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NSWBusiness StudiesQuick questions

Topic 3: Finance

Quick questions on Financial ratios: profitability, liquidity, gearing, efficiency (HSC Business Studies)

11short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.

What is liquidity?
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$Current ratio=Current assetsCurrent liabilities\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$
What is gearing (solvency)?
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$Debt to equity=Total liabilitiesTotal equity\text{Debt to equity} = \frac{\text{Total liabilities}}{\text{Total equity}}$
What is profitability?
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$Gross profit ratio=Gross profitSales=Sales−COGSSales\text{Gross profit ratio} = \frac{\text{Gross profit}}{\text{Sales}} = \frac{\text{Sales} - \text{COGS}}{\text{Sales}}$
What is efficiency?
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$Expense ratio=Total expensesSales\text{Expense ratio} = \frac{\text{Total expenses}}{\text{Sales}}$
What is trend, comparative and industry analysis?
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Single-period ratios are limited. Three analytical perspectives matter.
What is limitations of financial reports?
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NESA explicitly tests the limitations of financial reports for ratio analysis.
What is tying it together?
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Comparing Coles and Woolworths Group on illustrative FY24 figures.
What is forgetting that some industries run negative working capital by design?
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Supermarkets, fast food and subscription businesses can run current ratios below 1.0 without distress.
What is treating high gearing as always bad?
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Capital-intensive businesses (utilities, REITs) run high gearing routinely. The right benchmark is industry, not 1.0.
What is calculating without interpreting?
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A 4-5 mark question expects both the number and the interpretation. The calculation alone earns half the marks.
What is forgetting to discuss limitations?
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The dot point explicitly includes limitations of financial reports - have one ready. :::

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