Finance ratios cheat sheet for IB Business Management

How to use this sheet

Ratios on their own mean nothing. A current ratio of 1.5 is healthy for a manufacturer but worrying for a retailer. Always compare: against the industry, against the firm's prior year, against a competitor. That's where the marks are.

Profitability ratios

Ratio	Formula	Good range
Gross profit margin (GPM)	(Gross profit / Sales) × 100	30 to 60% (varies wildly by industry)
Net profit margin (NPM)	(Net profit / Sales) × 100	5 to 20%+
ROCE	(Net profit before tax & interest / Capital employed) × 100	15 to 25%+

Interpretation tip: a high GPM but low NPM signals fixed-cost or overhead problems. A high NPM but low ROCE signals under-utilised capital.

Liquidity ratios

Ratio	Formula	Good range
Current ratio	Current assets / Current liabilities	1.5 to 2.0
Acid test / Quick ratio	(Current assets − Stock) / Current liabilities	0.7 to 1.0

Both below 1.0 = potential cash flow distress. Both significantly above 2.0 = idle assets that could be invested.

Efficiency ratios

Ratio	Formula	Good range
Stock turnover	Cost of goods sold / Average stock	4 to 12× per year (depends on industry)
Debtor days	(Debtors / Sales) × 365	30 to 60 days
Creditor days	(Creditors / Cost of sales) × 365	30 to 60 days

Gearing

Gearing = (Long-term liabilities / Capital employed) × 100. Above 50% = highly geared = vulnerable to interest rate changes. Below 25% = under-geared = potentially missing leverage opportunities.

Comparing ratios

Three comparisons examiners look for:

1. Year-on-year: has the ratio improved or worsened?
2. Industry benchmark: is the firm above or below the norm?
3. Competitor: head-to-head with a similar firm.

Adding evaluation in Paper 2

The pattern that earns top-band marks:

"Firm X's current ratio has fallen from 1.8 to 1.1 over two years (calculation), signalling worsening liquidity. However, this is partly explained by [stimulus context, e.g. recent inventory expansion]. On balance, the trend is concerning but defensible in the short term."

Notice the order: calculate, interpret, contextualise, judge. Four sentences that cover the whole descriptor.