Profitability & Liquidity Ratio Analysis (DP IB Business Management: HL): Exam Questions

Mountain Adventure Gear is a small business that sells outdoor equipment such as hiking boots, tents, and climbing gear. The company’s sales have grown steadily due to increased interest in outdoor activities. However, its financial statements reveal that while revenue has increased, its gross profit margin has decreased.

To address this, the company’s management is exploring ways to reduce direct costs, such as negotiating with suppliers or finding cheaper raw materials. They are also reviewing their pricing strategy, considering whether raising prices for premium products could help offset the rising cost of goods sold.

Additionally, Mountain Adventure Gear is evaluating its return on capital employed (ROCE) to determine whether its recent investment in a new warehouse is generating sufficient returns.

Mountain Adventure Gear is a small business that sells outdoor equipment such as hiking boots, tents, and climbing gear. The company’s sales have grown steadily due to increased interest in outdoor activities. However, its financial statements reveal that while revenue has increased, its gross profit margin has decreased.

To address this, the company’s management is exploring ways to reduce direct costs, such as negotiating with suppliers or finding cheaper raw materials. They are also reviewing their pricing strategy, considering whether raising prices for premium products could help offset the rising cost of goods sold.

Additionally, Mountain Adventure Gear is evaluating its return on capital employed (ROCE) to determine whether its recent investment in a new warehouse is generating sufficient returns.

Artisan Furniture is a business that produces handmade wooden furniture, including tables, chairs, and cabinets. While the company has maintained steady sales, it has faced challenges with rising material costs and delivery delays.

The company’s recent Statement of Profit or Loss shows that its gross profit margin has declined, although operating expenses have remained constant. Artisan Furniture is considering ways to improve profitability, such as sourcing materials from local suppliers to reduce costs and renegotiating trade credit terms to improve liquidity.

Additionally, management is using liquidity ratios to assess the company’s ability to meet short-term obligations while maintaining adequate cash flow for daily operations.

Artisan Furniture is a business that produces handmade wooden furniture, including tables, chairs, and cabinets. While the company has maintained steady sales, it has faced challenges with rising material costs and delivery delays.

The company’s recent Statement of Profit or Loss shows that its gross profit margin has declined, although operating expenses have remained constant. Artisan Furniture is considering ways to improve profitability, such as sourcing materials from local suppliers to reduce costs and renegotiating trade credit terms to improve liquidity.

Additionally, management is using liquidity ratios to assess the company’s ability to meet short-term obligations while maintaining adequate cash flow for daily operations.

Zenith Publishing specialises in producing e-books and printed novels for a niche audience. The company has seen a steady increase in revenue over the past year but is facing profitability challenges due to rising overhead costs, such as higher rents and utility expenses for its office and warehouse.

Zenith’s management is considering reducing operating expenses by transitioning more operations online, such as offering digital-only publishing services. They are also reviewing their gross profit margin and return on capital employed (ROCE) to determine if their current investment in print publishing remains financially viable.

Additionally, Zenith’s recent liquidity ratios have revealed a slight decrease in the acid test ratio, prompting concerns about its ability to meet short-term financial obligations.

Zenith Publishing specialises in producing e-books and printed novels for a niche audience. The company has seen a steady increase in revenue over the past year but is facing profitability challenges due to rising overhead costs, such as higher rents and utility expenses for its office and warehouse.

Zenith’s management is considering reducing operating expenses by transitioning more operations online, such as offering digital-only publishing services. They are also reviewing their gross profit margin and return on capital employed (ROCE) to determine if their current investment in print publishing remains financially viable.

Additionally, Zenith’s recent liquidity ratios have revealed a slight decrease in the acid test ratio, prompting concerns about its ability to meet short-term financial obligations.

UrbanPrint Ltd provides customised printing services for small businesses and events. The company prides itself on offering competitive prices while maintaining quality. In 2024, UrbanPrint earned $342,560 in revenue and incurred $158,240 in cost of goods sold. Operating expenses, including rent and marketing, totalled $78,450.

ActivePulse Ltd produces and sells fitness trackers designed to help customers monitor their health. The company has been focusing on reducing production costs and streamlining operations. For 2024, management set a goal of achieving a profit margin greater than 15% to attract new investors. They are reviewing financial data to assess if they have met this target.

ClearFlow Ltd specialises in manufacturing eco-friendly water filtration systems, catering to environmentally conscious households and businesses. The company has invested heavily in new technology and marketing campaigns to boost profitability. Management has set an ambitious target to achieve a return on capital employed (RoCE) greater than 12%.

EcoGrow Ltd sells indoor gardening kits and accessories, targeting urban customers who want to grow their own herbs and vegetables. After a strong year of sales, the company is reviewing its liquidity position to ensure it can meet its short-term obligations in 2024. Management is particularly concerned about maintaining a healthy current ratio to support future investments in product development.

TechSpark Ltd designs and sells high-end smart home devices. The company is reviewing its liquidity and is particularly focused on its acid test ratio, as its management wants to ensure that short-term liabilities can be covered without relying on inventory. With a push to increase its market share, TechSpark has a significant amount of stock in hand.