3.5 Profitability and liquidity ratio analysis Topic Practice

IB Business Management syllabusBusiness Management SL/HLFirst assessment 2025

Students practise calculating, interpreting and linking profitability and liquidity ratios to real financial statements and operational decisions in Paper 1 and Paper 2.

Exam points

calculate 3.5 Profitability and liquidity ratio analysis with evidence from profit, margin and working
interpret diagrams, data or experimental contexts linked to 3.5 Profitability and liquidity ratio analysis
calculate and justify quantitative patterns in 3.5 Profitability and liquidity ratio analysis questions

[Maximum number: 3]

1. Call it Magic (CIM)
Call it Magic (CIM) is an online jewellery store that sells silver earrings. It has completed its first year of trading, during which it sold 1000 pairs of earrings. CIM's selling prices are low compared to those of other jewellery stores. The average unit cost per pair of earrings is $5, and overhead costs are already at a minimum level.

Table 1: Selected financial information for CIM for the year ended 31 December 2022

(a)

Using relevant information provided above and in Table 1:

[ 1 ]

(i)

calculate CIM's net profit margin (no working required).

[ 1 ]

(b)

Explain one strategy CIM could use to improve its net profit margin.

[ 2 ]

[Maximum number: 4]

Tipin (TI)

Tipin (TI) manufactures shirts using a batch production method.
Table 1 provides selected financial information for TI from:
- its profit and loss account for the year ending 31 May 2022
- its balance sheet at 31 December 2021.

$Table 1: Selected financial information for TI (all figures in \$000s)$

Table 1: Selected financial information for TI (all figures in \$000s)

At the end of 2021, Tl's current ratio was 2.1. Its net profit margin declined from 14.8 % in 2021 to 10.0 \% in 2022.

(a)

Calculate Tl's current ratio at 31 December 2022 (show all your working).

[ 2 ]

(b)

Using your answer in part (c), comment on the relationship between the changes in Tl's current ratio from 2021 to 2022 and the changes in its net profit margin from 2021 to 2022.

[ 2 ]

[Maximum number: 4]

1. The Pie Store (TPS)
The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its brand, TPS used the mathematical symbol pi ( $\pi$ ). In 2020, each store made a profit.

$Table 1: Financial information for TPS' three retail stores for 2020 (all figures in \$)$

Table 1: Financial information for TPS' three retail stores for 2020 (all figures in \$)

At the end of 2020, the balance sheet for TPS (the three stores combined) showed $ 200000 in assets and $ 120000 in liabilities. $ 50000 of the liabilities was long-term debt.

(a)

Calculate:

[ 2 ]

(i)

which store had the highest profitability (show all your working).

[ 2 ]

(b)

Calculate:

[ 2 ]

(i)

TPS' return on capital employed (ROCE) (show all your working).

[ 2 ]

[Maximum number: 5]

2. The Pie Store (TPS)
The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its brand, TPS used the mathematical symbol pi ( $\pi$ ). In 2020, each store made a profit.

$Table 1: Financial information for TPS' three retail stores for 2020 (all figures in \$)$

Table 1: Financial information for TPS' three retail stores for 2020 (all figures in \$)

At the end of 2020, the balance sheet for TPS (the three stores combined) showed $200000 in assets and $ 120000 in liabilities. $ 50000 of the liabilities was long-term debt.

(a)

Calculate:

[ 3 ]

(i)

which store made the highest net profit before interest and tax (no working required);

[ 1 ]

(ii)

which store had the highest profitability (show all your working).

[ 2 ]

(b)

Calculate:

[ 2 ]

(i)

TPS' return on capital employed (ROCE) (show all your working).

[ 2 ]

[Maximum number: 1]

2. Ritev Enterprises (RE)
Ritev Enterprises (RE) is a public limited company that owns a chain of 20 gas (petrol) stations. Next year, R E plans to modernize its gas stations by installing self-service pumps.
Table 2 provides selected financial data for R E from:
- the profit and loss account for year ending 31 May 2021
- the balance sheet as of 31 December 2021.

Table 2: Selected financial data for R E

The finance director is concerned about the trend in consumer preference for electric cars and the potential impact of increased numbers of electric cars on R E.

Calculate R E s gross profit margin (no working required).

[Maximum number: 4]

A friend of Aarvan owns a film studio, Satvi Films (SF), in Bengaluru. Aarvan has recommended that M M take over S F. SF has a reputation for making high-quality films that are very popular and it is accustomed to making full-length films for the Indian market. It has also made social marketing advertisements for Indian television. SF produces films to meet the precise demands of its customers, including producing them to customer specifications and tight deadlines. There are often pressures to get work done on time, especially as S F does not allow overtime working. Rachel is concerned that SF's managers are autocratic and that many of its employees lack the freedom to be creative. Although the pay scales at S F are lower than average for India, its managers do receive financial rewards, such as bonuses.

To assess the possible takeover, Rachel is analysing financial information for SF (Table 1).

Table 1: Selected financial information for SF for 2019 and 2020

Aarvan thinks that a takeover of S F will reduce MM's production costs and that owning S F would make it easier for M M to produce the advertisements that customers want. Aarvan knows that the owner wants to sell, so SF would be cheap and easy to buy.

However, Javed thinks that SF does not have enough experience in making short, attention

grabbing advertisements: its main experience is in making full-length films for cinema release. He also thinks that it would be difficult to manage two very different businesses, each with different conditions of employment.

(a)

Using Table 1:

[ 4 ]

(i)

calculate the current ratio for SF for 2020 (show all your working);

[ 2 ]

(ii)

suggest one reason why SF may have a liquidity problem.

[ 2 ]

[Maximum number: 5]

HSM Bakery Ltd. (HSM)

HSM Bakery Ltd. (HSM), a privately held company, produces baked goods (bread, cakes, and cookies), which are sold to shops.

In recent years, HSM has broadened its target market by producing a range of gluten-free cakes.

(a)

Table 5 shows selected items from HSM's 2024 final accounts.

$Table 5: Selected items from HSM's 2024 final accounts (in \$ millions)$

Table 5: Selected items from HSM's 2024 final accounts (in \$ millions)

Using Table 5:

[ 5 ]

(i)

calculate HSM's gross profit margin for 2024 (show all your working);

[ 2 ]

(ii)

calculate HSM's current ratio for 2024 (show all your working);

[ 2 ]

(iii)

calculate HSM's return on capital employed (ROCE) for 2024 (no working required).

The 150 employees in HSM's factory (plant) are paid above the industry average. The factory manager, Davina Coulthard, has an autocratic leadership style. This leadership style has influenced the selection and appointment of departmental managers.

In 2022, without consulting the workforce, Davina reduced the lunchtime break for factory employees from 60 minutes to 35 minutes. Many employees see working conditions as a problem. Frequent breakdowns in the factory's air conditioning and heating systems have forced employees to work in extreme temperatures. Employee absenteeism has increased in the last 18 months. HSM has 12 vacancies in its factory. Some of HSM's customers have complained about the quality of some batches of cakes.

The human resources director, Lesli Baldini, interviews employees who leave HSM. During these interviews, employees frequently comment on the "hostile" attitude of management in the factory and "intense pressure to meet targets." For these reasons, employees feel demotivated. Lesli believes employee demotivation and product quality are linked. Lesli and Davina have presented plans to improve employee motivation to the chief executive officer (CEO), Eloise Gibney. Lesli and Davina have differing views about the changes HSM should implement to improve employee motivation.

Davina's plan (Option 1) includes:
- a wage increase for all factory employees
- replacement of the heating and air conditioning systems in the factory
- a weekly 2 % performance-related pay (bonus) for attendance for all factory employees.

Lesli's plan (Option 2) is to:
- increase internal promotion opportunities for all factory employees
- introduce an Employee of the Month award
- have monthly meetings between the factory manager and employees to discuss problems.

[ 1 ]

0 selected

Exam points

Question 1

Question 1(b)

Question 1(b)(iii)

Question 1(c)

Question 1

Question 1(c)

Question 1(d)

Question 1

Question 1(b)

Question 1(b)(ii)

Question 1(c)

Question 1(c)(ii)

Question 2

Question 2(b)

Question 2(b)(i)

Question 2(b)(ii)

Question 2(c)

Question 2(c)(ii)

Question 2(b)(ii)

Question 4

Question 4(b)

Question 4(b)(i)

Question 4(b)(ii)

Question 4

Question 4(d)

Question 4(d)(i)

Question 4(d)(ii)

Question 4(d)(iii)