Besides the obvious 13 mark numerical question on time series, the calculation of 4 financial ratios is also a popular Q1a (13 mark numerical question) on the OCR F297 paper.
With regard to this, the ratios OCR expect students to know and be able to calculate, including how to calculate them are provided in the following document published by OCR: http://www.ocr.org.uk/Images/78299-unit-f292-and-f297-guidance-on-accounting-elements.pdf
They consist of:
- Solvency: gearing, interest cover.
- Liquidity: current ratio, acid test.
- Activity / efficiency: stock turnover, debtor days, creditor days, fixed asset turnover.
- Profitability: gross profit margin, net profit margin, return on capital employed, return on equity.
- Shareholder: earnings per share, dividends per share, dividend yield, and price / earnings.
In terms of the VGL case study, likely candidates for a ratio analysis question are liquidity and activity ratios – as they are specifically mentioned in the case study, and these have been calculated and analysed on p.29-32 of the APT Analysis.
The case study also makes the point that ‘commercial profit margins are tight’, which provides a thread for a question on profitability ratios. With regard to this, gross and net profit margins can be calculated for VGL as follows:
- gross profit margin: 34.88% for 2014; 49.09% for 2015.
- net profit margin (using the ‘net profit’ figure stated in the case study, which is profit after interest and tax): 4.65% for 2014; 14.55% for 2015.
It should be appreciated, however, that the profit before interest and tax figure is considered a more appropriate ‘profit’ figure to use in profit margin calculations when judging the performance of a business – in particular the performance of management in controlling costs – as this measures aspects over which the business / its management team has control. (In other words, the rate of interest and tax are outside their control). The net profit (before interest and tax) margin can be calculated for VGL as: 9.3% for 2014; 19.39% for 2015.
Whichever figure is used, VGL has clearly performed well in 2015 when comparing profit margins with 2014. This is largely because revenue not only increased, but cost of sales fell, and gross profit has risen at a greater rate than the rise in other costs, namely the higher depreciation.
If students were asked to calculate 4 profitability ratios, then besides the gross and net profit margin(s) calculated above, they could calculate Return on Capital Employed (ROCE) and Return on Equity (ROE) – these are calculated on p.6 and p.7 of the APT Analysis.
If students were asked to calculate solvency ratios: gearing and interest cover are relevant here and are calculated on p.11 of the APT Analysis.
There is insufficient information in the case study to calculate all the shareholder ratios listed in the OCR document above: dividend cover has been calculated on p.6 of the APT Analysis.
We talk a lot about the importance of using ratios in answers to questions in our seminars on the F297 case study, not just those that specifically require candidates to do this in the 13 mark numerical question. Appropriate use of ratios in 18 mark and 23 mark questions is one of the fastest ways to secure 8+ marks in just one sentence, as it demonstrates analysis – as opposed to descriptive use – of case material, which is essential to secure Level 3.