Report to Board of Directors for the substantial investments

This report provides a detailed analysis of liquidity ratios, profitability ratios, efficiency ratios, and investor ratios for two companies. It also includes recommendations for investment based on the findings.

REPORT

TABLE OF CONTENTS
Report to Board of Directors for the substantial investments..........................................................1
(a) Liquidity ratios...........................................................................................................................4
(B) Profitability of Companies.........................................................................................................4
© Efficiency ratio............................................................................................................................5
(d) Investor ratio..............................................................................................................................5
REFERENCES................................................................................................................................7

Report to Board of Directors for the substantial investments.
RATIO ANALYSIS
Particulars Formula Alpha Beta
Profitability Ratios
Return on
capital
employed
Net operating
profit/Employe
d Capital 15.14% 14.18%
Employed
Capital
Total assets –
Current
liabilities
(147000+1149
50)-53950 208000
(206000+1222
20)-127220 201000
Net operating
profit 31500 28500
Return on
Equity
Net Income /
Shareholder's
Equity 7.40% 12.44%
Net Income 11500 25000
Shareholder's
Equity 155500 201000
Gross profit
margin
Total Sales –
COGS/Total
Sales 20.00% 25.00%
1

COS 336000 236250
Sales 420000 315000
Operating
profit margin
Operating
Income/ Net
Sales 7.50% 9.05%
Operating
income 31500 28500
Revenues 420000 315000
Assets
Turnover
Sales / Net
assets 270.10% 156.72%
Sales 420000 315000
Net assets 155500 201000
Liquidity Ratios
Current assets 114950 122220
Current
liabilities 53950 127220
Inventory 70875 79800
Quick assets 44075 42420
Current ratio
Current assets /
current
liabilities 2.13 0.96
Quick ratio
Current assets -
(stock +
prepaid
expenses) 0.82 0.33
2

Efficiency Ratios
Inventory 70875 79800
Debtors 44075 42420
Creditors 32530 81720
Days 365 365
COS 336000 236250
Sales 420000 315000
Inventory
days
Inventory/
COS*365 76.992 123.289
Debtor days
Debtor/
Sales*365 38.30 49.15
Creditor days
Creditor /
Sales*365 28.27 94.69
Investor Return
EPS
Total Earnings/
Outstanding
shares
Total
Earnings 11500 25000
Outstanding
Shares (in
millions) 8400 12800
EPS 1.369 1.95
3

Gearing Ratio
Long-term debt 52500 0
Shareholder's
equity 155500 201000
Debt-equity
ratio 0.34 0.00
(a) Liquidity ratios
Current ratio: Current ratio reflect firm capability to make payment of current liability on time
(Kamar, 2017). Current ratio value is 2.13 for Alpha and same is 0.96 for Beta. Thus, Alpha is
in much better condition than Beta and have double current asset then current liability.
Quick ratio: Quick ratio value for Alpha is 0.82 and same for Beta is 0.33. On this basis it
can be said that Alpha is stronger than Beta on this position. Alpha relative to beta is in position
to pay majority of portion of its current liability by using liquid assets.
(B) Profitability of Companies
Profitability ratios are calculated for assessing the financial performance of company.
The financial performance of the company can be measured using various ratios given for the
profitability like return on capital employed, return on equity, gross profit and net profit margin
ratio (Dicle, and Meyer, 2018).
Return on capital employed of alpha is 15.14% where the of Beta is 14.18% this show
that bot the companies are effectively utilising its resources for generating required return over
the investments made. Both the companies are showing good returns over the invested capital.
Return on equity of company of alpha is 7.40 % and that of beta is 12.44%. IT could be
interpreted that the investors are getting heigh returns in beta as compared with the alpha. This
shows the funds invested of investors are being used by company in generative productive
operations (Kamar, 2017).
Gross profit margin shows how effectively companies are carrying their operations
keeping the cost of sales to minimum. Companies are required to utilize effective strategies and
steps where they can minimise the costs and generate more profits. Alpha is having gross margin
4

of 20% and beta of 25%. It could be analysed that alpha is having higher revenues than beta but
beta is more effectively managing its costs and generating higher gross margins.
Net profit margin of alpha is 7.50% where of beta is 9.05%. Net profit margin shows the
amount that is left with company after carrying out all the operations and activities. Ultimate
goal of every business is to earn higher profits. From the investor point of view beta is having
high return as compared with alpha despite of having higher revenues. Net profit margin can be
increased by increasing the sales and more effectively managing its cost operations
© Efficiency ratio
Asset turnover ratio: Asset turnover ratio indicate efficiency with which firm is making
effective use of current assets in the business (Zainudin and Hashim, 2016). Asset turnover ratio
of Alpha is 2.70 and same of Beta is 1.57. Former is utilizing asset in better way then latter one.
Inventory days: Inventory days ratio reflect number of days in which inventory convert into
sale (Williams and Dobelman,2017). Inventory days for Alpha is 76.92 and same for Beta is
123.28. It can be said that Beta is quickly selling its product in the market and due to this reason,
it is more efficient then Alpha on this front.
Debtor days: Debtor days indicate days in which payment is received from the debtors.
Debtor days value for Alpha is 38.30 and same for Beta is 49. This indicate that Alpha collect
payment from debtors quickly then Beta and due to this reason, it can be said that on this front
Alpha is in best position.
Creditor days: Creditor days reflect number of days in which payment is made to the
creditors. Creditor days for Alpha is 28.27 and same for Beta is 94.69. Facts revealed that Alpha
is quickly making payment to creditor’s then Beta and there is huge difference between value of
the ratios across the business firm. Hence, it can be said that Alpha in more efficient on this front
then beta.
(d) Investor ratio
EPS: EPS refers to the earning per share means amount that each unit of share hold by the
shareholder receive from income. EPS of Alpha is 1.369 and same of Beta is 1.95. this reflect
that shareholders of the Beta are receiving more return then Alpha on each unit of share they
hold.
5

Debt equity ratio: Debt equity ratio reflect the capital structure of the firm (Arkan, 2016). Value
of the ratio for the 0.34 and same for Beta is 0. Alpha is in better position than beta because latter
one has to pay heavy amount as dividend then former one. Hence, cost of capital is high in case
of Beta.
Investment must be made in Beta because its profitability is high and EPS is good. Moreover,
Beta cash management is also good as it is receiving amount from debtors earlier then payment
made to creditors. However, it is less efficient then Alpha but overall it can be said that it will be
better to invest in Beta.
6

REFERENCES
Books and Journals
Dicle, M.F. and Meyer, J., 2018. Financial Statement and Ratio Analysis: A Classroom
Perspective.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study
in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia. 79(1). pp.13-26.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting and Accounting. 14(2). pp.266-278.
Bhavani, G., 2018. Financial Statements Analysis on Tesla. Academy of Accounting and
Financial Studies Journal.
Kamar, K., 2017. Analysis of the effect of return on equity (ROE) and debt to equity ratio (DER)
on stock price on cement industry listed in Indonesia stock exchange (IDX) in the year of
2011-2015. IOSR Journal of Business and Management. 19(05). pp.66-76.
7