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Analyse reasons for the performance of a selected business by the use of nancial ratios.

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Introduction

Transfer-Encoding: chunked I am going to examine the financial statements of Alpha Ltd, a food retailer. I will be using ratios to measure solvency, profitability and efficiency of the company. Finally, I will analyse reasons for the performance of Alpha Ltd. Solvency ratio Solvency ratios measures the ability of Alpha Ltd to settle their short term debts. These ratios allow managers and other interested parties to monitor Alpha Ltd’s cash position. 1. Current ratio measures the ability of Alpha Ltd to meet its liabilities or debts over the next year or more. Formula: Current ratio = Current Assets Current Liabilities = £75000 £50000 = 1.5:1 Alpha Ltd’s current ratio of 1.5:1 is very close to a representative current ratio of 1.6:1. This means that Alpha Ltd are now in a position to settle their debts on time. This puts Alpha Ltd in a positive position. Alpha Ltd can improve their current ratio by rising more cash through the sale of fixed assets or the negotiation of long-term loans. ...read more.

Middle

This means that Alpha Ltd are working efficiently; as a food retailer, they are able to sell their stock quickly before perishable items are no longer in date. They can improve their stock turnover ratio by holding lower levels of stock or to achieve higher sales without increasing stock levels. 1. Debtors’ collection period calculates the time typically taken by a business to collect the money that it is owned. Formula: Debtors’ collection period = Debtors X 365 Turnover = £5000 £1200000 = £1825000 £1200000 = 1.52 days Alpha Ltd are able to gain their cash within 1.52 days which means they are running their business efficiently. They are able to gain from their debtors’ quickly because the majority of their customers pay by cash. Alpha Ltd can improve their debtors’ collection period by reducing the credit period on offer to customers or by insisting on cash payment. Profitability Ratios Profitability ratios assess the amount of gross or net profit made by Alpha Ltd in relations to Alpha Ltd’s turnover or the assets or capital available to it. ...read more.

Conclusion

= Operating Profit X 100 Capital Employed = 150000 X 100 275000 = 15000000 275000 = 54.55% Alpha Ltd’s return on capital employed is 54.55% which is exceptional because a typical ratio is between 20-30%. They have used the money very efficiently to generate profits. To improve their ROCE by increasing its operating profit without raising further capital or by reducing the amount of capital employed, for instance, paying off a long term debt. In conclusion, Alpha Ltd have done very well. They are able to settle their debts on time, and also can settle these debts despite selling their stock. In addition, Alpha Ltd are using their assets very efficiently to generate sales, are able to convert their stock into sales 15.5 times a year or every 23.55 days and are able to gain their cash within 1.52 days from their debtors. Lastly, for every £1 of sales they make a gross profit of 22.5p, every £1 of sales they make a net profit of 8.33p and their return on capital employed is 54.55% which means they have used the money very efficiently to generate profits. Reference – A2 business studies by Malcom Surridge and Andrew Gillespie ...read more.

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