Edexcel A-level Business (9BS0) · 3.5 Assessing competitiveness
Mini-Lesson
Assessing competitiveness
This mini-lesson covers Edexcel 3.5 Assessing competitiveness: 3.5.1 interpretation of financial statements (the income statement and the balance sheet, and what each stakeholder looks for), 3.5.2 ratio analysis (ROCE, gearing and the efficiency ratios) and 3.5.3 human resources (labour productivity, turnover, retention and absenteeism) — all with calculations.
Work through each screen, answer the questions as you go (multiple choice, calculations and sorting tasks) and collect ⭐ stars. Press Start when you are ready.
3.5.1 · Financial statements
The two statements and who reads them
The statement of comprehensive income (income statement) covers a period: revenue, cost of sales, gross profit, operating expenses, operating profit, finance costs, tax and profit for the year.
The statement of financial position (balance sheet) is a snapshot on one date: non-current assets, current assets, current liabilities, non-current liabilities, and equity (share capital and reserves).
Stakeholder interest:
Shareholders — profitability, ROCE, dividends, the trend in earnings.
Lenders — gearing, liquidity, interest cover: can the firm service the debt?
Suppliers — liquidity and payables days: will we be paid, and when?
Employees — profitability and stability: is my job secure, and can they afford a pay rise?
Managers — everything, as the basis for decisions and targets.
3.5.2 · Ratio analysis
The data set for this lesson
Meridian plc — extracts
Income statement: revenue £1,500,000 · cost of sales £960,000 · operating profit £150,000
Balance sheet: non-current assets £900,000 · current assets £300,000 (of which inventory £120,000 and receivables £150,000) · current liabilities £200,000 · non-current liabilities (long-term loans) £400,000 · equity (share capital and reserves) £600,000
Employees: 25 · average staff during the year 60 across the group · 9 leavers
capital employed = total equity + non-current liabilities= 600,000 + 400,000 = £1,000,000 (equivalently: total assets £1,200,000 − current liabilities £200,000)
Capital employed is the long-term money invested in the business. Every serious performance ratio compares what the firm earns with what it has been given to work with.
3.5.2 · Ratio analysis
ROCE and gearing
ROCE (%) = (operating profit ÷ capital employed) × 100The single most important measure of business performance: the return generated on all the long-term capital in the firm.
gearing (%) = (non-current liabilities ÷ capital employed) × 100Above about 50% a firm is highly geared — a large part of its long-term funding is debt.
High gearing: the owners keep control and debt is cheaper than equity when times are good, and interest is tax deductible. But interest must be paid whatever the profit, so a downturn or a rise in interest rates can be fatal.
Low gearing: safer and more resilient, with spare borrowing capacity for an opportunity — but the firm may be under-using cheap finance, and issuing equity dilutes existing owners.
Calculate
Your turn — ROCE
1Meridian's operating profit is £150,000 and its capital employed is £1,000,000. Calculate the ROCE.
%
Hint: (150,000 ÷ 1,000,000) × 100.
Calculate
Your turn — gearing
2Meridian's non-current liabilities are £400,000 and its capital employed is £1,000,000. Calculate the gearing ratio.
%
Hint: (400,000 ÷ 1,000,000) × 100.
Quick check
Interpreting ROCE
?Meridian's ROCE is 15%. A bank offers savers 4%, and the industry average ROCE is 19%. What is the best judgement?
3.5.2 · Ratio analysis
Efficiency: inventory turnover, receivables and payables days
inventory turnover = cost of sales ÷ average inventoryHow many times a year the firm sells and replaces its stock. Higher is usually better — less cash tied up.
receivables (debtor) days = (receivables ÷ revenue) × 365 payables (creditor) days = (payables ÷ cost of sales) × 365How long customers take to pay you, and how long you take to pay suppliers.
Meridian — worked
Inventory turnover = 960,000 ÷ 120,000 = 8 times a year (about every 46 days)
Receivables days = (150,000 ÷ 1,500,000) × 365 = 0.1 × 365 = 36.5 days
Payables days = (200,000 ÷ 960,000) × 365 = 76.0 days
Read them together: Meridian collects from customers in 36.5 days but takes 76 days to pay its suppliers. That is good for its own cash flow — but it may be straining supplier relationships, and if suppliers tighten their terms the firm's liquidity would deteriorate sharply.
Calculate
Your turn — inventory turnover
3Cost of sales is £960,000 and average inventory is £120,000. Calculate inventory turnover, in times per year.
times
Hint: 960,000 ÷ 120,000.
Calculate
Your turn — receivables days
4Receivables are £150,000 and revenue is £1,500,000. Calculate receivables days (to 1 decimal place).
days
Hint: (150,000 ÷ 1,500,000) × 365.
Quick check
Efficiency and liquidity
?Receivables days rise from 36.5 to 60 while revenue is unchanged. What is the effect, and what should the firm do?
Sort it
Where does each item belong?
Tap an item, then tap where it appears.
🧾 Income statement
🏛️ Balance sheet
👥 HR measure
3.5.3 · Human resources
Labour productivity, turnover, retention and absenteeism
labour productivity = output (or revenue) ÷ number of employees labour turnover (%) = (number of staff leaving ÷ average number employed) × 100 labour retention (%) = 100 − labour turnover absenteeism (%) = (days absent ÷ total days that could be worked) × 100
Why they matter: higher productivity cuts the labour cost per unit and drives cost competitiveness. High turnover is expensive (recruitment, induction, lost expertise, weaker service) and is a symptom of poor motivation, pay or management. High absenteeism raises costs, disrupts production and often signals poor morale or working conditions.
HR strategies to raise productivity and retention and cut turnover and absenteeism: financial rewards (bonuses, profit share, performance-related pay), employee share ownership (aligns staff with the firm's success), consultation strategies (works councils, staff surveys — Mayo) and empowerment strategies (delegation, autonomy, job enrichment — Herzberg).
Calculate
Your turn — labour productivity
5Meridian generates revenue of £1,500,000 with 25 employees. Calculate revenue per employee, in £.
£
Hint: 1,500,000 ÷ 25.
Calculate
Your turn — labour turnover
6During the year 9 employees left, from an average workforce of 60. Calculate the labour turnover rate.
%
Hint: (9 ÷ 60) × 100.
Match it
Match the ratio to its formula
Tap a formula on the left, then the ratio it defines on the right.
Formula
Ratio
Quick check
Gearing in a downturn
?Two firms each have a ROCE of 15%. Firm A is 20% geared; Firm B is 70% geared. A recession halves operating profit. What happens?
Quick check
Limitations of ratio analysis
?Which is the strongest limitation of ratio analysis?
Quick check
Productivity versus turnover
?A firm raises labour productivity by 20% by intensifying workloads, but labour turnover rises from 12% to 30%. What is the best judgement?
Recap
The big ideas to know
Capital employed: total equity + non-current liabilities (= total assets − current liabilities)
ROCE: (operating profit ÷ capital employed) × 100 — compare with the trend, the industry and the risk-free rate
Gearing: (non-current liabilities ÷ capital employed) × 100 — above 50% is highly geared and magnifies risk
Efficiency: inventory turnover = cost of sales ÷ average inventory · receivables days = (receivables ÷ revenue) × 365