To compare a ratio across two periods, calculate it for each period, state the change in numbers, then explain it using the facts in the case. The calculation shows what happened. The context suggests why, and what it means for the business.
You need the formulas from calculating a relevant ratio before this lesson. It leads into what statements cannot reveal.
How do you compare in four steps?
- Calculate the same ratio for both years, using the same formula each time.
- State the change with figures and the right unit. Percentages move in percentage points.
- Link to the case. What happened in the business that could explain the movement?
- Judge. Say whether the change looks favourable, unfavourable or unclear, and what further evidence you would want.
Worked example
Tiara Printing Sdn Bhd (from the previous lesson) reports two years.
| Item | Year 1 (RM) | Year 2 (RM) |
|---|---|---|
| Revenue | 400,000 | 450,000 |
| Gross profit | 140,000 | 148,500 |
| Net profit | 35,000 | 31,500 |
Gross profit margin: Year 1 = 140,000 ÷ 400,000 × 100 = 35%. Year 2 = 148,500 ÷ 450,000 × 100 = 33%. A fall of 2 percentage points.
Profit margin: Year 1 = 35,000 ÷ 400,000 × 100 = 8.75%. Year 2 = 31,500 ÷ 450,000 × 100 = 7%. A fall of 1.75 percentage points.
Revenue rose by 50,000 ÷ 400,000 × 100 = 12.5%. Net profit fell by 3,500 ÷ 35,000 × 100 = 10%.
Suppose the case says Year 2 saw a rise in the price of paper, a new colour printer and a rent increase. A strong comparison reads like this.
“Revenue rose 12.5% but net profit fell 10%, and profit margin fell from 8.75% to 7%.
Gross margin also fell by 2 percentage points, which fits the higher paper price, because cost of sales rose faster than revenue. The new printer and rent increase may explain lower profit as well. If the printer wins more orders next year, the margin may recover. I would want to know whether the paper price rise is permanent before judging.”
Notice that the answer uses figures, names a cause from the case, and ends with the missing evidence.
The mistake to watch for
A common slip is to say that profit fell, so the business did worse, and stop there.
Mistaken answer: “Net profit fell from RM35,000 to RM31,500, so the business is doing worse.”
The student ignored that revenue grew and that the case gave reasons for higher costs.
The correction is to use at least one ratio and one case fact. Percentage points describe the gap between two percentages. Percent describes the change relative to the start, so keep the two terms apart.
Check yourself
1. A shop’s revenue was RM200,000 with net profit of RM20,000 in Year 1, and RM260,000 with RM23,400 in Year 2. Compare the profit margin.
Show answer
Year 1 = 20,000 ÷ 200,000 × 100 = 10%. Year 2 = 23,400 ÷ 260,000 × 100 = 9%. The margin fell by 1 percentage point, even though profit rose by RM3,400. Sales grew faster than profit.
2. A firm’s current ratio fell from 1.8:1 to 1.2:1, and the case says it bought a new van using its cash. Is this necessarily a problem?
Show answer
Not necessarily. Cash became a non-current asset, so current assets fell. The business can still pay its short-term debts if 1.2:1 is enough for its sector, but it has less room than before. More information about its upcoming payments would help.
3. Name one piece of evidence beyond the figures that would help you judge a fall in gross profit margin.
Show answer
For example, whether supplier prices rose, whether the firm cut its selling prices, or whether the sales mix moved towards lower-margin products. Any one of these, with a reason, is acceptable.
Where this leads next
Comparison still has limits. Explaining what statements cannot reveal covers the information that figures leave out. The ratios tool lets you practise comparing two fictional years.
A teacher can mark your written comparison with you, point out where a case fact would strengthen it, and help you phrase the judgement. That is a central part of our online one-to-one Business tuition.