Ratio Analysis for Investment: Alpha Ltd vs Beta Ltd

This report analyzes the financial performance of Alpha Ltd and Beta Ltd using ratio analysis to determine the suitability for potential investment. The report examines liquidity ratios, profitability ratios, efficiency ratios, and solvency ratios. Based on the analysis, Alpha Ltd is found to be the most suitable company for investment.

ACCOUNTING AND
FINANCE FOR MANAGER

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
(A) Calculation of ratios.............................................................................................................3
..........................................................................................................................................................4
(B) Interpretations of Ratio.......................................................................................................11
(C) the suitability for potential investment in one of the company...........................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
In the present era every firm wants to know its overall financial performance to show its
investors that how much they earn or efficiently manage the liquidity. Ratio analysis helps the
company to analyse liquidity, operational efficiency, and profitability of the firm by comparing
two years financial performance. In this current report the suitability for potential investment in
one company will be highlighted. The present study will identify that which firm is most
appropriate for investment with the help of ratio analysis.
MAIN BODY
(A) Calculation of ratios
Liquidity ratios
1) Current Ratio:
Particulars Formula Alpha Ltd Beta Ltd
Current assets 114950 122220
Current liability 53950 127220
Current ratio Current asset/current
liability
2.13 0.96
Current ratio
0
0.5
1
1.5
2
2.5
2.13
0.96
alpha
beta
2) Quick ratio:

Particulars Formula Alpha Ltd Beta Ltd
quick assets 44075 42420
Current liability 53950 127220
Quick ratio Quick asset/current
liability
0.82 0.33
Quick ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9 0.82
0.33
alpha
beta
Profitability Ratios
1) Gross Profit Ratio:
Particulars Formula Alpha Ltd Beta Ltd
Gross profit 84000 78750
Net sales 4,20,000 3,15,000
GP Ratio GP/Net sales x 100 20.00% 25.00%

GP ratio
0
5
10
15
20
25
30
20
25
alpha
beta
2) Net Profit Ratio
Particulars Formula Alpha Ltd Beta Ltd
Net profit 11500 25000
Net sales 4,20,000 3,15,000
NP Ratio NP/Net sales x 100 2.74% 7.94%

NP ratio
0
1
2
3
4
5
6
7
8
9
2.74
7.94
alpha
beta
3) Return on Capital Employed:
Particulars Formula Alpha Ltd Beta Ltd
Net profit after tax 11500 25000
capital employed 208000 201000
Return on capital
employed Ratio
NP after tax/ capital
employed x 100
5.53% 12.44%

return on capital employed
0
2
4
6
8
10
12
14
5.53
12.44
alpha
beta
Efficiency Ratios
1) Inventory Ratio:
Particulars Formula Alpha Ltd Beta Ltd
Net sales 4,20,000 3,15,000
Inventory 70875 79800
Inventory Ratio Net sales/ Inventory 5.93% 3.95%

Inventory ratio
0
1
2
3
4
5
6
7
5.93
3.95
alpha
beta
2) Account Receivables:
Particulars Formula Alpha Ltd Beta Ltd
Total sales 4,20,000 3,15,000
Account Receivables 44075 42420
Account Receivables
Ratio
Total sales/ account
receivables
9.53% 7.43%

account receivables ratio
0
2
4
6
8
10
12
9.53
7.43
alpha
beta
3) Fixed Assets Turnover Ratio:
Particulars Formula Alpha Ltd Beta Ltd
COGS 336000 236250
Total Fixed Assets 147000 206000
Fixed assets Turnover
Ratio
COGS/ Total Fixes
Assets
2.28% 1.15%

Fixed assets Turnover Ratio
0
0.5
1
1.5
2
2.5
2.28
1.15 alpha
beta
Solvency Ratio
1) Debt Equity ratio:
Particulars Formula Alpha Ltd Beta Ltd
Total long term Debt 52500 -
Share holder fund 155500 201000
Debt Equity ratio Total long term debt/
share holder fund
0.34% 0.00%

debt equity ratio
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.34
0
alpha
beta
2) proprietary Ratio:
Particulars Formula Alpha Ltd Beta Ltd
Shareholder fund 155500 201000
Total assets 261950 328220
Proprietary ratio share holder fund/ total
assets
0.59% 0.61

Proprietary ratio
0.575
0.58
0.585
0.59
0.595
0.6
0.605
0.61
0.615
0.59
0.61
alpha
beta
(B) Interpretations of Ratio
1) Current Ratio - The ideal current ratio is 2:1 if any company has double its assets in
respect to its current liabilities then it shows good condition of company (Lee and Lee 2018).
Alpha Ltd current ratio is 2.13, which means company have enough assets to pay its current
liabilities. Beta Ltd current ratio is 0.96 means firm don't have enough current assets to meet out
its short term liabilities. So it is necessary for company to invest in current assets. With
comparison of both the companies it is evaluated that Alpha Ltd is better than Beta Ltd
2) Quick Ratio - It measures liquidity using more liquid current assets. If the quick ratio
is greater than 1 means the company has enough quick assets to pay for its current liabilities.
From the above data alpha Ltd has 0.82 times quick ratio which means firm have to invest more
in current assets. Beta Ltd has 0.33 times quick assets so company does not meet out its current
liability. Therefore, both companies need to invest more in current assets. With the comparison
of the above companies alpha Ltd is better company for investment.
3) Gross Profit Ratio - From the above studies it is identified that alpha limited GP ratio
is 20% while beta limited is 25%. Beta Ltd earn more than Alpha Ltd so better to invest in the
Beta Ltd for higher return.

4) Net Profit Ratio - Alpha limited GP ratio is higher but NP ratio is only 2.74%. Means
company's indirect expenses are higher (Kim and Im, 2017). Beta Ltd net profit ratio is 7.94%. It
gives more profit then Alpha Ltd. By comparing both the firms Beta limited is best.
5) Return On Capital Employed - A higher ROC is more favourable, as it indicates
higher profit on its capital invested. Alpha limited return on capital employed is 5.53% while
Beta limited returns is 12.44%. Higher the return higher the investment. So by comparing both
the firm Beta limited gives more return so invest in Beta Limited.
6) Inventory Ratio: Lower inventory ratio shows lower sales and inefficient
management and vice versa. Alpha limited inventory ratio is 5.93% while Beta limited ratio is
3.95%. By interpreting both the above data Alpha limited sales are higher than Beta limited so
company should invest in Alpha limited.
7) Account Receivable ratio: High ratio indicates that firm is enjoying a high quality
customer base and able to pay debt quickly. Alpha limited account receivable turnover ratio is
9.53% while Beta limited is 7.43%. From the above analysis the most acceptable firm for
investment is Alpha limited. The reason behind that is the company have high proportion of
quality customers.
8) Fixed Assets Turnover Ratio: It measures the productivity of the company’s fixed
assets to generate revenue (Kim and Im,2017). Higher ratio indicates higher efficiency in
utilizing assets and lower ratio indicates that firm does not utilize its fixed assets efficiently.
Alpha limited fixed asset ratio is 2.28% and on the other side Beta limited ratio is 1.15%. It
means Alpha limited efficiently use their fixed assets as compare to beta limited. So for
investment purpose Alpha limited is good.
9) Debt Equity Ratio: With the above calculations debt equity ratio of Alpha limited is
0.34 times. It means company is having 34% debt against 66% of the equity. Most financially
stable company usually have lower debt equity ratio. Beta limited does not rely on borrowings to
finance the operation so company only running its business on equity fund only
10) Propitiatory Ratio: Higher the ratio greater the financial position and vice versa. So
in this study it is identified that Beta limited have a higher propitiatory ratio that is 0.61 as
compared to alpha limited that is 0.5 (Basioudis, I.2019)1. The reason behind is that company
does not have any long term debt so in this case also Alpha limited is better. Because it operates
with the balance fund.

(C) the suitability for potential investment in one of the company
From the above calculations the most suitable potential investment company is Alpha
Limited (Kahn and Baum, 2020). Company current ratio is higher than the beta limited which
shows the firms have enough current assets to meet out its current obligation. Alpha limited
have ideal quick assets to pay off its current liabilities. The company gives 5.53% return on its
capital employed which influence higher investment. From the further study it is evaluated that
company account receivable ratio is also high, it means firm have quality customer on high
proportion. So overall performance of Alpha limited is best for doing investment.
CONCLUSION
By summing up this report, it can be concluded that financial performance of Alpha Ltd
found good in comparison to Beta. It can be seen in the report that Alpha Ltd maintained enough
liquidity for dealing with monetary obligation. It can be summarized from evaluation that
investors will get good return by investing funds in Alpha Ltd over others.

REFERENCES
Books and Journals
Basioudis, I. G., 2019. The Interpretation of Financial Statements. In Financial Accounting (pp.
274-308). Routledge.
Kahn, M. J. and Baum, N., 2020. Basic Accounting and Interpretation of Financial Statements.
In The Business Basics of Building and Managing a Healthcare Practice (pp. 13-18).
Springer, Cham.
Kim, J. and Im, C., 2017. Study on corporate social responsibility (CSR): Focus on tax
avoidance and financial ratio analysis. Sustainability. 9(10). p.1710.
Lee, B. H. and Lee, S. H., 2018. A study on financial ratio and prediction of financial distress in
financial markets. The Journal of Distribution Science. 16(11). pp.21-27.Analysis
Online
Ratio analysis. 2021. [Online]. Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/finance/ratio-analysis/>