A ratio turns two figures into one number that can be compared. The tool below calculates six common ratios from fictional statements and shows every step of the formula. It then lists the questions to ask before interpreting and the evidence that is not available from the figures alone.
It supports calculating a relevant ratio from supplied figures and explaining a ratio’s limitation. It sits in the learning tools section, and nothing you enter is saved or sent.
How do I use the tool?
- Enter the figures: revenue, cost of sales, other expenses, current assets, inventory, current liabilities and capital employed. Inventory is part of current assets, so it cannot be larger.
- Choose a ratio from the list: gross profit margin, mark-up, profit margin (before tax), current ratio, liquid (acid-test) ratio, or return on capital employed (ROCE).
- Press Calculate. Use Reset to return to the starting figures.
Every figure must be zero or more. The denominator of the chosen ratio must be greater than zero, otherwise the ratio is undefined and the tool says so.
How do I read the result?
The result heading gives the ratio and its value. Underneath you see the formula, the numerator and denominator with their values, and the division written out.
Two further parts matter more than the number itself.
- Questions before interpreting. Prompts such as whether the figure is similar to earlier years, or when the liabilities fall due.
- Evidence not available here. What the figures do not show, for example earlier years, industry context or the quality of receivables.
For gross profit margin and mark-up, the tool also shows the same profit on two bases, so you can see both percentages at once.
Worked example with the starting figures
The tool opens with revenue 100, cost of sales 60, other expenses 25, current assets 80, inventory 30, current liabilities 50 and capital employed 200.
| Ratio | Working | Result |
|---|---|---|
| Gross profit margin | (100 − 60) ÷ 100 × 100 | 40% |
| Mark-up | (100 − 60) ÷ 60 × 100 | 66.67% |
| Profit margin (before tax) | (100 − 60 − 25) ÷ 100 × 100 | 15% |
| Current ratio | 80 ÷ 50 | 1.6 |
| Liquid ratio | (80 − 30) ÷ 50 | 1.0 |
| ROCE | (100 − 60 − 25) ÷ 200 × 100 | 7.5% |
Read them together. The gross margin is 40% but the profit margin is 15%, so expenses take a large share of the gross profit. The liquid ratio of 1.0 is lower than the current ratio of 1.6 because inventory is excluded.
What mistake does the tool help me catch?
The classic slip is using the wrong base. A student asked for gross profit margin divides 40 by the cost of sales, 60, and writes 66.67%. That is the mark-up.
The tool shows both results side by side so the difference is obvious.
A second slip is a conclusion the figures cannot support, such as “the business is healthy because the ratio is 1.6”. The figure alone cannot say that. I name a limitation without explaining its consequence shows how to link a limitation to what it affects.
Assumptions and limits
- The figures are fictional, and the tool does not rank real businesses or recommend any investment.
- Ratio definitions are versioned (this tool uses definition set v1). Your syllabus version may define a ratio slightly differently, so use the definition in your own course materials in the exam.
- The tool uses only the figures you enter. It cannot know about seasonal trade, one-off items or the quality of receivables.
Where to go next
Practise comparing a ratio across two years in comparing a ratio across periods with context and what statements cannot reveal. Then try the ratios and interpretation mixed practice if you study Accounting.
For a wider view of the subject, see the Business learning guide. If you want a teacher to check your interpretation comments, one-to-one Business tuition can work on them with your own answers.