenue is £200 000 and cost of sales is £130 000. What is the gross profit margin?
Show the answer
Answer: 35 %
GP = £200 000 − £130 000 = £70 000. £70 000 ÷ £200 000 × 100 = 35%.
Revenue is £500 000 and operating profit is £45 000. What is the operating profit margin?
Show the answer
Answer: 9 %
£45 000 ÷ £500 000 × 100 = 9%.
Check you have got it
Answer 7 quick questions with instant marking. If you get one wrong, GCSE-ready shows you why and gives you another go. It is free, and you do not need an account.
Checked by the GCSE-ready editorial team, 17 October 2026. Last updated 2 October 2026. Spotted a mistake? Tell us and we will fix it.