Reading the statements: simple analysis and interpretation

A number on its own means nothing

Khumalo Traders made a net profit of R145 000. Is that good? On its own the question cannot be answered. R145 000 on sales of R1 250 000 is one story; R145 000 on sales of R8 000 000 is a very different one.

Analysis turns a rand amount into a comparison, usually a percentage or a ratio. Interpretation is the sentence you write afterwards, saying what the comparison means for the business. Marks and good decisions both come from the second part, not the first.

Three questions worth asking

Is the business profitable? Compare profit with sales, and gross profit with cost of sales.

• Gross profit on sales = gross profit ÷ sales × 100
• Mark-up achieved on cost = gross profit ÷ cost of sales × 100
• Net profit on sales = net profit ÷ sales × 100
• Operating expenses on sales = operating expenses ÷ sales × 100

Can the business pay what falls due soon? This is liquidity.

• Current ratio = current assets : current liabilities
• Acid-test ratio = (current assets − inventories) : current liabilities

The acid-test ratio leaves stock out because stock has to be sold before it becomes cash, and a shop cannot force customers to buy.

Is the owner's money working hard enough? This is return.

• Return on owner's equity = net profit ÷ average owner's equity × 100

Compare that percentage with what a fixed deposit would have paid. If the business returns less than a bank account, the owner is carrying business risk for nothing.

Worked example

Worked example. Khumalo Traders, year ended 28 February 2026. Sales R1 250 000, cost of sales R750 000, gross profit R500 000, operating expenses R356 000, net profit R145 000. Current assets R236 000 (of which inventories are R120 000), current liabilities R81 000. Owner's equity was R600 000 at the start of the year and R649 000 at the end.

Now the interpretation, which is the part that matters. The shop keeps 40 cents of every sales rand as gross profit, and after running costs it keeps 11,6 cents. Running the shop swallows 28,5% of sales, so expense control is where the profit is won or lost. It has R2,90 of current assets for every R1 due soon, and R1,40 even ignoring stock, so it can pay its bills comfortably. A return of 23,2% is well above what a bank fixed deposit pays, so the owner's money is better off in the business than in the bank.

Core checkpoint: always name the figure, quote the calculated result, and then say what it means for the business in a full sentence. "The current ratio is 2,9:1" is arithmetic. "The business holds R2,90 of current assets for every R1 of short-term debt, so it can settle what is due without borrowing" is interpretation.