Ratio analysis is the 1) Single most important technique of financial analysis in which quantities are converted into ratios for meaningful comparisons, with past ratios and ratios of other firms in the same or different industries. Ratio analysis determines trends and exposes strengths or weaknesses of a firm.
There are many reasons why the use of ratio analysis will benefit Alpha Ltd. Ratio analysis simplifies the financial statements and helps in comparing companies of different size with each other. In addition, ratio analysis helps in trend analysis which involves comparing a single company over a period. And lastly, it can highlights important information in simple form quickly; Alpha Ltd can explore their business performance by just looking at few numbers instead of reading the whole financial statements.
There are many internal stakeholders who will be interested in Alpha Ltd ratio analysis.2) Internal Stakeholders are anyone within the business such as managers, employees and shareholders. Managers will be interested in Alpha Ltd ratios because they can make use of business ratio to see if they are meeting their business objectives and using their resources effectively ; this will then allow them to highlight where they may need improving. In addition, employees will make use of the ratio to see if the business is stable and their jobs are safe. 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. Lastly, Shareholders will use the business ratio to make sure they are gaining the right dividends and if they are not, they may request a fairer share. Furthermore, there are external stakeholders.
3) External stakeholders are people outside a particular company who is affected by its success or failure, these include creditors, the government and competitors. Creditors will be interested in Alpha Ltd ratio analysis because they will use the ratios to see how much the business are earning and will know if they will be able to pay the bills. Moreover, the government will be interested because they will look at the ratios to set the corporation tax which depends on profits. Finally, Competitors will look at the ratios to see how the business are doing and they will draw up comparison to try to compete to get better profits.
There are five types of ratio analysis that Alpha Ltd can use to measure their financial performance. Firstly, there is liquidity ratio (solvency). 4) This ratio will measure the ability of the business to settle its debts in the short term; this is good because from this ratio Alpha will be able to know if they have the ability to pay off its short-term liabilities when they fall due, if they can’t, they will need to find ways to be able to, as it they may lead them into financial danger. Additionally, there is the efficiency ratio. 5) Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. This would be good for Alpha Ltd because it’s a quick and easy measure of their ability to turn resources into revenue.
4) Furthermore, profitability ratio asses the amount of gross or net profit made by the business in relation to the business’s turnover or the assets or capital available; this will be good for Alpha to use to see how much money they are making, and can easily see if there are any concerns (not making enough money). 4) In addition, gearing examines the relationship between internal sources and external sources of finance. It is therefore concerned with long-term financial position of the company. 4) Lastly, shareholder ratio measures the returns received by the owners of the company allowing comparison with alternative investments. For obvious reasons they are also called investment ratio.