Charlie And Lola Ratios Activities

Charlie and Lola: Ratios Activity

Two of my friends have been having an argument about who owns the best business. They have asked me to judge which business is the best. I said that it depends upon what they mean by “the best” – do they mean which is the most profitable, or do they mean which one is the most stable (in other words, can meet its debts on time – always a difficulty for a small business)?

I don’t want to upset either friend, so I told them I would ask you to judge…..

Here are some extracts from their accounts

Task:

Criteria 1: Profitability (a) Working on your own, you should calculate the performance ratios for both businesses: i. Net profit margin ii. Gross profit margin iii. Expenses: sales
(b) Write a sentence explaining the results of each ratio for each business
Explain which business is better and why

(c) Working in pairs or threes, draw a graph of these three ratios comparing the two businesses

(d) On a piece of A3 paper large enough for others to read explain which business has the better net profit margin and why by looking at all 3 ratios

Criteria 2: Liquidity

(e) Working on your own, you should calculate the performance ratios for both businesses: iv. Current Ratio v. Liquid/Acid Test Ratio vi. Stock turnover (in days) vii. Debtor Collection Period

(f) Write a sentence explaining the results of each ratio for each business
Explain which business is better and why

(g) Working in pairs or threes, draw a graph of these four ratios comparing the two businesses

(h) On a piece of A3 paper large enough for others to read explain which business is better able to meet short term debts with short term assets and why
Criteria 3: Other ratios (if you have time)
Working on your own, you should calculate the Return on Capital Employed for both businesses: * Write a sentence explaining which business is better and why
Conclusion

One of the businesses sells gold and silver jewellery and good quality watches, the other sells kitchenware (things like pans, cutlery, dishes etc). Can you tell which is which? Give three reasons for your choice based on the ratios.

And finally ……
I think I can truthfully say that it is not possible to decide which business is better – why do you think this is?
Extension Task

Both Charlie and Lola have invited me to invest in their businesses. I can’t afford to invest in both – which do you think would be the best investment?

Use shareholder ratios and the information below to decide