Syllabus: International Baccalaureate - Individuals and societies - Business management (Standard Level)
Module: Unit 3: Finance and Accounts
Lesson: 3.5 Profitability and Liquidity Ratio Analysis

Introduction

This article supports the delivery of IB Business Management SL – Unit 3.5: Profitability and Liquidity Ratio Analysis, a crucial component of the Finance and Accounts topic. The unit equips students with financial literacy through the analysis of performance metrics central to understanding business viability.

Aligned with the International Baccalaureate Individuals and Societies curriculum, this topic also provides ideal opportunities for delivering Gatsby Benchmark 4 by linking core classroom concepts to future careers in finance, business, and enterprise. By embedding commercial awareness, teachers can deepen understanding while preparing students for post-16 transitions into study or work.

Key Concepts

Students are expected to:

• Define and calculate key profitability ratios:

  • Gross profit margin = (Gross profit ÷ Sales revenue) × 100

  • Net profit margin = (Net profit ÷ Sales revenue) × 100

• Define and calculate core liquidity ratios:

  • Current ratio = Current assets ÷ Current liabilities

  • Acid test ratio = (Current assets – Inventory) ÷ Current liabilities

• Interpret what the ratios reveal about a business’s financial health

• Compare ratio results over time and against industry benchmarks

• Recognise limitations of ratio analysis (e.g. use of historical data, lack of qualitative insights)

The IB syllabus places emphasis not only on calculation but on interpretation, comparison, and evaluation—developing students’ ability to apply knowledge in context.

Real-World Relevance

Profitability and liquidity ratios are used every day by business leaders, investors, banks, and analysts to assess organisational performance. For example:

• Greggs plc reported a decline in its net profit margin during the cost-of-living crisis due to rising input costs, despite growing sales—a case that illustrates how external factors impact profitability.

• Tesla Inc. faced liquidity scrutiny in early growth stages due to low current ratios, prompting concerns about its ability to meet short-term obligations. Yet its high gross margins in later years became a sign of operational efficiency.

Using such examples during lessons helps students understand that financial metrics are more than just numbers—they reflect strategic decisions, market pressures, and stakeholder expectations.

How It’s Assessed

In IB assessments, students may encounter:

• Data-response questions where ratio analysis is embedded within a case study

• Paper 1 (SL): Typically includes short-answer and structured questions with financial documents

• Command terms such as calculate, explain, interpret, evaluate are commonly used

• Students must be comfortable not only calculating ratios but explaining their significance, justifying recommendations, and acknowledging limitations

Teaching should focus on developing students’ confidence with financial data and their ability to argue persuasively using evidence.

Enterprise Skills Integration

This unit provides an excellent opportunity to foster decision-making and problem-solving skills—both identified as key enterprise capabilities. For example:

• Students can evaluate the liquidity of a struggling business and recommend whether to invest or seek additional finance

• Through ratio interpretation, they learn how to analyse risks, predict financial challenges, and propose strategies for improvement

Simulations and tools like Skills Hub Business provide realistic business contexts where learners must make financial decisions under time and resource constraints. These experiences are shown to significantly enhance higher-order thinking and student engagement.

Careers Links

Understanding financial ratios opens direct pathways into:

• Accounting and finance roles (e.g. financial analyst, management accountant)

• Entrepreneurship (evaluating viability of start-ups)

• Banking and investment (analysing company performance for lending or investment decisions)

Delivering this topic through practical tools and scenarios also helps meet Gatsby Benchmark 4 by linking learning to real careers. Enterprise Skills products also support:

• Benchmark 5 through employer-set challenges

• Benchmark 6 via simulation-based workplace experiences

Teaching Notes

Tips for effective delivery:

• Use current company reports (e.g. Greggs, Tesco, Apple) for live data analysis

• Compare companies from different sectors to highlight variation in margin expectations

• Practice interpreting ratios before introducing formulae—build narrative skills first

• Integrate Skills Hub or simulations where students “play the role” of finance directors deciding based on ratios

• Ask students to present recommendations using visual aids like dashboards or graphs

Common pitfalls:

• Students often confuse gross and net profit margins—use layered examples to reinforce the difference

• The acid test ratio can seem abstract—use physical assets/liabilities props or analogies

• Ratio interpretation often lacks depth—encourage students to link numbers to decisions

Extension activities:

• Research real financial turnarounds using ratio improvements

• Compare financial health of a charity vs. a private company

• Build mock financial statements and ask students to “analyse their own firm”