Analysis and Communication of Accounting Information — common mistakes

In Paper 3, a question asking you to 'advise an investor' requires a balanced argument. You should present both positive and negative points revealed by your ratio analysis before reaching a final, justified recommendation. For example: 'Although the dividend yield is attractive, the low dividend cover and high gearing present significant risks. Therefore, a risk-averse investor should be cautious about investing in this company at present.'

There is no universal 'good' or 'bad' value for most ratios. The interpretation depends entirely on context. You must compare the ratio to:

1. The company's own performance in previous years (trend analysis).
2. Other companies in the same industry (comparative analysis).
3. The economic environment. For example, a gearing of 60% might be normal for a stable utility company but very risky for a volatile retail business.

A good structure is essential. Start by calculating the required ratios, showing your workings. Then, for each ratio or group of related ratios, follow a 'Point, Evidence, Explain, Link' (PEEL) structure.

• Point: Make a statement (e.g., 'The company's liquidity has worsened').
• Evidence: Support it with your calculated ratio values (e.g., 'The working capital cycle has increased from 45 days to 65 days').
• Explain: Explain what this means for the business (e.g., 'This means cash is tied up in operations for 20 days longer...').
• Link: Link it to other ratios or the overall question, and conclude with a justified recommendation for the relevant stakeholder.

No. The Cambridge syllabus is very clear that candidates must use the formulae given in the appendix to the exam paper. Using a different formula, even if it is a valid alternative used in the real world, will likely result in you not being awarded the marks. Always stick to the provided formulae.