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

Introduction

This article supports the International Baccalaureate (IB) Business Management (Higher Level) syllabus, specifically Unit 3: Finance and Accounts – 3.5 Profitability and Liquidity Ratio Analysis. It provides classroom-ready teaching insights, aligned examples, and assessment strategies, supporting SLT, careers leads, and business teachers with both curriculum and careers provision.

Understanding profitability and liquidity ratios equips students with financial literacy and strategic thinking. These are not just exam requirements but essential skills for analysing business performance – applicable in any sector, whether students pursue finance, marketing, entrepreneurship, or public service.

Key Concepts

According to the IB syllabus, this sub-unit covers:

• Profitability Ratios:

  • Gross profit margin: Measures how efficiently a business produces its products.

  • Net profit margin: Evaluates overall profitability after all expenses.

  • Return on capital employed (ROCE): Indicates how effectively long-term capital is generating profit.

• Liquidity Ratios:

  • Current ratio: Measures a firm’s ability to meet short-term obligations.

  • Acid-test ratio: Similar to current ratio but excludes inventory for a stricter assessment.

• Interpretation of Ratios:

  • Trends over time and comparisons with competitors.

  • Limitations of ratio analysis (e.g. outdated data, manipulation).

• Use of ratio analysis by stakeholders:

  • Investors, lenders, managers, and employees interpret financial health differently.

Students must not only know how to calculate these ratios, but also apply them critically to make informed judgements in context – a skill closely aligned with our focus on commercial awareness and decision-making.

Real-World Relevance

Understanding profitability and liquidity isn’t abstract. These ratios are routinely used in real business decision-making:

• Case Study: Marks & Spencer
  In its 2023 annual report, M&S posted improved profitability through cost-saving initiatives and increased gross margins, while maintaining a solid current ratio to reassure investors. Analysing their ratios over time reveals strategic shifts post-COVID.

• SME Scenario:
  A local catering company sees declining net profit margins despite increased sales. Ratio analysis highlights rising input costs and inefficient overheads, prompting them to renegotiate supplier contracts and adjust pricing.

In both cases, ratio analysis provides essential insights into operational efficiency and strategic risk – exactly the type of thinking students can practise using simulation tools on the Skills Hub platform.

How It’s Assessed

Assessment in IB Business Management HL requires application, analysis, and evaluation:

• Paper 1 (25%): Based on a pre-seen case study. Students may be asked to calculate and interpret profitability/liquidity ratios in a real scenario.

• Paper 2 (35%): Includes data response questions with unseen stimuli. Students analyse financial data to evaluate a business’s performance.

• Assessment Objectives include:

  • AO2: Application – using ratios in context

  • AO3: Analysis – implications and interconnections

  • AO4: Evaluation – making justified recommendations

• Command terms to highlight during teaching:

  • Calculate: show mathematical working

  • Analyse: break down into components and relationships

  • Evaluate: weigh up arguments and reach reasoned conclusions

A strong teaching focus should be placed on how ratios guide decisions, not just numerical accuracy.

Enterprise Skills Integration

Ratio analysis links directly to key enterprise and workplace skills:

• Decision-Making & Problem-Solving:
  Students must interpret financial health and propose actions – mirroring strategic business roles.

• Commercial Awareness:
  Ratio interpretation fosters an understanding of how organisations monitor success, control risk, and communicate performance to stakeholders.

• Financial Literacy:
  Builds fluency in reading and applying business data – crucial for both personal and professional contexts.

Active learning strategies such as business simulations or budgeting challenges deepen these skills. Studies show that students using simulation-based learning demonstrate better comprehension and engagement than those in traditional lecture formats.

Careers Links

Teaching this topic directly supports Gatsby Benchmarks 4, 5 and 6:

• Benchmark 4 – Linking curriculum learning to careers:
  Financial analysis is vital in careers ranging from accountancy to marketing. Skills Hub tools include job role profiles aligned with every topic.

• Benchmark 5 – Encounters with employers:
  Employer case studies within Skills Hub simulate real decision-making moments. Examples from financial services and retail show how ratios inform board-level decisions.

• Benchmark 6 – Experiences of workplaces:
  Virtual scenarios allow students to act as financial analysts within simulated businesses – bridging the gap between classroom and career.

Career pathways enhanced by this unit:

• Finance (analyst, accountant, auditor)

• Business consultancy

• Entrepreneurial ventures

• Strategic roles in any sector

Teaching Notes

Practical Delivery Tips:

• Start with real company annual reports (e.g. Greggs, Tesco) to extract ratios from real data.

• Use collaborative tasks – assign different stakeholders to students and ask them to interpret the same ratios from different perspectives.

• Build in reflection: “What would you do next if you were the finance director?”

Common Pitfalls:

• Students focus on formulae, not interpretation.

• Over-reliance on absolute figures rather than percentage trends or industry comparisons.

• Weak connection between ratio changes and real-world causes.

Extension Activities:

• Compare two competing firms using five years of data.

• Introduce limitations of ratio analysis and integrate ethical or external influences.

• Encourage students to present findings to a mock board – combining numeracy with communication.

Tools from Enterprise Skills:

• Skills Hub Business: Break-even calculator, ratio analysis worksheet, real-company case studies.

• Skills Hub Futures: Simulation challenges linked to financial decisions with employer feedback loops – no prep required.