• Join over 1.2 million students every month
• Accelerate your learning by 29%
• Unlimited access from just £6.99 per month
Page
1. 1
1
2. 2
2
3. 3
3
4. 4
4

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

Extracts from this document...

Introduction

Transfer-Encoding: chunked ï»¿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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

## Found what you're looking for?

• Start learning 29% faster today
• 150,000+ documents available
• Just £6.99 a month

Not the one? Search for your essay title...
• Join over 1.2 million students every month
• Accelerate your learning by 29%
• Unlimited access from just £6.99 per month

# Related AS and A Level Accounting & Financial Management essays

1. ## Evaluate the adequacy of accounting ratios as a means of monitoring business health in ...

* Facilitates inter-firm comparison: Ratio's can outline the things that are associated with successful and unsuccessful firms. So therefore it reveals the strong firms as well as the weak firms and ratios also show the overvalued and undervalued firms. * Helps in planning: Ratios also help keep track of the performance of the business.

Tesco do have other aims regarding environmental issues including reducing the levels of CO2 emissions from their distribution and transportation. It means that they should cut down on their total carbon footprint making them look better in the public eye.

1. ## Describe the key features of UK and EU nancial service legislation and regulation likely ...

This is achieved using a number directives that needs to be implemented. The first EU legislation is Second Bank Directive which gives permit to credit institutions to carry out any activities in the directive in the EU if it permitted in their home state.

2. ## Analyse the extent to which issues of nancial service ethics are effectively addressed.

Another example of unethical practice where banks did not show a duty of care to customers is when Lloyds pressurised staff to hit sales targets or risk being demoted and have their pay cut. This meant they would pressurise customers into buying products that they didn?t really need.

1. ## Produce a report evaluating the relative significance of solvency and profitability ratios in identifying ...

A business will make use of the current and acid test ratio to see the performance of the business.

2. ## Justify a proposed comprehensive and integrated nancial service package that is appropriate for the ...

I recommend to do this because although Ifter may qualify for the state pension, it?s a very small amount of money which is hard to live on. Therefore the earlier money gets put into an occupational pension the more money he will have in the long-haul thus letting him have a good lifestyle when he reaches a pensionable age.

1. ## There are many reasons why the use of ratio analysis will benefit Alpha Ltd

Also to make sure they are receiving a far pay in comparison of the business performance, and if they are not, they may be able to ask for a pay rise.