Interpret the contents of a trading and profit and loss account of a food retailer.

Authors Avatar by ellouise1997hotmailcom (student)

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 and interpret reasons for the performance of Alfa 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


                                          = 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 raising more cash through the sale of fixed assets or the negotiation of long-term loans.

  1. Acid test ratio measures the ability for Alpha Ltd. to pay its debts over a period of two or three months without requiring the sale of their stock.  

Formula: Acid test ratio = Current assets - Stock    

                                              Current Liabilities

                                          = £75000 - £60000                                             


                                          = £15000


                                          = 0.3:1

Alpha Ltd.’s acid test ratio of 0.3:1 is very close to a typical Acid test ratio of 0.4:1. This means that Alpha Ltd. are in a position to settle their short-term debts despite selling their stock. Alpha Ltd. can improve their asset test ratio by selling fixed assets or agreeing long-term borrowing.

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Efficiency Ratio

Efficiency ratios measure the effectiveness with which management controls the internal operation of Alpha Ltd. They measure three things, the extent to which assets are used to generate profits, how well stock is managed and the efficiency of creditor control.

  1. Asset turnover ratio measures Alpha Ltd.’s sales in relation to the assets used to generate these sales.

Formula:   Asset Turnover = Sales (Turnover)    

                                                  Net ...

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