Active learning ideas
Ratio analysis is the primary tool for evaluating business performance and financial health. In Year 13, students move beyond simple calculations to deep interpretation. They analyse profitability (e.g., ROCE), liquidity (e.g., Acid Test), efficiency (e.g., Inventory Turnover), and gearing. Gearing is particularly important at this level, as it measures the long-term risk associated with a company's debt levels.
Activity 01
Post the ratios of four anonymous companies (e.g., a supermarket, a tech startup, a utility company, and a luxury retailer). Students move in pairs to match the ratios to the industry, justifying their choices based on typical business models.
What do gearing ratios reveal about financial risk?
Activity 02
One group acts as a company applying for a loan, presenting their 'good' profitability ratios. The other group acts as the bank, highlighting 'bad' gearing and liquidity ratios. They debate whether the loan should be approved.
How can different stakeholders use ratio analysis to inform their decisions?
Activity 03
Students consider a scenario where a company takes on massive debt to fund expansion. They discuss in pairs: 'Is high gearing always a sign of weakness?' and then share their thoughts on risk versus reward with the class.
What are the limitations of relying solely on historical financial ratios?
A few notes on teaching this unit
Watch Out for These Misconceptions
A high current ratio is always a sign of a strong business.
A very high ratio might mean the business is inefficiently holding too much idle cash or obsolete stock. Peer-comparing a 'healthy' ratio with an 'excessive' one helps students understand the balance between safety and efficiency.
Ratios provide a complete picture of a company's performance.
Ratios are based on historical data and can be manipulated by 'window dressing'. Using a case study of a failed company that had 'good' ratios right before collapsing helps students appreciate the limitations of the data.
Methods used in this brief