Financial Decision Making: Analysis of Two-Year Financial Ratios of Alpha Ltd

This report analyzes the two-year financial ratios of Alpha Ltd, including return on capital employed, net profit margin, current ratio, debtor collection period, and creditor payment period. The report comments on the performance of Alpha Ltd from a potential investor's perspective.

Financial Decision Making

TABLE OF CONTENTS
INTRODUCTON.............................................................................................................................3
TASK 2............................................................................................................................................3
Calculation of following five ratios for year 2017 and 2018 for Alpha Ltd................................3
Comment on the performance of Alpha Ltd based on two year financial ratios result stating
causes and effects of changes......................................................................................................4
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTON
Ratio analysis is one of the quantitative method with the help of which the users of
financial statement able to visualize and analyse the performance of the company. In the second
task, the report will compute the two-year financial ratios of Alpha Ltd and comment on the
performance of company based on their ratio results. The ratio will be calculated in the report is
return on capital employed, net profit margin, current ratio, debtors collection period and
creditors payment period (Fridson and Alvarez, 2022). The comment will also be made on the
company as per potential investors' perspective.
TASK 2
Calculation of following five ratios for year 2017 and 2018 for Alpha Ltd.
Return on capital employed
Ratios Formula 2017 2018
Return on cap.
employed
EBIT / cap. employed 375 / 2002.5 * 100 =
18.73%
412.50 / 2925 * 100
= 14.10%
Capital employed Total assets – current
liabilities
2325 – 322.50 =
2002.5
4035 – 1110 = 2925
Earning before
interest & tax
(EBIT)
375 412.50
Net profit margin
Ratios Formula 2017 2018
Net profit margin Net income / revenue
* 100
300 / 2400 * 100 =
12.5%
262.50 / 3000 *
100 = 8.75%
Net income 300 262.50
Revenue 2400 3000
Current ratio
Ratios Formula 2017 2018
Current ratio Current assets / 757.50 / 322.50 = 2.35 1035 / 1110 = 0.93

current liabilities
Current assets 757.50 1035
Current liabilities 322.50 1110
Debtor collection period/ Average receivable days
Ratios Formula 2017 2018
Debtor collection
period
Average debtors* /
net sales * 365 days
225 / 2400 * 365 days
= 34 days (approx)
525 / 3000 * 365
days = 64 days
(approx.)
Average debtor (Opening debtors +
Closing debtors) / 2
(0 + 450) / 2 = 225 (450 + 600) / 2 =
525
Net sales 2400 3000
Average Payable days / Creditors payment period
Ratios Formula 2017 2018
Creditor collection
period
Average creditor /
cost of sales * 365
days
570 * 365 / 3450 = 60 2100 * 365 / 4350
= 176
Average creditors (opening creditors +
closing creditors) / 2
(0 + 285) / 2 = 142.5 (285 + 1050) / 2 =
667.5
Cost of sales 1725 2250
Comment on the performance of Alpha Ltd based on two year financial ratios result stating
causes and effects of changes
Return on capital employed:
This is one of the financial ratio matrix which state the ability of the company to generate
income from its capital employed or capital. On the basis of above calculation of Alpha return on
capital employed, it has been identified that the ROCE of company in the year 2017 is 18.73%
while in the year 2018 is 14.10%. This means that in the current year, the ability of Alpha to
generate income from capital is reduced. The causes of such change might be because of lack
increase in cost of sales or reduction in sales revenue (Tello and et.al., 2019). In the present case,

the cost of sales of Alpha Ltd has increases which leads to poor return on capital employed of
business. Another causes of negative change in ROCE is increase in the non-current liabilities of
business. The impact of such negative change in ROCE on the Alpha business is that there image
among the investors or other stakeholder will reduce.
Net profit:
Another financial ratio matrix is net profit margin which indicate the ability of the
company to generate higher income from the sales revenue after deducting cost of sales and
other administration and selling expenses. According to above calculation, the net profit margin
of Alpha Ltd has reduced in current year to 8.75% as compared to previous year net profit of
12.5%. This indicates the reduction in the profitability of the business which highly affect the
potential investors of the company (Belousova and et.al., 2019). The cause of reduction in NP
margin of Alpha is increase in operating expenses as well as the increase in finance cost of
business. However, this ratio affect the investors of the company as there decision is directly
linked with the company profitability earning capacity. Hence, Alpha Ltd should adopt strategies
to improve the net profit such as providing discounts to customers, training to employees,
avoiding unnecessary investment in marketing etc.
Current ratio:
One of the most significant matrix of financial ratio is current ratio which state the
liquidity position of the company. This ratio basically state the ability of the company to pay-off
its current liabilities with the use of cash balance and cash generated from current assets. As per
above calculation, it is identified that the current ratio of Alpha Ltd in the current year is lower
than compared to previous year. Also, the current ratio of Alpha Ltd of year 2018 does not fulfil
the standard or ideal ratio requirement which the ability of Alpha to pay its current liabilities
from current assets has reduced in current year (Addo, Guegan and Hassani, 2018). The causes
of change or reduction in current assets is because of late payment receivables from debtors,
mismanagement of minimum cash balance within Alpha, increase in prepayments etc. The effect
of such change over the company is that the brand impact and liquidity performance of company
are highly affected or get poor. However, the reduction in current assets will not affect the
decision of investors as they do not visualize current ratio of company while making investment
related decisions.
Debtors collection period:

The debtor's collection period means the period or days required for the company to
collect its payments from debtors or customers. This ratio basically state the efficiency
performance of the business. On the basis of above calculation, it is identified that the debtor's
collection period of Alpha Ltd in the year 2017 is 34 days which increase to 64 days in current
year i.e., 2018. This means Alpha company do not have the ability to collect its payment from its
customer on time. This change might be because of poor credit policy of company. Also, the lack
of discounts, EMI and online payment facility to customer causes reduction in the debtor
collection days of Alpha. However, this does not affect the decision of investors directly but
affect the investors decision indirectly (Ginting, 2021). It is because if the company fails to
receive payment from debtors on time than they are unable to manage the operation of business
which ultimately leads to temporary closer of business operation and losses. Hence, it is
important for the company to improve its average receivable period in order to enhance the
performance of the company and attract the potential investors towards the business for the
purpose of investment.
Creditors payment period:
This is another financial indicator which indicate the efficiency performance of company.
The creditors' payment period state the time or days company takes in order to pay the amount to
its creditors. As per the above calculations, the creditors' payment period of Alpha Ltd is
increases in the current year as compared to the previous year. The creditor's payment period of
Alpha company in the year 2018 is 176 days which is higher than compared to the previous
year's ratio of 60 days. This indicates the poor efficiency performance of company which directly
affecting the credit worthiness of Alpha Ltd. The causes of such unfavourable change or increase
in average payable payment days is poor credit policy of company. Further, the company unable
to receive its payment from customer or other sources on time the impact of which they are
unable to pay the creditors or suppliers on time (Nugroho, Arif and Halik, 2021). Hence, it can
be said that the biggest reason behind the change in the creditors' payment period of Alpha is
reduces in its debtors collection period. The effect of such change over Alpha company is that
the supplier will stop dealing with the company and stop the supply of raw material till they
receive their earlier dues. Hence, the company should maintain a strong relation with its supplier
so that they can understand company issue and support them.

Comment on company performance from a potential investor's perspective:
As per potential investor's perspective, it is identified that the overall performance of
Alpha Ltd is poor in the current year as compared to previous year. The low profitability,
efficiency and liquidity ratio indicate that the company are facing lots of difficulty in their
business operation as well as management. Thus, it is advisable to company such as Alpha Ltd
that they should not further invest in the company and all existing investors should wait for next
year to visualize whether the company will able to turnaround itself or not (Setiany, 2021).
However, selling the shares based on only current performance of Alpha is not a good decision
for investors.
CONCLUSION
After summing up the above information, it has been summarized or concluded that the
overall performance of Alpha Ltd in the year 2018 as compared to previous year is poor. Hence,
it is advisable to potential investors to not to further reinvest their earning or savings in the
company.

REFERENCES
Books and journals
Tello, K. and et.al., 2019. Validation of the tricuspid annular plane systolic excursion/systolic
pulmonary artery pressure ratio for the assessment of right ventricular-arterial coupling
in severe pulmonary hypertension. Circulation: Cardiovascular Imaging. 12(9).
p.e009047.
Belousova, T. A. and et.al., 2019. The financial literacy assessment among students majoring in
the field of finance. EurAsian Journal of BioSciences. 13(1).
Addo, P. M., Guegan, D. and Hassani, B., 2018. Credit risk analysis using machine and deep
learning models. Risks. 6(2). p.38.
Ginting, E. S., 2021. Ratio-Based Financial Performance Analysis of PT. Mustika Ratu,
Tbk. Enrichment: Journal of Management. 11(2). pp.456-462.
Nugroho, M., Arif, D. and Halik, A., 2021. The effect of loan-loss provision, non-performing
loans and third-party fund on capital adequacy ratio. Accounting. 7(4). pp.943-950.
Setiany, E., 2021. The Effect of Investment, Free Cash Flow, Earnings Management, and
Interest Coverage Ratio on Financial Distress. Journal of Social Science. 2(1). pp.64-69.
Fridson, M. S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide. John
Wiley & Sons.