IB Business Management – Finance and Accounts

3.5A: Profitability and Liquidity Ratio Analysis: Activity

IB Business Management: www.BusinessManagementIB.com

3.5 PROFITABILITY AND LIQUIDITY RATIO ANALYSIS: ACTIVITY A

Read the case study information below and answer the questions that follow.

HOW IS MY BUSINESS DOING?

Emma Wong is the chief executive of the Star Fish

clothing retail chain. The company specialises in
producing and retailing designer fashion clothing to
the Australasian market.
Emma is keen to compare the performance and
liquidity of her company with those of another
competitor – Zambesi. She obtained a set of published
accounts for Zambesi and used ratios to help her in the
comparison. These were the figures she used for both
companies.

Starfish Zambesi
($000) ($000)
Gross profit (2014) 48.5 87.0
Net profit (2014) 24.5 45.0
Sales revenue (2014) 91 138
Current assets (as at 31/12/14) 11 13
Inventories (as at 31/12/14) 20 55
Current liabilities (as at 31/12/14) 35 60

Source: www.BusinessManagementIB.com
 IB Business Management – Finance and Accounts
3.5A: Profitability and Liquidity Ratio Analysis: Activity

QUESTIONS: 46 MARKS, 75 MINUTES

1. Calculate two profit margins for both companies. Show all workings. [6 marks]

2. Comment on the profitability of both businesses. Justify whether Emma Wong should be
pleased about the performance of her own company compared to that of Zambesi.
[10 marks]

3. Evaluate two ways in which Emma might attempt to increase the net profit margin ratio for
her business. [10 marks]

4. Calculate two liquidity ratios for both businesses. Show all workings. [6 marks]

5. Comment on your results to question 4. [6 marks]

6. Evaluate two ways in which Starfish might be able to improve its liquidity position.
[8 marks]