Lesson 3.5.2

3.5.2 Ratio analysis Quiz: Pearson Edexcel Business, Unit 3

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 3.5.2, Ratio analysis: 20 multiple choice questions for the Pearson Edexcel Business (9BS0), Unit 3: Business decisions and strategy, written with Revision Ninja.

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The 20 questions

  1. What is the denominator used when calculating the gearing ratio of a business?

    • Operating profit
    • Current liabilities
    • Sales revenue
    • Capital employed

  2. What is the numerator when calculating Return on Capital Employed (ROCE)?

    • Net profit
    • Total revenue
    • Operating profit
    • Gross profit

  3. What does a high gearing ratio indicate about a business?

    • High labour productivity
    • High liquidity
    • High profit margin
    • High financial risk

  4. Which ratio measures how efficiently a business uses its long-term capital to generate profit?

    • Acid test ratio
    • ROCE
    • Gearing ratio
    • Current ratio

  5. Which formula represents capital employed when calculating financial ratios?

    • Equity plus non-current liabilities
    • Total revenue minus costs
    • Share capital plus reserves
    • Current assets minus liabilities

  6. What is a key limitation of relying solely on historical financial ratio analysis?

    • Measures qualitative factors
    • Uses historical data
    • Ignores past performance
    • Guarantees future success

  7. A firm has long-term loans of 300,000 pounds and equity of 700,000 pounds. What is its gearing ratio?

    • 43%
    • 300%
    • 70%
    • 30%

  8. A firm has operating profit of 200,000 pounds and capital employed of 1,000,000 pounds. What is its ROCE?

    • 200%
    • 5%
    • 20%
    • 10%

  9. What does an increase in a firm's ROCE from 12% to 15% show?

    • Lower labour productivity
    • Decreased total revenue
    • Improved capital efficiency
    • Higher financial risk

  10. What is the main effect of a firm's gearing ratio rising from 25% to 60%?

    • Zero debt obligations
    • Increased share liquidity
    • Higher interest commitments
    • Lower financial risk

  11. What does it indicate when a firm's ROCE is higher than its borrowing interest rate?

    • Insolvent capital structure
    • Profitable use of debt
    • Excessive borrowing costs
    • Negative operational gearing

  12. A firm with operating profit of 150,000 pounds and capital employed of 750,000 pounds has ROCE of:

    • 5%
    • 50%
    • 20%
    • 15%

  13. A firm has equity of 400,000 pounds and long-term loans of 600,000 pounds. What is its gearing ratio?

    • 150%
    • 60%
    • 40%
    • 67%

  14. Why might single-year ratio analysis give a misleading picture of performance?

    • Constant market share
    • Accurate inflation adjustments
    • Fixed exchange rates
    • One-off seasonal distortions

  15. What major risk does high gearing create alongside high ROCE?

    • Excess retained profit
    • High financial risk
    • Low profit margins
    • Reduced labour productivity

  16. Which factor most reassures lenders when a highly geared firm seeks extra funding?

    • High employee turnover
    • Stable operating profit
    • Declining brand equity
    • Falling asset values

  17. Which ratio is most useful to a bank evaluating a firm's loan application?

    • Labour turnover
    • Price elasticity
    • Absenteeism rate
    • Gearing ratio

  18. Why should a business combine financial ratio analysis with non-financial performance measures?

    • Non-financials predict cash flow
    • Law requires balanced scorecards
    • Ratios ignore staff morale
    • Ratios are mathematically flawed

  19. Why might a firm's ROCE fall despite an increase in its operating profit?

    • Falling interest rates
    • Reduced long-term borrowing
    • Lower tax rates
    • Faster capital growth

  20. What is the main risk of high gearing during a severe economic slowdown?

    • Inability to cover interest
    • Excessive dividend demands
    • Immediate share price rises
    • Lower corporation tax bills

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