Financial Analysis Case Study: Alpha Limited's Performance Evaluation

This case study provides a comprehensive analysis of Alpha Limited's financial performance, focusing on key financial ratios from 2017 to 2018. The analysis includes the Return on Capital Employed (ROCE), Net Profit Margin, Current Ratio, Debtor Collection Period, and Creditor Collection Period. The study calculates these ratios, interprets their trends, and identifies potential reasons for changes in financial performance, such as outdated machinery, debt levels, and operational costs. It offers recommendations for improvement, including optimizing capital usage, reducing debt, managing inventory, and controlling costs. The case study references several academic sources to support its findings and conclusions, providing a well-rounded evaluation of the company's financial health and efficiency.

CASE STUDY

TABLE OF CONTENTS
TASK 2............................................................................................................................................1
Analysis of financial performance of Alpha Limited..................................................................1
REFERENCES................................................................................................................................5

·TASK 2
·Analysis of financial performance of Alpha Limited
1. ROCE- It is referred as the profitability ratio which measures the efficiency of an
enterprise in generating profits from its invested or employed capital in its business by making
the comparison of its net profit with that of the amount of capital employed by it. Furthermore,
capital employed is been computed by reducing the current liability from the total amount of the
assets (Caballero, Farhi and Gourinchas, 2017). In other words it is considered as the value of an
overall assets that are employed in the business unit and thus by employing the capital, it means
an entity is making an investment for the purpose of generating higher returns. Return on capital
employed is considered as the useful measure in respect of assessing the financial efficiency as it
helps the firm in analysing the factor of profitability that will be gained from the amount of the
capital invested.
Calculation of Ratios31-DEC-201731-DEC-2018Return on capital employed = Operation
Profit ×100
Capital Employed
375/1912.5 = 0.19 or 19%
412.5/2925 = 0.141 or 14%
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Interpretation- The above analysis shows that the ROCE ratio of Alpha Limited is
declining over the year which is not a positive sign in context of its performance. Higher the
ROCE ratio implies that the capital is been used optimally whereas lower ratio depicts that the
firm is not using its capital effectively (Ak and et.al., 2013). The reason behind the decreasing
ROCE of Alpha Limited is use of the outdated machinery and delay in paying off its debts.
Company should sale of its outdated or obsolete machinery which in turn would result in lower
base of its total assets and this leads to improve its ROCE ratio as by removing the unnecessary
assets allows for employment of lesser capital in order to facilitate same value of the production.
Other ways through which an organisation can improve its ROCE ratio is by paying off their
debts that in turn reduces the liabilities and hence the resulted value of the ratio get improved.
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2. Net profit margin ratio- This ratio means the amount of revenue that is been attained
after the deduction of all the expenses from the revenue. It is the ratio that reveals the value of
profits that could be extracted by the business from its entire sales. NP ratio is counted as
essential because it helps an investors in assessing that the management of the company is been
generating sufficient profits from its sales revenue after the payment of all its operating and the
overhead cost (Grizzle, Sloan and Kim, 2015). This ratio is accounted as the most essential
indicator regarding the financial health of the company.
Calculation of Ratios31-DEC-201731-DEC-2018Net Profit Margin = Net Profit
×100
Sales Revenue
300/2400*100 = .125 or 12.5%
262.50/3000*100 = .875 or 8.75%
Interpretation- From the above evaluation it has been reflected that the net profit margin
of Alpha Limited shows an declining trend from one accounting period to another which
indicates that its financial performance is decreasing with decline in the level of profitability.
Lower the ratio, lower value of the profits while higher the ratio reflects higher profitability. The
main grounds behind the decrease in the value of NP ratio of Alpha Limited is Increase in its
operating cost or expenses and finance cost the against the value of its sales. Alpha Limited must
take necessary measures in order to improve its NP ratio such as by removing its irrelevant or
unprofitable products and the service, by finding for the new customers, reducing the level of
inventory and by reducing the overhead cost.
3. Current ratio- It means a liquidity ratio that measures the ability of the company in
paying off its current obligations. It tells an investor about the effective and efficient use of the
short term assets made by the company for meeting its current payables and the short term debts.
Current ratio is been reflected as the most useful measure as it helps in knowing the liquidity
position of an entity's business. Moreover, it shows the capability of the firm in converting its
current assets in form of cash for paying their current liabilities.
Calculation of Ratios31-DEC-201731-DEC-2018Current ratio = Current Assets
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Current Liabilities
757.50/322.50 = 2.34
11035/1110 = 0.93
Interpretation- By interpreting the above results it has been seen that current ratio of
Alpha Limited is falling from 2017 to 2018. This clearly reflects that the liquidity position of
Alpha Limited is not good which in turn means that the company has reduced ability in
generating cash from its short term assets. This means that and the current debts of the company
is increasing more than the value of its current assets. An ideal current ratio stated as 2:1 means
that company must contain double the value of current assets over its liabilities (Altman, 2015).
In the year 2017, the current ratio of Alpha Limited accounted as 2.34 which shows an ideal
performance of an organization. However, during the year 2018 the ratio resulted as 0.93 which
indicates that an entity does not have sufficient liquid assets fro covering its current obligations.
In order to improve the current ratio, Alpha Limited should convert its receivable into cash on
quick basis, by making timely payment of its short-term liabilities, selling off its unproductive
assets, improving the value of its current assets by enhancing the shareholders funds and by
sweeping its bank accounts.
4. Debtor collection period- This refers to the average no. of the days the tat the firm
takes fro collecting its trade receivables that is period between presenting the invoice and
receiving the cash. In other words it is the period that the business takes in collecting its money
that is been owed by its debtors (Grizzle, Sloan and Kim, 2015). This period helps an enterprise
in comparing the real period of collection with that of its credit period. The sooner a debtor pay
the business, the better it is counted so shorter average receivable period is stated as better while
long period is a true indication of the late or the slow payments made by the debtors.
Calculation of Ratios31-DEC-201731-DEC-2018Debtors collection period = Trade
Receivable ×365
Credit Sales
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450/2400*365 = 68.4 days
600/3000*365 = 73 days
Interpretation- The computation of the average receivable period shows that as the year
passes the period is increasing which in turn means that Debtors of Alpha Limited takes a longer
period in making the payment. This clearly reflects that Alpha Limited must take care in
collecting its receivable on a faster basis so that its financial performance can be improved.
Alpha Limited should take appropriate measures for improving its receivable period by
negotiating the terms of payment with their suppliers, by offering adequate amount of discount
for the early repayment, by changing the terms of payment, By automating credit control,
seeking for credit control externally and improving the stock control. These measures will help
the company in creating better period of collecting the amount due on part of the debtors so that
smooth functioning could be attained in managing the routine activities of the business.
5. Creditors collection period- It means the average estimated time period which an
organization takes for settling or making payment of its debts to its trade suppliers. It is
considered as the most useful ratio for the firm to assess its liquidity position (Altman, 1968). It
is been computed by dividing the purchases with that of the trade payables and the resultant
number will be multiplied with the total number of the days in a year.
Calculation of Ratios31-DEC-201731-DEC-2018Creditors collection period = Trade
Payables ×365
Credit Purchases
285/1350*365 = 77.05 days
1050/2400*365 = 160 days
Interpretation- The assessment shows that the creditor’s collection period of Alpha
Limited is increasing over one period to another. This reflects that Alpha Limited takes a long
time in in paying off its liabilities and keeps its current liabilities outstanding for longer duration.
This also shows the firm is not having enough liquidity foe making payment to its creditors and
thus takes a long time. Shorter the average payment period indicates timely payment to the
creditors but it should not be very short as it directly means that an entity is not taking benefit of
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credit terms that is been allowed by the suppliers. For making this period shorter, Alpha Limited
must negotiate the terms of payments with its suppliers on the basis of the particular needs,
availing discounts for timely payment, setting up chasers, improving the control over the stock
and by changing the terms of payments.
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·REFERENCES
Books and Journals
Ak, B.K. and et.al., 2013. The use of financial ratio models to help investors predict and
interpret significant corporate events. Australian journal of management. 38(3). pp.553-
598.
Altman, E. I., 2015. Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy. The journal of finance. 23(4). pp.589-609.
Caballero, R. J., Farhi, E. and Gourinchas, P. O., 2017. Rents, technical change, and risk premia
accounting for secular trends in interest rates, returns on capital, earning yields, and factor
shares. American Economic Review. 107(5). pp.614-20.
Grizzle, C., Sloan, M. F. and Kim, M., 2015. Financial factors that influence the size of
nonprofit operating reserves. Journal of Public Budgeting, Accounting & Financial
Management. 27(1). pp.67-97.
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