Syllabus: AQA - AS and A Level Business
Module: 3.7 Analysing the Strategic Position of a Business (A-level only)
Lesson: 3.7.2 Analysing the Existing internal Position of a Business to Assess Strengths and Weaknesses: Financial Ratio Analysis

Introduction

This article supports the delivery of AQA A-level Business 3.7.2, which focuses on analysing a business’s internal position using financial ratio analysis. As outlined in the official AQA syllabus, this topic enables students to assess financial strengths and weaknesses using balance sheets, income statements and a set of financial ratios.

Aligned with workplace readiness and commercial awareness themes, this unit equips students with tools to make strategic decisions, building real-world financial literacy and data interpretation skills essential for both academic and career success.

Key Concepts

Students are expected to understand and apply the following financial ratios:

• Profitability Ratios

  • Return on Capital Employed (ROCE): Measures the return a business generates from its capital.

• Liquidity Ratios

  • Current Ratio: Assesses the firm’s ability to pay short-term obligations.

• Gearing Ratio

  • Evaluates the proportion of a business’s finance from debt versus equity.

• Efficiency Ratios

  • Payables Days, Receivables Days, and Inventory Turnover: Analyse how efficiently a business manages cash flow and stock.

Students must also learn to:

• Compare ratios over time or between businesses

• Evaluate the implications of financial performance

• Interpret financial documents such as balance sheets and income statements

These concepts link directly to decision-making, investment appraisal, and strategic planning later in the course.

Real-World Relevance

Understanding financial ratio analysis is essential in virtually every organisational context. For example:

• Retail Sector: A fall in inventory turnover could signal poor stock control at companies like Marks & Spencer, affecting strategic decisions on pricing and supply chain.

• Tech Industry: High gearing at a firm like Tesla or Spotify might be acceptable due to growth potential, but riskier in traditional sectors.

• Hospitality: Liquidity ratios have been critical during post-COVID recovery, where cash reserves determined survival.

Bringing real company reports into class (e.g. from Tesco, Greggs, or JD Sports) supports students in applying ratios to dynamic, live businesses.

How It’s Assessed

In AQA A-level Business, this topic is assessed across all three papers. Assessment styles include:

• Data response questions requiring interpretation of financial data

• Extended written answers asking for strategic analysis using financial ratios

• Calculation-based questions applying ratio formulas accurately

Common command words include:

• Calculate, Interpret, Assess, Analyse, Evaluate
  These require students not only to compute ratios but explain what they indicate about business performance.

Enterprise Skills Integration

This topic develops critical enterprise skills including:

• Decision-Making & Problem-Solving: Students weigh financial evidence to advise businesses strategically.

• Data Interpretation: Essential in roles where financial documents are used to drive action.

• Strategic Thinking: Learners use ratios to identify risks and opportunities, replicating the real-world analysis used by business leaders.

Using simulation tools like those in Skills Hub Business, students can apply ratios in context, navigating realistic business challenges with measurable outcomes.

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Careers Links

This module connects directly to Gatsby Benchmark 4 by linking curriculum content to real careers.

Roles and sectors where ratio analysis is essential:

• Finance Analyst (Banking, Insurance)

• Management Accountant

• Investment Banker

• Business Consultant

• Retail or Operations Manager

Incorporate Skills Hub Futures tools or employer case studies to demonstrate how ratio interpretation drives decisions in sectors from logistics to health services.

Teaching Notes

Top Tips:

• Use real company reports: Students engage more with real numbers than fictional examples.

• Flip the classroom: Pre-lesson tasks can include watching company financial briefings or exploring FTSE 100 ratio comparisons.

• Practice with purpose: Emphasise why a ratio matters in a business context, not just how to calculate it.

Common Pitfalls:

• Rote learning of formulas without understanding their strategic use

• Misinterpreting high/low ratios without considering industry norms

• Failing to link ratios to wider business functions (e.g. marketing or operations)

Suggested Extension Activities:

• Simulation Debriefs: After a financial decision in a simulated environment, students reflect using ratios to evaluate success.

• Boardroom Roleplays: Assign roles (e.g. CFO, Marketing Director) and assess a business using ratios from different perspectives.

• Case Comparison: Analyse the same ratios across two firms in different sectors, discussing contextual interpretation.