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# 4a.3 assessing competitiveness

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1. INTERPRETATION OF FINANCIAL STATEMENT
a. Gross profit margin
b. Net profit margin
c. ROC (Return on Capital)
d. ROCE (Return on Capital Employed)
e. Acid test ratio
f. Current ratio
g. Gearing ratio
h. Interpretations of these margins and ratios
i. Limitations of ratios as a decision making tool

2. HUMAN RESOURCE COMPETITIVENESS
a. Labour productivity
b. Labour turnover
i. Unavoidable leavers
c. Limitations of these calculations

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### 4a.3 assessing competitiveness

1. 1. 1|Q u az i N a f i u l I sl a m – w w w . s t u d e n t t e c h .c o . c c ASSESSING COMPETITIVENESSOVERVIEW 1. INTERPRETATION OF FINANCIAL STATEMENT a. Gross profit margin b. Net profit margin c. ROC (Return on Capital) d. ROCE (Return on Capital Employed) e. Acid test ratio f. Current ratio g. Gearing ratio h. Interpretations of these margins and ratios i. Limitations of ratios as a decision making tool 2. HUMAN RESOURCE COMPETITIVENESS a. Labour productivity b. Labour turnover i. Unavoidable leavers c. Limitations of these calculationsINTERPRETATIONS OF FINANCIAL STATEMENTS Ratio analysis is an examination of accounting data by relating one figure to another. The approach allows more meaningful interpretation of the data and the identification of trends. BUSINESS STUDIES FOR A LEVEL 3RD EDITION BY IAN MARCOUSÉ Before we proceed onto actually calculating the ratios, it is very important to familiarise ourselves with a financial statement, as these statements are what we need to calculate these ratios. The gross profit margin, the net profit margin and the ROCE is calculated from the profit and loss account. The table to the left is an example of a profit and loss account. The expenses are essentially costs that are not involved in the production of goods and services such as advertising, wages of the administration staff as well as depreciation (the value of the company’s capital decreases with age). Cost of sales are the costs directly related to production including wages for labour as well as the overheads for rent, fuel etc. Figure 1 - This has been taken from Dave Halls book, Business Studies 4th Edition←
3. 3. 3|Q u az i N a f i u l I sl a m – w w w . s t u d e n t t e c h .c o . c cROC (RETURN ON CAPITAL)This essentially measures the profitability of a business. If a business invests into a project, it will want to know the profitabilityof the project. ������������������ ������������������������������������ ������������������ (������������������������������������ ������������ ������������������������������������������) = × 100 ������������������������������������������ ������������������������������������������������This value is expressed as a percentage.THE CURRENT RATIO AND THE ACID TEST RATIOBoth these ratio assess the liquidity of a business i.e. how easily a business’ assets can be turned into cash. Again, this is anotherratio that is concerned with the balances sheets a business publishes.CURRENT RATIOThe current ratio of a business is essentially the ratio between its current asses and its current liabilities. ������������������������������������������ ������������������������������������ ������������������������������������������ ������������������������������ = ������������������������������������������ ������������������������������������������������������������������ACID TEST RATIOThe acid test ratio takes into account that stocks are the least liquid of all the current assetsand should not be counted as an asset that can be easily liquefied. ������������������������������������������ ������������������������������������ − ������������������������������ ������������������������ ������������������������ ������������������������������ = ������������������������������������������ ������������������������������������������������������������������GEARING RATIOThis essentially is a ratio that gives an indication of how much debt the business isunder, giving insight into the long term stability of the organisation. ������������������������-������������������������ ������������������������������ ������������������������������������������ (������������������������ ������������������������������ ������������ ������������������������������������������������)������������������������������ = × 100 ������������������������������������������ ������������������������������������������������This value (like every other ratio that is multiplied by 100) is expressed as apercentage. In boom times, investors and banks find gearing a good thing, as thebusiness is focusing on growth, however this entails great risk. However, if a recessionsuddenly hits, then the business will be in grave danger because now the business stillhas to pay back the interest with a reduced income from battered sales.