Financial Analysis Report: Performance of Alpha Limited (2017-2018)

This report provides a comprehensive financial analysis of Alpha Limited, a UK-based manufacturing company, focusing on its financial performance between 2017 and 2018. The report begins with an introduction to the company, its operations, and a SWOT analysis, highlighting its strengths, weaknesses, opportunities, and threats. The main body delves into the roles of the accounting and finance departments, covering financial accounting, management accounting, tax and auditing functions, investment, financing, dividend, and working capital functions. The core of the analysis involves calculating and interpreting key financial ratios, including Return on Capital Employed (ROCE) and Net Profit Margin (NPM). The analysis reveals trends in the company's profitability and efficiency, discussing factors affecting these ratios and suggesting areas for improvement. The report concludes with a summary of the findings and recommendations for enhancing Alpha Limited's financial performance.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Role of accounting and finance function in an organization.......................................................3
MAIN BODY ..................................................................................................................................5
TASK 2............................................................................................................................................7
Ratio Calculation and Interpretation and Analysis of the Performance of Alpha Limited.........7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
Books & Journals......................................................................................................................12

INTRODUCTION
The accounting and finance department plays a crucial in leading the company's growth.
It typically includes various functions such as planning, auditing, accounting, summarizing and
controlling the company’s finances (Yee and et.al., 2017).
This study will include a brief introduction and SWOT(strength, weakness, opportunities and
threats) analysis of Alpha limited, role of accounting and finance department in the organization
under which some points are covered in accounting department that is financial accounting,
management accounting, Tax function, auditing function, and under the finance department these
points are covered that is investment function, financing function, dividend function and working
capital function. Further it will calculate return on capital employed, net profit margin, current
ratio, debtor's collection period and creditors payment period (Booth, 2018).
TASK 1
Role of accounting and finance function in an organization
Introduction
Alpha limited is a manufacturing company in United Kingdom, established in 1954.Alpha
limited deals in manufacturing fabricating sheet metals in UK. It is one of the leading industries,

which supplies sheet metal fabrication to the various manufacturing sectors, the company is also
planning of expanding its operations in next ten years. Alpha manufacturing limited has over 100
people working for the company (Busco, and Quattrone, 2015).
The SWOT analysis of the Alpha limited:
Strength
 Effective fabrication services.
 Implementation of advanced
technology.
Weakness
 Dealing in only a particular type of
service.
 Various competitors with updated
technology.
Opportunities
 Expansion the business globally
 Environmentally friendly plants
 Merger
Threats
 Government policies
 increase in taxation policies
 Enforcement of environmental laws
Competitors
Strength
 The strength of the company is that the fabrication services which the company is
providing are extensive and they implement the most advanced computer aided
technologies (Crowther, 2018).
 The fabrication services are available at the Alpha manufacturing company is extensive,
as they provide nationwide delivery which is a strength for the company.
Weakness
 Dealing in only sheet metal fabrication could be considered weakness as the company is
only specialized in one sector and the entry of a strong competitor can beat the company.
Opportunities
 Opportunities with the Alpha limited is that they could expand their business in various
countries and it could give the company to cover the market worldwide.
 Merger with the innovative company or any other bug company could be a great
opportunity for the company to expand its operations.
Threat

 The threats of Alpha manufacturing could be change in government policies, increase in
tax rated and environmental laws could be enforced by the law etc.
 New entry of competitors could be treated as innovative ideas can strike any person's
mind.
MAIN BODY
Accounting and finance are the crucial factors in the management of any organization or
business. The flow of funds of Alpha limited can be managed by keeping proper accounting for
the income and expenses. The responsibility of accounting department is to record and report the
cash-flow transactions of an organization or business. The department is responsible for accounts
receivable and payable, payroll, financial reporting and maintaining the financial controls (Otley,
2016).
The accounting department is concerned with financial accounting or financial
accountancy which is the process of recording, summarizing and preparation of financial
statement such as income statements, Balance sheet etc. in order to keep a track on the financial
position of Alpha limited. The information is needed by the external parties like creditors,
investors and tax authorities in order to know the financial condition of the company.
Income Statement
Balance sheet

Management accounting or cost accounting is another function of the accounting
department as the department are required to prepare the internal reports, analyses the business
cost which aids the managers in decision making process. However, Management accounting
helps the accounting department in recording and analyzing the organizational activities its
internal company use for increasing the efficiency and productivity of Alpha limited.
Planning, decision and control
Management accounting is helpful tool that helps business in making correct plan by
looking at financial statements and other report of business. By this way company can take
effective investment decision and can increase its rate of return over its investments.
Management accounting is beneficial in controlling over unnecessary expenditures and
controlling over debt of business so that net profit can be increased.
Another crucial function of accounting department is performed tax function, tax
accounting's focus is in tax payments and returns. They ensure that Alpha limited comply with
tax laws and fill the federal and income tax returns on time (Otley, 2016). Latest tax figure of
alha ltd
Auditing function is a necessary function for the organization that is needed to be
perform by the accounting department to ensure that the company's financial statements are fair
and accurate representing the financial position of the company. The auditor of Alpha limited not

only evaluate the financial statements but also examine whether the system of company is
operating accordingly (Jaques, 2017).
Finance department plays a significant role in an organization, which oversees activities
such as financial planning and management activities, reporting, budgeting, forecasting and
creating the value. It also aids in reducing the cost of capital and increase the value of firm and
investment opportunities as managing the finance can create a many opportunity to explore
investments. It provides Finance department to play many other functions, some of them are
discussed below:
Investment function: Allocation of capital to long term assets in order to get maximum
return in future helps the organization to earn profit. Investment decision is concerned with two
aspects, Evaluating the new investments in context with profitability and comparison between
cut-off rates against new and prevailing investments. Allocation of Alpha limited fund is decided
by the finance managers, decisions such as capital budgeting decisions, management of working
capital, buying of assets etc. An investment decision should generate profits, revenue, and save
cost to the Alpha limited company (Anderson-Gough, 2018). figures of investment
Finance function: It is the part of financial management which is concerned with the
activities of planning and controlling the financial resources. Finance function also involves the
utilization and acquisition of funds which are necessary for efficient operation. Alpha limited
cannot functions well without finance function, hence it is the lifeblood for a business. It is the
source to operate any business as it provides fund and acquires money (Otley, 2016).
Loan figures and share capital
Loan figure: 750 in 2017 and 1500 in 2018
Share capital: 1162.50 in 2017 and 1,425 in 2018
Dividend function: This is one of the most crucial decision made by finance managers, it
refers to the policies that managers formulate in relation with earning for distribution of divided
among the shareholders. Distribution of dividends determines the earning between retained
earnings and payment to shareholders. A best dividend decision is considered when the wealth of
shareholders increases with an increment in the value of company's shares (Zietlow and et.al.,
2018). The motive of a financial management is to maximize the shareholder's wealth; therefore,
the manager should have ability to create a win situation for shareholder as well as for the
company.

Figures of dividend
Working capital function: Working capital function is part of finance management which
ensured the liquidity of Alpha limited by monitoring the accounts receivables and payables, debt
and stock management. This function help Alpha limited in running the business smoothly and
effectively as working capital function enable the company to pay the expenses like salaries of
the employees, payment to suppliers, administrative expenses etc. It also maintains the
goodwill of Alpha limited as no employees, creditors or suppliers will be interested in dealing
with Alpha if the working capital of the company is poor (Duska, Duska, and Kury, 2018).
TASK 2
Ratio Calculation and Interpretation and Analysis of the Performance of Alpha Limited
(i) Return on Capital Employed
Return on Capital Employed is a tool for financial analysis of a company's performance.
It is a ratio that measures the profitability and efficiency of a company. This ratio is calculated to
measure the efficiency of company in generating profits from the capital of the company. It
shows investor how much profit per unit of capital is generating (Chakrabarti, 2016).
The formula for calculating Return on Capital Employed is:
Return on Capital Employed = Operating Profit/Total Assets – Current Liabilities
*100
2017 (£000) 2018 (£000)
Operating Profit 375 412.5
Total Assets 2235 4035
Current Liabilities 322.5 1110
Total Assets – Current Liabilities 1912.5 2925
ROCE = Operating Profit/Total Assets – Current Liabilities *100 19.60% 14.10%
Working Note:
Operating Profit = Gross Profit - Operating Expenses

Therefore, in the year 2017 operating profit is equal to 675-300 = 375 & in the year 2018
operating profit is equal to 750-337.5 = 412.5
Interpretation:
Return on Capital Employed ratio indicates the intensity of efficient use of capital. A
higher ratio ensures more efficient use of capital employed and vice versa. In the year 2017,
Alpha limited has ROCE equal to 19.60% whereas in the year 2018, it has fallen down to
14.10%. The reason behind falling of ROCE in year 2018 as compared to 2017 is due to increase
in current liabilities of Alpha Limited. In-spite of increase in operating profit in 2018 as
compared to 2017, the ROCE has decline due to the employment of more current liabilities.
Return on Capital Employed of Alpha Limited can be improved in future by reducing its current
liabilities. Current liabilities can be reduced by making more of cash purchases and reducing
outstanding expenses. Furthermore, it can also cut its operating expense cost which in turn will
increase the operating profit and thus raising the Return on Capital Employed of company. An
improvement in Return on Capital Employed will attract potential investors to invest in
company's stake.
(ii) Net Profit Margin
Net Profit Margin ratio is an approach to measure the net income of a company in respect
to the total sales of the business. It is a tool to check how efficiently a company is converting its
total sales into net profit. A higher net profit margin signifies a sound financial position of the
company. It shows investor how much profit per unit of sales is generating (Yasa and Wirawati,
2016).
The formula for calculating Net Profit Margin is:
Net Profit Margin = Net profit/Sales*100
2017 (£000) 2018 (£000)
Net Profit 300 262.5
Sales 2400 3000
NPM = Net profit/Sales*100 12.50% 8.75%
Interpretation:

Net Profit Margin ratio indicates the amount of net profit generated as a percentage of
total sales of business. Net Profit Margin signifies the financial health of a company. In the year
2017, Alpha limited has net profit margin of 12.50% whereas in the year 2018, it has fallen down
to 8.75%. In-spite of increase in sales in the year 2018 as compared to year 2017, net profit
margin of Alpha Limited has declined. The reason behind this decline is due to the rise in
purchases and operating expenses of Alpha Limited. The company is able to generate lesser per
unit profit in year 2018 than in the year 2017. Alpha Limited can improve its value of net profit
margin in future by increasing the per unit selling price of its product. It can further decrease its
fixed and variable costs to generate more profit. There should be measures taken to control and
administer the finance cost and operating expenses. These expenses reduce the profitability of
the business concern. A higher net profit margin will lead to growth and expansion of Alpha
Limited. It will also motivate potential investors to invest in shares of company.
(iii) Current Ratio
Current Ratio measures the liquidity of the company. Current Ratio expresses the
company's ability to pay its short-term obligations. It is also called the working capital ratio. It
defines a proportion between company's current assets and current liabilities. A current ratio of
2: 1 is considered to be an ideal current ratio for any business concern. When current assets of a
company are just double than its current liabilities, it is considered to be a satisfactory position.
Though current ratio of a company does not completely represent the liquidity or solvency
position of a company. A current ratio of less than one may not be considered as a sound current
ratio (Yuliana, Datien and Si, 2017).
The formula for calculating Current Ratio is:
Current Ratio = Current Assets/Current Liabilities
2017 (£000) 2018 (£000)
Current Assets 757.5 1035
Current Liabilities 322.5 1110
CR = Current Assets/Current Liabilities 2.34: 1 0.93: 1
Interpretation:

Current Ratio of a company indicates the ability of a firm to cover its short-term
obligations by using its current assets. It expresses the liquidity and solvency position of a
company. The liquidity and solvency position of Alpha Limited has levelled down. The current
ratio of Alpha Limited has gone down from 2.34 to 0.93. In the year 2017, the current ratio of the
company is 2.34: 1 which is considered a sound ratio while in the year 2018, the current ratio is
0.93: 1 which below the ideal ratio. The sole reason behind the decline of current ratio is the
employment of higher current liabilities in the business. There has been a dramatic growth in
current liabilities from 322000.5 pounds to 110000 pounds. The current ratio of Alpha Limited
can be improved by declining current liabilities in business by way of reducing credit purchases,
outstanding business expenses, etc. An improved current ratio will increase the liquidity and
solvency of Alpha Limited which in turn will attract potential shareholders.
(iv) Average Receivable Days/ Debtors Collection Period
It measures the average collection period taken to collect the trade debts of the company.
Debtors are the persons who have purchased goods on credit and thus owe money to the
company. These are the current assets of a firm. It is concerned with the conversion of trade
receivables or debtors into cash or cash equivalents. A low debtor collection period indicates
increased efficiency and vice versa (Charitou and et.al., 2016).
The formula for calculating Debtors Collection Period is:
Debtors Collection Period = Receivables/Sales*365
2017 (£000) 2018 (£000)
Receivables 450 600
Sales 2400 3000
DCP = Receivables/Sales*365 68 Days 73 Days
Interpretation:
Debtors Collection Period indicates the average period a firm takes to collect its trade
receivables from its debtors. A low average collection period signifies a positive image of
company as the company does not take a long time to convert its receivables into cash. In the
year 2017, Alpha Limited has a sound debtor collection period than in comparision in year 2018.

A rising debtor collection period decreases the efficiency of firm as cash is received late on an
average business. The debtor collection period of Alpha Limited can be improved in future by
framing strict credit policies and regulations. A diligent follow up process from debtors is
necessary to reduce the debtors' collection period. The time frame in which debtors make
payment should also be reduced. Alpha Limited can also charge interest on outstanding debt
which will comply debtors to make payment on time. Debtors Collection Period can be
improved by offering discounts to debtors on early repayment of their trade debts.
(v) Average Payable Days/ Creditors Collection Period
Creditors Collection Period measures he average time a business concern takes to pay its
trade debts to creditors. Creditors are persons from whom goods are purchased on credit. A high
Creditors Collection Period signifies the company's ability to conserve cash and delay payment
of creditors. This could be possible if there are healthy and good terms between company and
vendor. A business should take full advantage of trade credit available to it which will help in
reserving cash in the business for a longer time (Onar, Oztaysi and Kahraman, 2018).
The formula for calculating Creditors Collection Period:
Creditors Collection Period = Payables/Purchases*365
2017 2018
Payables 285 1050
Purchases 1350 2400
CCP = Payables/Purchases*365 77 Days 160 Days
Interpretation:
Creditors Collection Period indicates the average period a firm takes to pay its trade
payables to its creditors. In the year 2017, Alpha Limited had a Creditors Collection Period of 77
days and in the year 2018, the Creditors Collection Period was 160 days. A Creditors Collection
Period of 160 days signifies a company ability to hold cash for longer period comparatively. It
reflects better credit terms with vendor. The Creditors Collection Period has improved in the year
2018 which reflects more sustainability of cash in the business. A negotiation on payment terms
with creditors will help in improvement of average payable days. Stock Control Process can be