Financial Performance Analysis: Ratio Analysis of Alpha Ltd's Finances

This report provides a comprehensive financial ratio analysis of Alpha Ltd, examining its performance over two years (2017 and 2018). The analysis includes calculations and interpretations of key financial ratios such as Return on Capital Employed (ROCE), Net Profit Margin, Current Ratio, Average Receivable Days (Debtors collection period), and Average Payable Days (Creditors collection period). The report highlights the importance of these ratios in assessing a company's profitability, efficiency, and financial health, using formulas and data to demonstrate trends and provide insights into Alpha Ltd's financial position. The analysis reveals fluctuations in profitability and liquidity, offering a detailed perspective on the company's financial strengths and weaknesses, and concludes with recommendations based on the findings.

Financial decision making part 2

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Return on capital employed and its importance......................................................................3
2. Net profit margin.....................................................................................................................4
3. Current ratio............................................................................................................................5
4. Average receivable days/Debtors collection period................................................................5
5. Average payable days/Creditors collection period.................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting ratio is the comparison of two or more financial date which are used for
analysing the financial statement of company. It is the effective and valuable tool which is used
by the shareholders, creditors and all kind of stakeholders in order to understand the profitability,
strength and financial status of companies. The present report is based on the Alpha Ltd
company (Agrawal, 2018). This report will discussed and calculate by different ratios for
company. This is effective and valuable for the company or evaluate result and position between
two years. The main purpose and importance of ratio analysis are to evaluate or analyse the
financial performance of the firm in terms of risk, profitability and efficiency. This help to bring
the attention of the management to such area.
MAIN BODY
1. Return on capital employed and its importance.
Return on capital employed is the profitability ration that measures the efficiently a
Alpha Lid can generate profits from its capital employed by comparing the new operating profit
to capital employed. This is the long term profitability ratio because its hows assets are
performing while taking into the consideration long term financing. This ratio have great
importance in Alpha Ltd company because this provide better indication of financial
performance for the company with effective debts (Bischof, Laux and Leuz, 2019). This more
complicated because this cannot calculate easily. This provide perfect calculation of cost equity
in workplace in effective manner. With the help of this ratio company manager is easily able to
understand their cost of equity is correct or related with performance or not.
Formula of return on capital employed:
= Net operating profit / Employed capital * 100
Employed capital = Total Assets – Current Liabilities
Particulars Year 2017 Year 2018
Net operating profit 300 262.5
Total assets 2235 4035
Current liabilities 322.5 1110
Employed capital 1912.5 2925

Return on capital employed 15.69% 8.97%
The return on capital employed ratio is shows the much profits each dollar of employed
capital generate. The higher ration is more favourable its means more profit. In year 2017 return
on capital employed is 15.69% or in 2018, 8.97%. The profit is higher in 2017 as compare to
2018. For instance, a return of 2017 is more as compare with 2018 that means is that company
face lower profit in 2018.
The main causes which affect the returns capital employed which is in 2017, total assets
and liabilities are lower as compare to 2018. This is the main reason by which Alpha Ltd
company got lower profit in 2018. Here, is company manager makes the proper list and makes
control on their expenses.
2. Net profit margin
The net profit margin is equal to the net income or profit is generated as a % of revenue.
This measurement is reveals a amount of profit that a business can extract from its total sales.
The net sales part of the equation is gross sales. This is important for understanding effective
manner. This helps to investors in order to assess the management is generating enough profit
from its sales and operating costs and overheads costs. This is one of the best indicators of
financial health (Chattopadhyay, Lyle and Wang, 2016). It is the last line of income statement
which shows the figure that are concerns most people who are use this statement in effective
manner. This help to improve their management skills of Alpha Ltd company in effective
manner.
Formula of Net profit margin:
= Net income / Total sales * 100
Particulars Year 2017 Year 2018
Net income 300 262.5
Total sales 2400 3000
Net profit margin 12.50% 8.75%
The net profit margin ratio is shows a great and effective profit margin of company in the
year. This provide the actual % values for business by calculating it in effective manner or using

proper formula of net profit margin. Profit margin is higher in 2018 as compare with 2018
because net income is low in 2018 and sales are high in 2018. Net income in 2017 are 300 and
sales 2400. As per that, calculation of Net profit margin is low in 2018 as compare with 2017.
This shows lower profits margin in 2018.
3. Current ratio
Current ratio is shows ability of company in order to meet its financial obligations by
including debts, payments, taxes and payroll. This shows the short term obligations of business
and Alpha Ltd. This ratio is looks the current assets and current liabilities which are have to paid
off in then a year (Lutilsky, Liović and Marković, 2018). This is important because its
measurement short terms liabilities are due to within the next year. This is important and
effective for company.
Formula of current ration:
= Current assets / Current liabilities
Particulars Year 2017 Year 2018
Current assets 757.5 1035
Current liabilities 322.2 1110
Current ratio 2.3510242086 0.9324324324
This ratio can be both too low and high. In 2017, the current ratio is 2.3 and in 2018, 0.9
is current ratio. As per this, current ratio is high in 2017, this suggest to shareholders that the
company is sitting on its cash. Its means that, manager of Alpha Ltd pays their payments in cash.
The current ratio is higher in 2017 as compare to 2018. The main cause of this is company more
pays in 2017 as compare by 2018.
4. Average receivable days/Debtors collection period
Debtors days refers to the ample number of days which is company takes to collect cash
from their credit sales. This also known as days sales in outstanding or the receivable days.
Average receivable days or debtors collection period is most important and effective for
company because this rely heavily on the receivables for their cash flows (Marín Salazar and Ilić,
2018). This helps to company in order to reduce the risk of customers not paying the money they
one.

Formula of Average receivable days/Debtors collection period:
= Average Accounts Receivable / Annual Total sales * 365 days
Average Accounts Receivable:
= year 2018 account receivable + year 2017 account receivable / 2
Particulars Year 2017 Year 2018
Accounts receivable 450 600
Average receivable 450 750
Total sales 2400 3000
Average receivable in days 68.4375 91.25
For instance, in 2017 days of collection is low as compare with 2018 because in this year
the total sales are more. This is good for the company profits because this increases sales of
company in effective manner. Numbers of days in 2017 is 68 and in 2018 is 91. In the, 2018 is
takes time for collecting money from debtors in effective manner. Average receivable days or
debtors collection period is higher or more in 2018 as compare with 2017. The main cause of this
is sales is higher in 2018.
5. Average payable days/Creditors collection period
Average payable days or creditors collection period is a ratio which is measures the
averages number of days which takers a business yo pay its vendors for their purchases which
are made on credit (Messa and Wang, 2018). It is the estimates the averages times for business in
order to settle its debts with trade suppliers. This maximise its cash flow should takes as soon as
possible to pay its bills. Through, this company have great advantages which is trade credit
available.
Formula of Average payable days/Creditors collection period:
= Average payable days/Creditors collection period / total credit purchase * 365
days
Average Accounts Payable:
= year 2018 account Payable + year 2017 account Payable / 2
Particulars Year 2017 Year 2018

Accounts payable 285 1050
Average accounts payable 285 810
Total credit purchase 1950 2625
Average accounts payable in days 53.3461538462 112.6285714286
This period can help to management of company in order see how efficient the company
has been over the past year with the various credit decisions in effective manner. The number of
Average payable days/Creditors collection period are higher in 2018 year as compare with 2017.
This days are increases in 2018 for work in the effective manner. It create the various
opportunity for business and Alpha Ltd company in order to collect their credit payments. In
2017, 53 days for collecting payments but in 2018, 113 days for collect payments. This process
will shows the growth of company in effective manner.
CONCLUSION
From the above study it had been concluded that the accounting ratios has important for
business in order to know about the position of company in effective manner. This has shows a
different ratio such as return on capital employed, net profit margin, current ratios, average
receivable days and average payable days. As per the above discussion it had been concluded
that the company has the effective has high profit and earnings in 2017. In 2017, company got
the extra profit margin and return on capital employed. This gave the effective and positive
impact on company growth. In 2018, company's profit margin has low as compare with 2017
because here company have low net income against of sales. The sales has high in 2018 with
lower income rate.

REFERENCES
Books and Journals
Agrawal, R. K., 2018. Principle of Management Accounting. Educreation Publishing.
Bischof, J., Laux, C. and Leuz, C., 2019. Accounting for financial stability: Lessons from the
financial crisis and future challenges.
Chattopadhyay, A., Lyle, M. R. and Wang, C. C., 2016. Accounting data, market values, and the
cross section of expected returns worldwide. Harvard Business School Accounting &
Management Unit Working Paper, (15-092).
Lutilsky, I. D., Liović, D. and Marković, M., 2018, January. THROUGHPUT ACCOUNTING:
PROFIT-FOCUSED COST ACCOUNTING METHOD. In International Conference
Interdisciplinary Management Research XIV, Opatija–Croatia. 18–20 May 2018..
Marín Salazar, D. A. and Ilić, I., 2018. Accounting information and the structure of corporate
debt covenants (Master's thesis, Universidad EAFIT).
Messa, G. V. and Wang, Y., 2018, October. Importance of accounting for finite particle size in
CFD-based erosion prediction. In ASME 2018 Pressure Vessels and Piping Conference.
American Society of Mechanical Engineers Digital Collection.