Mick is deciding whether to purchase Business A or Business B and has received the following information - HSC - SSCE Business Studies - Question 15 - 2017 - Paper 1

To make the best decision regarding the purchase of Business A or Business B, Mick should utilize comparative ratio analysis. This method allows him to evaluate the performance and financial health of both businesses relative to the assets and total sales.

1. Calculate Ratios: Begin by calculating key financial ratios for both businesses. This could include:

   • Return on Assets (ROA): Measures how efficiently a company uses its assets to generate earnings. The formula is: $ROA = \frac{Net\ Income}{Total\ Assets}$
   • Sales to Assets Ratio: Indicates how efficiently a company is utilizing its assets to generate sales: $Sales\ to\ Assets\ Ratio = \frac{Total\ Sales}{Total\ Assets}$

   For Business A:

   • ROA = $\frac{4m}{10m} = 0.4$ or 40%
   • Sales to Assets Ratio = $\frac{4m}{10m} = 0.4$

   For Business B:

   • ROA = $\frac{2m}{1m} = 2$ or 200%
   • Sales to Assets Ratio = $\frac{2m}{1m} = 2$

2. Comparative Analysis: Compare these ratios:

   • The higher ROA and Sales to Assets Ratio for Business B indicates it utilizes its assets more effectively compared to Business A.

3. Conclusion: Opting for the business with favorable ratios suggests a more profitable investment, indicating Mick should lean towards Business B based on the analysis.