THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF ACCOUNTING, BANKING AND FINANCE

DEPARTMENT OF ACCOUNTING AND FINANCE

BASIC TECHNIACIAN CERTIFICATE IN ACCOUNTANCY (BTCA)

ACADEMIC YEAR

2024/2025

A PROJECT REPORT ON ANALYSIS OF FINANCIAL STATEMENTS OF ALPHA

TECH LIMITED FOR FIVE YEARS 2020-2024

NAME: XXXXXXX
REG. NO: XXXXXXX
ACADEMIC YEAR: XXXXXXX
SUBMISSION DATE: XXXXXXX

SUPERVISOR: XXX
1
 DEDICATION
This work is dedicated to my beloved parents, whose unwavering support and encouragement have
been the foundation of my academic journey. I also dedicate this report to my project supervisor
Mr. Swedi and colleagues at the Institute of Finance Management, who have contributed
significantly to my learning and growth.

i
 ACKNOWLEDGEMENT
I would like to express my sincere gratitude to the Almighty God for granting me the strength and
perseverance to complete this project. Special thanks go to my supervisor Mr. Swedi for the
continuous guidance, support, and valuable feedback throughout the project. I am also thankful to
the management and staff of AlphaTech Ltd for providing the necessary financial data and support
required for the completion of this analysis. Lastly, my heartfelt appreciation goes to my family
and friends for their encouragement and moral support.

ii
 LIST OF ACRONYMS
A/P – Accounts Payable
A/R – Accounts Receivable
CA – Current Assets
CL – Current Liabilities
COGS – Cost of Goods Sold
CR – Current Ratio
D/A Ratio – Debt-to-Assets Ratio
D/E Ratio – Debt-to-Equity Ratio
DPS – Dividend Per Share
EBIT – Earnings Before Interest and Taxes
EPS – Earnings Per Share
GP Margin – Gross Profit Margin
ICR – Interest Coverage Ratio
IFM – Institute of Finance Management
LTD – Limited
NP Margin – Net Profit Margin
P/E – Price-to-Earnings Ratio
PPE – Property, Plant, and Equipment
QR – Quick Ratio
ROA – Return on Assets
ROE – Return on Equity
SE – Shareholders’ Equity
TA – Total Assets
TL – Total Liabilities
TZS – Tanzanian Shillings

iii
 LIST OF TABLES

Table 1 Formulas for Key Financial Ratios .................................................................................. 17

Table 2 Current Ratio (2020–2024) .............................................................................................. 20

Table 3 Quick Ratio (2020–2024) ................................................................................................ 20

Table 4 Gross Profit Margin (2020–2024).................................................................................... 21

Table 5 Operating Profit Margin (2020–2024) ............................................................................. 22

Table 6 Return on Capital Employed (ROCE) (2020–2024)........................................................ 23

Table 7 Return on Assets (ROA) (2020–2024) ............................................................................ 24

Table 8 Return on Equity (ROE) (2020–2024)............................................................................. 25

iv
 EXECUTIVE SUMMARY
This project aimed to evaluate the financial performance of AlphaTech Ltd over the period 2020
to 2024 using ratio analysis, a critical financial tool for interpreting and comparing performance
indicators. The main objectives were to assess the company's liquidity and profitability, analyze
performance trends, and provide practical recommendations based on the results.

To achieve this, key financial ratios were calculated using the company's summarized financial
statements. These included current ratio, quick ratio, gross profit margin, net profit margin, return
on assets (ROA), and return on equity (ROE). Trend analysis techniques and interpretations were
applied to understand the performance over the five-year period.

The results revealed that AlphaTech Ltd demonstrated a consistent improvement in profitability,
with increasing net profit and return on equity. However, liquidity ratios showed mixed
performance, especially the quick ratio, indicating potential cash flow challenges in later years.
The company maintained a healthy growth in revenue, assets, and equity.

In conclusion, while AlphaTech Ltd appears to be profitable and growing, it should enhance its
liquidity management to ensure it can meet short-term obligations. The findings provide valuable
insight into the financial strengths and risks facing the company and offer a solid basis for strategic
decision-making. Recommendations were also proposed to AlphaTech and the Institute of Finance
Management for continuous improvement in project-based learning.

v
 TABLE OF CONTENTS
DEDICATION ................................................................................................................................. i

ACKNOWLEDGEMENT .............................................................................................................. ii

LIST OF ACRONYMS ................................................................................................................. iii

LIST OF TABLES ......................................................................................................................... iv

EXECUTIVE SUMMARY ............................................................................................................ v

TABLE OF CONTENTS ............................................................................................................... vi

CHAPTER ONE ............................................................................................................................. 1

INTRODUCTION .......................................................................................................................... 1

1.0 Chapter introduction ............................................................................................................. 1

1.1 Background of Financial Statement Analysis ....................................................................... 1

1.2 Purpose of the Report............................................................................................................ 2

1.3 Techniques of Financial Statement Analysis ........................................................................ 2

1.4 Scope of the Study ................................................................................................................ 3

1.5 Summary of the Chapter ....................................................................................................... 4

CHAPTER TWO ............................................................................................................................ 5

OVERVIEW OF RATIO ANALYSIS ........................................................................................... 5

2.0 Introduction to Ratio Analysis .............................................................................................. 5

2.1 Importance of Ratio Analysis in Business Valuation ........................................................... 5

2.2 Objectives of Ratio Analysis ................................................................................................ 6

2.3 Types of Financial Ratios ..................................................................................................... 8

2.2.1 Profitability Ratios ......................................................................................................... 8

2.2.2 Liquidity Ratios ........................................................................................................... 11

2.2.3 Efficiency (Activity) Ratios ......................................................................................... 12

2.2.4 Gearing/Leverage Ratios ............................................................................................. 13

vi
 2.2.5 Investment Ratios......................................................................................................... 15

2.4 Advantages and Disadvantages of Ratio Analysis.............................................................. 16

2.4.1 Advantages of Ratio Analysis ...................................................................................... 16

2.4.2 Disadvantages of Ratio Analysis ................................................................................. 16

2.6 Formulas for Key Financial Ratios ..................................................................................... 17

2.7 Conclusion .......................................................................................................................... 18

CHAPTER THREE ...................................................................................................................... 19

PRESENTATION OF ANALYSIS AND DISCUSSION ............................................................ 19

3.1 Introduction ......................................................................................................................... 19

3.2 Ratio Calculations and Trend Analysis............................................................................... 19

3.2.1 Liquidity Ratio Analysis .............................................................................................. 19

3.2.2 Profitability Ratio Analysis.......................................................................................... 21

CHAPTER FOUR ......................................................................................................................... 26

CONCLUSION AND RECOMMENDATION ............................................................................ 26

4.1 Conclusion .......................................................................................................................... 26

4.2 Recommendations ............................................................................................................... 26

4.2.1 Recommendations to AlphaTech Ltd .......................................................................... 26

4.2.2 Recommendations to the Institute of Finance Management (IFM) ............................. 28

REFERENCES ............................................................................................................................. 29

APPENDICES .............................................................................................................................. 30

vii
 CHAPTER ONE

INTRODUCTION

1.0 Chapter introduction

This chapter introduces the concept of financial statement analysis as a crucial tool for evaluating
a company's financial performance and decision-making. It sets the foundation for the report by
explaining the importance of interpreting financial data and outlines the specific focus of the study
analyzing the financial performance of AlphaTech Limited over the period 2020 to 2024. The
chapter discusses the purpose of the analysis, the key financial ratios used (such as liquidity,
profitability, efficiency, and solvency ratios), and briefly explains other techniques like horizontal
and vertical analysis. It also defines the scope and objectives of the study while summarizing what
the reader should expect in the following chapters.

1.1 Background of Financial Statement Analysis

Financial statements are foundational documents that reflect a company’s financial activities and
performance over a specific period. These include the Statement of Profit or Loss (Income
Statement), Statement of Financial Position (Balance Sheet), and the Statement of Cash Flows.
They are prepared in accordance with standardized accounting principles to ensure consistency,
comparability, and transparency. While these documents provide critical numerical data, they do
not always offer immediate insight into the financial health of an organization. To extract deeper
meaning, financial statement analysis is essential.

Among various techniques, ratio analysis is one of the most widely used and effective tools for
interpreting financial data. It transforms raw financial figures into meaningful relationships and
indicators. By analyzing these ratios, stakeholders such as investors, creditors, management, and
regulators can evaluate a company’s liquidity, profitability, operational efficiency, and long-term
solvency (Brigham & Ehrhardt, 2022). For instance, while an increase in revenue might seem
positive, a declining net profit margin could indicate rising operational costs or inefficiencies that
require managerial attention.

1
In today's competitive business environment, companies must constantly assess their financial
position to make informed strategic decisions. Financial analysis not only reveals internal strengths
and weaknesses but also supports external decision-making, such as investment appraisals and
credit evaluations.

1.2 Purpose of the Report

The purpose of this report is to assess the financial performance of AlphaTech Limited over a
five-year period (2020–2024) using financial ratio analysis. The study aims to go beyond surface-
level figures to evaluate the company’s financial strength, identify performance trends, and
provide well-informed recommendations for improvement.
The key objectives of the report are:
a) To calculate and interpret key financial ratios related to liquidity, profitability, efficiency,
and solvency.
b) To identify trends in AlphaTech Ltd.’s financial performance over the five-year period.
c) To assess investment viability, determining whether AlphaTech is a financially stable and
profitable enterprise.
d) To recommend practical strategies to enhance financial performance and sustainability.

1.3 Techniques of Financial Statement Analysis

Financial statement analysis comprises various techniques, each offering unique insights
depending on the purpose of the analysis and the nature of the user. The most commonly used
techniques include:
A. Ratio Analysis
Ratio analysis involves calculating and interpreting numerical relationships between financial
statement items. The key categories include:
• Liquidity Ratios – assess the company’s ability to meet short-term obligations (e.g.,
Current Ratio, Quick Ratio).

• Profitability Ratios – evaluate the company’s ability to generate profit relative to revenue,
assets, or equity (e.g., Net Profit Margin, Return on Assets).

• Efficiency Ratios – measure how effectively the company utilizes its assets (e.g.,
Inventory Turnover, Receivables Turnover).

2
 • Solvency Ratios – analyze the company’s long-term financial stability and reliance on debt
(e.g., Debt-to-Equity Ratio).

B. Horizontal Analysis
This involves comparing financial information across multiple periods to identify trends, growth
patterns, or inconsistencies over time. For example, a steady increase in revenue over five years
might suggest strong market performance.

C. Vertical Analysis
In vertical analysis, each item in the financial statement is presented as a percentage of a base
figure (e.g., total assets or total sales). This helps assess the relative size of financial components
and facilitates comparison across companies or periods.

D. Trend Analysis
Trend analysis involves studying patterns in financial ratios or metrics over a series of periods. It
helps detect changes in a company’s performance trajectory and can serve as an early warning
system for emerging financial issues.
These techniques, when used collectively, provide a more holistic view of a company’s financial
health and help avoid misinterpretation that might result from relying on a single measure.

1.4 Scope of the Study

This study focuses on the financial analysis of AlphaTech Limited, a Tanzanian technology
company, over the five-year period from 2020 to 2024. The analysis is based on the company’s
audited financial statements and primarily employs ratio analysis to assess key aspects of financial
performance, including liquidity (short-term financial stability), profitability (earning efficiency),
efficiency (asset utilization), and solvency (long-term financial risk).

The study assumes the financial data is accurate and prepared in compliance with generally
accepted accounting principles (GAAP). It does not cover non-financial factors or industry
benchmarking due to the limited availability of comparative data. The main aim is to provide an
insightful evaluation of AlphaTech Limited’s financial health and trends during the specified
period.

3
1.5 Summary of the Chapter
Financial statement analysis is a vital process that converts raw financial data into meaningful
insights for effective decision-making. This chapter introduced the fundamental concepts of
financial analysis, highlighting its importance in evaluating AlphaTech Ltd.’s performance. It
clearly outlined the objectives of the study, focusing on assessing liquidity, profitability,
efficiency, and solvency through ratio analysis, while also defining the scope and limitations of
analyzing the company’s financial data from 2020 to 2024. By establishing this foundation, the
chapter prepares the reader for a comprehensive evaluation of whether AlphaTech Ltd has
experienced improvement, stagnation, or decline in its financial health over the specified period.

The next chapter will provide an in-depth exploration of ratio analysis, covering its theoretical
framework, key categories, and practical applications. This progression from conceptual
understanding to empirical analysis will facilitate a structured assessment of AlphaTech Ltd.’s
financial statements and culminate in data-driven recommendations aimed at promoting
sustainable growth and operational efficiency. The insights gained will be valuable for various
stakeholders including management, investors, and creditors—enabling them to make informed
strategic and financial decisions.

4
 CHAPTER TWO

OVERVIEW OF RATIO ANALYSIS

2.0 Introduction to Ratio Analysis

Ratio analysis is a fundamental tool used to evaluate the financial health and performance of a
company by analyzing relationships between different financial statement items. According to
White, Sondhi, and Fried (2003), financial ratios help stakeholders such as investors, creditors,
and management to assess profitability, liquidity, solvency, and operational efficiency of a
business. By interpreting these ratios, decision-makers gain insights into the company’s financial
strengths and weaknesses, which aids in strategic planning and investment decisions.

Financial ratios are typically derived from the Balance Sheet, Income Statement, and sometimes
the Cash Flow Statement, offering a comprehensive view of the company’s financial health
(Penman, 2019). The ability to accurately interpret these ratios is essential for sound business
valuation, credit assessment, and strategic decision-making (Fraser & Ormiston, 2020).

2.1 Importance of Ratio Analysis in Business Valuation

Ratio analysis is an essential tool in business valuation and financial decision-making because it
translates complex financial data into understandable metrics that highlight a company’s strengths
and weaknesses. Its importance can be explained through several key functions:
a) Performance Evaluation
Ratio analysis helps in measuring how well a company performs financially over time. By
analyzing profitability ratios such as net profit margin and return on assets, stakeholders can
determine whether the company is generating sufficient returns on sales and investments.
Efficiency ratios, like inventory turnover, reveal how well the company utilizes its resources. This
ongoing evaluation helps identify positive trends or areas needing improvement, which is vital for
maintaining financial health (Brigham & Ehrhardt, 2022).

b) Comparative Analysis
One of the major advantages of ratio analysis is its ability to benchmark a company’s financial
ratios against industry averages or key competitors. This comparison allows stakeholders to

5
understand how the company stands in relation to peers, which is critical when assessing
competitive advantage or operational efficiency. For instance, a higher debt-to-equity ratio than
the industry average might indicate higher financial risk (Fraser & Ormiston, 2020).

c) Investment Decisions
Investors rely heavily on ratio analysis to assess the attractiveness of a company as an investment.
Profitability ratios indicate potential earnings, while liquidity ratios assess the company’s capacity
to sustain operations in the short term. A company with strong profitability but poor liquidity might
pose a risk, influencing investment choices. Ratio analysis therefore supports informed decisions
about buying, holding, or selling stock (Gibson, 2021).

d) Creditworthiness Assessment
Creditors use ratio analysis to evaluate the ability of a firm to repay its debts. Liquidity ratios such
as the current ratio indicate short-term solvency, while solvency ratios like the interest coverage
ratio assess long-term financial stability. A company with weak ratios may find it difficult to secure
loans or may face higher borrowing costs due to perceived risk (Penman, 2019).

e) Strategic Planning
Management uses ratio analysis to guide strategic decisions aimed at improving the company’s
financial position. By identifying weak areas such as low asset turnover or declining profit
margins, managers can implement targeted actions like cost reduction, inventory optimization, or
debt restructuring. Ratio analysis thus acts as a diagnostic tool supporting proactive financial
management (Wild, Subramanyam, & Halsey, 2021).
Example:
A high current ratio (e.g., above 2) indicates that the company has sufficient short-term assets to
cover its liabilities, which is a sign of strong liquidity. Conversely, a declining net profit margin
may suggest increasing costs or pricing pressures, which could reduce profitability and signal the
need for cost control measures (Gibson, 2021).

2.2 Objectives of Ratio Analysis

This is very well-structured and clear! Here’s a lightly polished version with smoother transitions
and slightly enhanced explanations, still keeping your point form clarity:

6
a) Assessing Financial Health
Ratio analysis provides a comprehensive view of a company’s financial stability by evaluating its
ability to meet both short-term and long-term obligations. Liquidity ratios, such as the current ratio,
measure whether the company can cover immediate liabilities, while solvency ratios, like the debt-
to-equity ratio, assess long-term financial structure and risk. For example, a current ratio below
1.0 may indicate difficulty in paying bills on time, and a high debt-to-equity ratio may signal
potential bankruptcy risk. These insights help stakeholders understand whether the business is
financially sound or requires corrective actions.

b) Identifying Trends (Time-Series Analysis)

Analyzing ratios over several periods enables identification of performance trends and patterns.
For instance, observing AlphaTech’s net profit margin over five years can indicate whether
profitability is improving, stable, or declining. Trend analysis helps differentiate between
temporary fluctuations and ongoing problems, which supports more accurate forecasting and
informed strategic planning.

c) Comparative Analysis (Cross-Sectional Analysis)

Ratio analysis allows comparison of a company’s performance against industry benchmarks or
competitors. If AlphaTech’s return on assets (ROA) is significantly lower than industry peers, it
suggests inefficiencies in resource utilization. These comparisons highlight competitive strengths
and weaknesses, guiding management decisions about resource allocation and operational
improvements.

d) Supporting Decision-Making
Different stakeholders use specific ratios to support their unique decision-making needs. Investors
may focus on profitability ratios like Return on Equity (ROE) to evaluate returns on investment.
Creditors look at liquidity and solvency ratios to assess the risk of lending. Management uses
efficiency ratios, such as inventory turnover, to optimize operations and reduce costs. This tailored
use of ratios ensures each group makes informed, data-driven decisions.

7
e) Forecasting Future Performance
Historical ratio trends provide useful indicators of future financial health. A declining quick ratio
may signal impending cash flow difficulties, while improving gross margins may reflect effective
pricing or cost management strategies. These forecasts help businesses prepare for challenges and
seize growth opportunities proactively.

f) Detecting Financial Problems Early

Ratios serve as early warning signals for underlying financial or operational issues. For example,
a sudden decrease in receivables turnover might indicate delays in customer payments, while
increasing inventory days could suggest overstocking or product obsolescence risks. Early
identification of such problems allows management to implement timely corrective measures and
avoid financial distress.

Conclusion
The objectives of ratio analysis go beyond simple number-crunching; they provide actionable
insights into a company’s financial health, operational efficiency, and risk exposure. For
AlphaTech Ltd, these objectives will guide the assessment of whether the company’s financial
position has improved or deteriorated over the period under review. The following chapter will
focus on the specific types of ratios and their calculation methods used to fulfill these objectives.

2.3 Types of Financial Ratios

Financial ratios can be broadly categorized into four main groups: Liquidity Ratios, Profitability
Ratios, Leverage (or Solvency) Ratios, and Efficiency (or Activity) Ratios. Each group includes
several specific ratios that focus on particular aspects of financial performance.

2.2.1 Profitability Ratios

Profitability ratios assess a company’s ability to generate earnings relative to its sales, assets, or
shareholders’ equity. These ratios are critical for evaluating the financial success and efficiency of
a company’s operations.
a) Gross Profit Margin
Gross Profit Margin is a key profitability ratio that measures the percentage of revenue remaining
after deducting the cost of goods sold (COGS). It reflects how efficiently a company produces its

8
goods or services relative to its sales revenue (Brigham & Houston, 2021). This ratio highlights
the company’s ability to manage production costs while maintaining sales prices.
Importance
A higher gross profit margin indicates better control over direct costs such as raw materials and
labor, which directly impacts the company's profitability. It serves as an important indicator of
operational efficiency and pricing strategy effectiveness. Businesses with a strong gross profit
margin are typically better positioned to cover their operating expenses and invest in growth
opportunities.
Formula
Gross Profit Margin=Gross Profit×100
Net Sales
Where
Gross Profit=Net Sales−Cost of Goods Sold (COGS)
b) Net Profit Margin
Net Profit Margin is a crucial profitability ratio that measures the percentage of net income
generated from total sales revenue after all expenses—including operating costs, interest, and
taxes—have been deducted (Brigham & Houston, 2021). This ratio indicates the overall
profitability of a company by showing how much profit remains from each unit of sales.
Importance
A higher net profit margin signifies that the company effectively controls its expenses relative to
revenue, leading to stronger profitability. It provides insights into the company’s cost management,
pricing strategies, and operational efficiency. Investors and creditors closely monitor this ratio as
it reflects the company’s ability to generate sustainable profits and shareholder value.
Formula
Net Profit Margin=Net Profit ×100
Net Sales
Where
Net Profit=Total Revenue−Total Expenses (including taxes and interest)

c) Return on Assets (ROA)

Return on Assets (ROA) is a profitability ratio that measures how efficiently a company uses its
total assets to generate net income. It reflects the company’s ability to convert investments in assets

9
into profits (Brigham & Houston, 2021). ROA is an important indicator of management’s
effectiveness in utilizing resources to maximize earnings.
Importance
A higher ROA indicates that the company is efficiently using its assets to produce profits, signaling
good operational performance and asset management. This ratio helps investors and management
evaluate how well the company is deploying its asset base to generate returns, which is particularly
important in asset-intensive industries.
Formula
ROA=Net Income ×100
Total Assets
Where
• Net Income refers to the profit after all expenses and taxes.
• Total Assets represents the average or end-of-period asset value on the balance sheet.

d) Return on Equity (ROE)

Return on Equity (ROE) is a key profitability ratio that measures a company’s ability to generate
profit from its shareholders’ equity. It shows the percentage return earned on the invested capital
provided by shareholders, reflecting how effectively management is using equity financing to grow
the company (Brigham & Houston, 2021).
Importance
A high ROE indicates efficient utilization of shareholders’ funds to generate profits, which is
attractive to investors seeking strong returns. It also signals good management performance in
creating value for equity holders. ROE is widely used by investors to compare profitability across
companies and industries.
Formula
ROE= Net Income ×100
Shareholders’ Equity
Where
• Net Income is the company’s profit after taxes and expenses.
• Shareholders’ Equity is the residual interest in the assets of the company after deducting
liabilities.

10
2.2.2 Liquidity Ratios
Liquidity ratios assess a company’s ability to meet its short-term obligations using its current or
most liquid assets. These ratios are vital indicators of financial health, helping creditors and
investors evaluate whether the company can cover its immediate liabilities.
a. Current Ratio
The Current Ratio measures a company’s ability to pay off its short-term liabilities using all of its
current assets. It reflects the overall liquidity position by comparing assets that are expected to be
converted into cash within one year against current liabilities (Brigham & Houston, 2021).
Importance
A higher current ratio indicates a stronger liquidity position, meaning the company is more capable
of meeting short-term debts as they come due. However, an excessively high ratio may suggest
inefficient use of assets.
Formula
Current Ratio=Current Assets
Current Liabilities
b. Quick Ratio (Acid-Test Ratio)
The Quick Ratio refines the current ratio by excluding inventory and other less liquid current
assets. It measures a company’s ability to meet short-term obligations with its most liquid assets,
such as cash, marketable securities, and accounts receivable (White et al., 2003).
Importance
Since inventory can take time to convert to cash, the quick ratio provides a more stringent test of
liquidity. A quick ratio above 1 indicates that the company can cover current liabilities without
relying on inventory sales.
Formula
Quick Ratio=Current Assets−Inventory
Current Liabilities

c. Cash Ratio
The Cash Ratio is the most conservative liquidity measure, assessing a company’s ability to pay
off short-term liabilities using only its cash and cash equivalents (Fridson & Alvarez, 2011).

11
Importance
This ratio shows the immediate liquidity available to cover obligations. Although a high cash ratio
signals strong liquidity, it may also suggest that the company is not effectively using its cash for
growth or investment.
Formula
Cash Ratio=Cash and Cash Equivalents
Current Liabilities

2.2.3 Efficiency (Activity) Ratios

Efficiency ratios, also known as activity ratios, evaluate how effectively a company utilizes its
assets and resources to generate revenue. These ratios are critical in assessing the operational
performance and asset management of a business.
a) Inventory Turnover Ratio
The Inventory Turnover Ratio measures how many times a company sells and replaces its
inventory during a given period. It indicates the efficiency of inventory management (White et al.,
2003).
Importance
A high inventory turnover ratio suggests efficient inventory management and strong sales.
Conversely, a low ratio may indicate overstocking, slow-moving products, or weak sales.
Formula
Inventory Turnover Ratio=Cost of Goods Sold (COGS)
Average Inventory

b) Total Asset Turnover Ratio

The Total Asset Turnover Ratio measures how efficiently a company uses its total assets to
generate sales (Brigham & Houston, 2021).
Importance
This ratio shows how productive a company is in using its assets. A higher ratio indicates effective
use of assets, while a lower ratio may point to underutilization.
Formula
Total Asset Turnover Ratio=Net Sales
Total Assets

12
c) Average Collection Period (Receivables Collection Period)
The Average Collection Period measures the average number of days it takes a company to collect
payments from its credit customers (Fridson & Alvarez, 2011).
Importance
This ratio helps assess the effectiveness of a company’s credit and collection policies. A shorter
collection period indicates efficient receivables management.
Formula
Average Collection Period=Average Accounts Receivable ×365
Net Credit Sales
d) Inventory Holding Period (Days Sales of Inventory)
The Inventory Holding Period indicates the average number of days inventory is held before being
sold (White et al., 2003).
Importance
This ratio helps evaluate how quickly inventory is turned into sales. A shorter holding period
indicates efficient inventory turnover.
Formula
Inventory Holding Period=365
Inventory Turnover Ratio

2.2.4 Gearing/Leverage Ratios

Gearing or leverage ratios evaluate the extent to which a company is financed through debt
compared to equity. These ratios are crucial for understanding the financial structure and long-
term solvency of a business, as they measure financial risk and the firm’s ability to meet its
financial obligations.

a) Debt Ratio
The Debt Ratio measures the proportion of a company’s total assets that are financed by total
liabilities. It provides insight into the company’s financial leverage and risk exposure (Brigham &
Houston, 2021).

13
Importance
A higher debt ratio indicates that a greater portion of the company's assets are financed through
debt, which may signal higher financial risk. A lower ratio suggests greater financial stability and
less reliance on external financing.
Formula
Debt Ratio=Total Liabilities
Total Assets

b) Debt-to-Equity Ratio
The Debt-to-Equity Ratio compares a company’s total liabilities to its shareholders' equity. It
measures the degree to which the company is financing its operations through debt versus wholly
owned funds (White et al., 2003).
Importance
This ratio is vital for assessing financial risk. A high debt-to-equity ratio may indicate that a
company is heavily reliant on debt to finance its operations, which could lead to higher interest
obligations and financial instability, especially during downturns.
Formula
Debt-to-Equity Ratio=Total Liabilities
Shareholders’ Equity

c) Interest Coverage Ratio

The Interest Coverage Ratio evaluates a company’s ability to meet its interest payments on
outstanding debt from its operating income (Fridson & Alvarez, 2011). It shows how comfortably
a company can pay interest expenses from its earnings before interest and taxes (EBIT).
Importance
A high interest coverage ratio suggests that the company generates sufficient income to easily meet
interest obligations, indicating low financial risk. Conversely, a low ratio may signal potential
difficulty in servicing debt, which could lead to liquidity problems.
Formula
Interest Coverage Ratio=Earnings Before Interest and Taxes (EBIT)
Interest Expense

14
2.2.5 Investment Ratios
Investment ratios help investors evaluate the attractiveness and performance of a company’s stock.
They provide insight into profitability, dividend policy, and market expectations, enabling
informed investment decisions.
a. Price-Earnings (P/E) Ratio
The Price-Earnings (P/E) Ratio measures the relationship between a company’s stock price and its
earnings per share (EPS). It shows how much investors are willing to pay today for one unit of
earnings (Brigham & Houston, 2021).
Importance
The P/E ratio is widely used by investors to assess market valuation and growth expectations. A
high P/E ratio may indicate that investors expect future growth in earnings, while a low P/E might
suggest that the stock is undervalued or that the company faces uncertainty. It’s a key metric for
comparing valuation across companies within the same industry.
Formula
P/E Ratio=Market Price per Share (MPS)
Earnings per Share (EPS)
Where
EPS=Net Income
Number of Outstanding Shares
b. Dividend per Share (DPS)
Dividend per Share (DPS) represents the number of dividends paid to each outstanding share of a
company’s stock during a given financial period. It reflects the portion of profits distributed to
shareholders (White et al., 2003).
Importance
DPS is crucial for income-focused investors, as it indicates the income generated from holding a
share. A consistent or growing DPS may signal a financially healthy and shareholder-friendly
company, while fluctuations in dividends can indicate instability or changes in company policy.
Formula
DPS=Total Dividends Paid
Number of Outstanding Shares

15
2.4 Advantages and Disadvantages of Ratio Analysis
Ratio analysis is a widely used financial tool that assists in evaluating an organization’s
performance, financial position, and operational efficiency. While powerful, it is essential to
understand both its advantages and limitations to ensure proper interpretation and use.

2.4.1 Advantages of Ratio Analysis

a) Simplifies Complex Financial Data
Ratio analysis condenses large volumes of financial information into key indicators that are easy
to interpret. For instance, instead of reviewing detailed income statements, a user can assess
profitability through the net profit margin (Net Profit ÷ Revenue), which gives a quick overview
of profit efficiency.
b) Enables Performance Benchmarking
It facilitates meaningful comparisons with industry peers and standards. For example, if
AlphaTech Ltd.’s current ratio is 2.0 compared to the industry average of 1.5, it suggests superior
short-term liquidity and better ability to meet current obligations.
c) Reveals Financial Trends Over Time
When applied over multiple years, ratio analysis helps identify patterns in performance. A
consistently rising debt-to-equity ratio, for example, may indicate an increasing reliance on debt
financing, posing potential long-term risk.
d) Supports Strategic Decision-Making
Ratio analysis supports strategic decision-making by helping investors assess returns, creditors
evaluate repayment ability, and managers improve operational efficiency. It provides clear
financial indicators that guide informed business decisions.
e) Assists in Forecasting and Planning
Trends in key ratios, such as improving gross margins or increasing ROA, can serve as reliable
indicators of future financial performance, helping businesses prepare and strategize accordingly.

2.4.2 Disadvantages of Ratio Analysis

a) Relies on Historical Financial Data
Since ratios are derived from past performance, they may not fully reflect current market
conditions or future prospects. A company with strong historical ratios may still face unforeseen
challenges.

16
a) Subject to Accounting Policy Differences
Differences in accounting practices—such as methods for depreciation or inventory valuation
(e.g., FIFO vs. LIFO)—can distort ratio comparisons between firms.
b) Inflation and Currency Effects
Ratio analysis does not adjust for inflation or currency fluctuations, which can overstate or
understate values, especially for asset-based ratios like Return on Assets (ROA).
c) Industry Limitations
Some ratios are not meaningful across different industries. For instance, inventory turnover is
typically high in retail but may be low in construction or manufacturing due to the nature of their
operations.
d) Potential for Financial Manipulation
Companies may engage in “window dressing” — temporarily altering financial results to present
a stronger financial position (e.g., delaying expenses or inflating revenues). This undermines the
reliability of the ratios.

2.6 Formulas for Key Financial Ratios

Table 1 Formulas for Key Financial Ratios

Ratio Ratio Formula Interpretation

Category
Liquidity Current Ratio Current Assets ÷ Measures short-term ability to pay
Current Liabilities current obligations; higher than 1
indicates good liquidity.
Quick Ratio (Current Assets – More stringent liquidity measure
Inventory) ÷ Current excluding inventory; indicates
Liabilities immediate ability to cover debts.
Profitability Net Profit (Net Profit ÷ Percentage of revenue that remains
Margin Revenue) × 100 as profit after all expenses; higher
values indicate better profitability.

17
 Return on (Net Profit ÷ Total Shows how effectively assets
Assets (ROA) Assets) × 100 generate profit; higher ROA means
efficient asset use.
Return on (Net Profit ÷ Measures return earned on
Equity (ROE) Shareholders’ Equity) shareholders’ investment; higher
× 100 ROE reflects better financial
performance.
Gross Profit (Gross Profit ÷ Percentage of revenue remaining
Margin Revenue) × 100 after COGS; indicates production
efficiency and pricing power.
Operating Profit (Operating Profit ÷ Shows profitability from core
Margin Revenue) × 100 operations before interest and taxes;
reflects operational efficiency.
Return on (Operating Profit ÷ Measures overall efficiency in using
Capital Capital Employed) × capital to generate profits; higher
Employed 100 ROCE indicates better capital use.
(ROCE)

2.7 Conclusion
This chapter has provided an in-depth overview of ratio analysis, including its definitions,
importance in business valuation, objectives, types, advantages, and disadvantages. It has shown
that while ratio analysis is a valuable tool for evaluating financial performance and guiding
strategic decisions, its effectiveness depends on proper context, accurate data, and informed
interpretation.

18
 CHAPTER THREE

PRESENTATION OF ANALYSIS AND DISCUSSION

3.1 Introduction
This chapter presents the detailed financial ratio analysis of AlphaTech Ltd for the five-year period
from 2020 to 2024. The ratios are calculated to assess the company’s liquidity, profitability,
efficiency, and solvency trends. The analysis aims to evaluate the financial health, operational
efficiency, and investment attractiveness of the company over time. Visual aids such as tables and
graphs are used to enhance clarity and provide a comprehensive understanding of the company’s
performance.

3.2 Ratio Calculations and Trend Analysis

This part focuses on the calculation and trend analysis of AlphaTech Ltd.’s liquidity and
profitability ratios over the five-year period from 2020 to 2024. Liquidity ratios, including the
current ratio and quick ratio, measure the company’s ability to meet its short-term financial
obligations, reflecting its operational stability and cash flow management. Profitability ratios, such
as gross profit margin, operating profit margin, and return on capital employed (ROCE), evaluate
the company’s effectiveness in generating profits from its sales and investments. Analyzing these
ratios across multiple years highlights AlphaTech Ltd’s financial strengths, operational efficiency,
and areas that may require management attention for sustained growth and stability.

3.2.1 Liquidity Ratio Analysis

Liquidity ratios are essential indicators of a company's short-term financial health and its ability
to cover immediate obligations without raising external capital. This section analyzes AlphaTech
Ltd.’s liquidity position from 2020 to 2024 by calculating key ratios such as the Current Ratio
and Quick Ratio. These ratios help determine whether the company maintains enough liquid
assets to pay off its current liabilities, which is crucial for operational stability and avoiding
solvency issues.
a) Current Ratio
Current Ratio=Current Assets
Current Liabilities

19
Table 2 Current Ratio (2020–2024)

Year Current Assets (TZS) Current Liabilities (TZS) Current Ratio

2020 90,000,000 45,000,000 2.00

2021 100,000,000 50,000,000 2.00

2022 115,000,000 58,000,000 1.98

2023 130,000,000 65,000,000 2.00

2024 145,000,000 78,000,000 1.86

Interpretation
The current ratio remained stable around 2.0 from 2020 to 2023, indicating AlphaTech has twice
as many current assets as current liabilities, showing strong short-term liquidity. A slight decrease
to 1.86 in 2024 is still healthy but suggests a small reduction in liquidity.

b) Quick Ratio (Acid-Test Ratio)

Quick Ratio=Current Assets−Inventories
Current Liabilities

Table 3 Quick Ratio (2020–2024)

Year Current Assets (TZS) Inventories (TZS) Current Liabilities (TZS) Quick Ratio

2020 90,000,000 30,000,000 45,000,000 1.33

2021 100,000,000 33,000,000 50,000,000 1.34

2022 115,000,000 36,000,000 58,000,000 1.36

2023 130,000,000 40,000,000 65,000,000 1.38

2024 145,000,000 60,000,000 78,000,000 1.09

20
Interpretation
The quick ratio shows a generally positive trend from 2020 to 2023, indicating increasing ability
to meet short-term obligations without relying on inventory sales. The drop in 2024 to 1.09
suggests increased inventory levels might affect liquidity, but it remains above 1, indicating
satisfactory liquidity.

3.2.2 Profitability Ratio Analysis

Profitability ratios evaluate AlphaTech Ltd.’s effectiveness in generating earnings from its
operations and use of resources. These ratios provide insight into how well the company converts
sales into profits and how efficiently it utilizes its capital to produce returns. Analyzing these ratios
over the five-year period from 2020 to 2024 helps to understand the company’s financial
performance trends and operational efficiency, highlighting strengths and areas for improvement.
a) Gross Profit Margin
Formula
Gross Profit Margin=Gross Profit×100
Net Sales
Where
Gross Profit=Net Sales−Cost of Goods Sold (COGS)

Table 4 Gross Profit Margin (2020–2024)

Year Revenue (TZS) Cost of Sales (TZS) Gross Profit Margin (%)

2020 300,000,000 180,000,000 40.00

2021 340,000,000 200,000,000 41.18

2022 380,000,000 225,000,000 40.79

2023 410,000,000 250,000,000 39.02

2024 450,000,000 270,000,000 40.00

21
Interpretation
The gross profit margin remained stable around 40% over the five years, showing consistent
management of production costs relative to sales.
b) Operating Profit Margin
Formula:
Operating Profit Margin=Profit Before Tax+Finance Costs−Other Income ×100
Revenue
where
(Operating Profit = Profit Before Tax + Finance Costs - Other Income)

Table 5 Operating Profit Margin (2020–2024)

Year Operating Profit (TZS) Revenue (TZS) Operating Profit
Margin (%)

2020 52,000,000 + 12,000,000 - 4,000,000 = 300,000,000 20.00

60,000,000

2021 67,000,000 + 13,000,000 - 5,000,000 = 340,000,000 22.06

75,000,000

2022 78,000,000 + 14,000,000 - 7,000,000 = 380,000,000 22.37

85,000,000

2023 78,500,000 + 14,500,000 - 8,000,000 = 410,000,000 20.73

85,000,000

2024 95,000,000 + 15,000,000 - 10,000,000 = 450,000,000 22.22

100,000,000

Interpretation
Operating profit margin fluctuated but generally improved, peaking in 2022 and 2024 above 22%,
indicating good control over operating expenses and strong core profitability.

22
c) Return on Capital Employed (ROCE)
Formula:
ROCE=Operating Profit ×100%
Capital Employed
Where; Capital Employed = Total Assets – Current Liabilities

Table 6 Return on Capital Employed (ROCE) (2020–2024)

Year Operating Total Assets Current Capital ROCE

Profit (TZS) (TZS) Liabilities (TZS) Employed (TZS) (%)

2020 60,000,000 250,000,000 45,000,000 205,000,000 29.27

2021 75,000,000 280,000,000 50,000,000 230,000,000 32.61

2022 85,000,000 320,000,000 58,000,000 262,000,000 32.44

2023 85,000,000 360,000,000 65,000,000 295,000,000 28.81

2024 100,000,000 400,000,000 78,000,000 322,000,000 31.06

Interpretation
ROCE remained strong, peaking above 32% in 2021 and 2022, showing AlphaTech’s efficient use
of capital to generate profits. A slight dip in 2023 was followed by improvement in 2024.

d) Return on Assets (ROA)

ROA=Net Profit ×100%
Total Assets

23
Table 7 Return on Assets (ROA) (2020–2024)

Year Net Profit Total Assets (TZS) ROA Calculation ROA (%)
(TZS)

2020 36,400,000 250,000,000 36,400,000 × 100 14.56%

250,000,000

2021 46,900,000 280,000,000 46,900,000 × 100 16.75%

280,000,000

2022 54,600,000 320,000,000 54,600,000 × 100 17.06%

320,000,000

2023 54,950,000 360,000,000 54,950,000 × 100 15.26%

360,000,000

2024 66,500,000 400,000,000 66,500,000 × 100 16.63%

400,000,000

Interpretation
AlphaTech Ltd.’s ROA increased from 14.56% in 2020 to a peak of 17.06% in 2022, showing
improved asset efficiency in generating profit. Although it dipped slightly in 2023, it recovered in
2024, indicating consistent asset utilization over time.

a) Return on Equity (ROE)

ROE=Net Profit ×100%

Equity

24
Table 8 Return on Equity (ROE) (2020–2024)

Year Net Profit (TZS) Equity (TZS) ROE Calculation ROE (%)

2020 36,400,000 130,000,000 36,400,000 × 100 28.00%

130,000,000

2021 46,900,000 150,000,000 46,900,000 × 100 31.27%

150,000,000

2022 54,600,000 180,000,000 54,600,000 × 100 30.33%

180,000,000

2023 54,950,000 205,000,000 54,950,000 × 100 26.80%

205,000,000

2024 66,500,000 232,000,000 66,500,000 × 100 28.67%

232,000,000

Interpretation
The company’s ROE is strong, averaging around 28–31%, suggesting that AlphaTech Ltd is
generating good returns for shareholders. A slight decrease in 2023 reflects increased equity, but
the overall trend remains healthy, showing effective use of shareholder funds.

25
 CHAPTER FOUR

CONCLUSION AND RECOMMENDATION

4.1 Conclusion
This report examined the financial performance of AlphaTech Ltd from 2020 to 2024 through a
comprehensive ratio analysis, focusing specifically on liquidity and profitability indicators.
Theoretically, financial ratios provide critical insight into a company’s financial health, helping
stakeholders assess operational efficiency, short-term solvency, and return on investment
(Brigham & Ehrhardt, 2022; Gibson, 2021). In practice, AlphaTech Ltd showed steady growth in
both revenue and net profit, indicating improved cost control and operational management.

Liquidity ratios such as the current ratio and quick ratio remained stable during the five-year
period, indicating that the company generally managed its short-term liabilities effectively (Fraser
& Ormiston, 2016). However, the decline in the quick ratio in 2024 suggests that AlphaTech may
be increasing its inventory levels, potentially risking short-term liquidity strain.

Profitability indicators including gross profit margin, operating profit margin, return on assets
(ROA), and return on equity (ROE) showed an overall upward trend, reflecting improved
efficiency and stronger returns for shareholders (White, Sondhi & Fried, 2003). While some year-
to-year fluctuations occurred, the general financial direction of AlphaTech Ltd indicates resilience
and competent financial strategy.

In summary, the theoretical foundations of ratio analysis were validated through the company’s
financial data. AlphaTech Ltd’s liquidity position remained adequate, and its profitability ratios
indicated strong performance, though some operational areas such as inventory management
warrant further attention.

4.2 Recommendations
4.2.1 Recommendations to AlphaTech Ltd
a) Enhance Inventory Management
The drop in the quick ratio in 2024 highlights increased dependency on inventory, which may not
be easily convertible to cash in the short term. This situation could lead to potential liquidity stress

26
if short-term obligations arise unexpectedly. To address this, AlphaTech Ltd should adopt
advanced inventory control techniques such as Just-In-Time (JIT) systems or ABC inventory
classification, which will help reduce holding costs, improve turnover rates, and release cash tied
up in stock (Weygandt, Kimmel & Kieso, 2020). Additionally, implementing inventory forecasting
software could help balance supply with demand more effectively, avoiding both overstocking and
stockouts.

b) Improve Cash Flow Monitoring

Although net profit has increased over the five-year period, cash and cash equivalents saw a slight
decline in 2024, indicating that profitability gains are not necessarily translating into stronger cash
reserves. AlphaTech should therefore implement more robust cash flow management strategies,
including regular cash forecasting, reviewing payment terms with suppliers and customers, and
controlling discretionary spending. These steps can ensure the company maintains enough
liquidity to meet obligations and seize new opportunities (Palepu, Healy & Peek, 2020).

c) Sustain Profitability Initiatives

The profitability ratios gross profit margin, ROA, and ROE all improved steadily over the period,
which is a positive sign. To maintain this trend, AlphaTech should continue to focus on cost
control, value-added operations, and productivity improvement. Leveraging data analytics and
KPIs (Key Performance Indicators) can help identify cost-saving opportunities and areas for
operational refinement. Investment in employee training, automation, and quality improvement
can also enhance efficiency and sustain profitability in the long term.

d) Utilize Financial Strength for Expansion

The high and rising ROE and ROA indicate that AlphaTech is effectively utilizing both
shareholders' equity and its overall asset base to generate profits. This strong financial footing
provides a good platform for business expansion. The company could consider entering new
geographic markets, launching new product lines, or investing in digital transformation to improve
competitiveness and create additional revenue streams. However, expansion should be preceded
by detailed market analysis and supported by strategic financial planning to manage potential risks.

27
4.2.2 Recommendations to the Institute of Finance Management (IFM)
a) Strengthen Field Work Resources
To better support student projects like this one, IFM should provide enhanced access to financial
modeling tools, databases, and industry-standard software (e.g., Excel with financial add-ins,
QuickBooks, SPSS, or Bloomberg terminals). These tools can enhance students’ ability to perform
detailed and professional-level financial analyses, bridging the gap between academic learning and
real-world application (Brigham & Ehrhardt, 2022).

b) Improve Supervision Structure

Many students would benefit from a more structured supervision framework, where they receive
regular feedback, milestone check-ins, and progress evaluations. Supervisors should have
scheduled office hours and defined responsibilities to help guide students through complex
analytical tasks and report writing. This approach would reduce confusion and promote academic
excellence.

c) Promote Industry Engagement

IFM should pursue strategic partnerships with businesses and financial institutions to offer
students practical exposure. Projects involving real company data—under confidentiality
agreements if needed will help students gain insight into industry practices and enhance their
employability. Guest lectures, site visits, and mentorship programs can also enrich the learning
experience.

d) Review and Update Project Guidelines

Current project guidelines could be enhanced by introducing a comprehensive project handbook
with clear instructions on formatting, citation standards (e.g., APA, Harvard), financial ratio
interpretation, data presentation, and ethical considerations. Consistent standards would ensure the
quality and uniformity of student work while making assessment more transparent and objective.

28
 REFERENCES

AlphaTech Ltd. (2025). Summarized Financial Statements 2020–2024. Internal Company Data.

Brigham, E. F., & Ehrhardt, M. C. (2022). Financial Management: Theory & Practice (16th ed.).
Cengage Learning.

Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management (15th ed.).
Cengage Learning.

Fraser, L. M., & Ormiston, A. (2020). Understanding Financial Statements (11th ed.). Pearson
Education.

Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner’s Guide (4th
ed.). John Wiley & Sons.

Gibson, C. H. (2021). Financial Reporting and Analysis (14th ed.). Cengage Learning.

Higgins, R. C. (2019). Analysis for Financial Management (12th ed.). McGraw-Hill Education.

Penman, S. H. (2019). Financial Statement Analysis and Security Valuation (6th ed.). McGraw-
Hill Education.

White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements (3rd
ed.). Wiley.

Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2021). Financial Statement Analysis (12th ed.).
McGraw-Hill Education.

29
 APPENDICES

AlphaTech Ltd Summarized Financial Statements (2020-2024)

Statement of Profit or Loss and Other Comprehensive Income

Year 2020 2021 2022 2023 2024

Revenue (TZS) 300,000,000 340,000,000 380,000,000 410,000,000 450,000,000

Cost of Sales 180,000,000 200,000,000 225,000,000 250,000,000 270,000,000

Operating Exp 60,000,000 65,000,000 70,000,000 75,000,000 80,000,000

Other Income 4,000,000 5,000,000 7,000,000 8,000,000 10,000,000

Finance Costs 12,000,000 13,000,000 14,000,000 14,500,000 15,000,000

Profit Before Tax 52,000,000 67,000,000 78,000,000 78,500,000 95,000,000

Tax Expense 15,600,000 20,100,000 23,400,000 23,550,000 28,500,000

Net Profit 36,400,000 46,900,000 54,600,000 54,950,000 66,500,000

30
Statement of Financial Position

Year 2020 2021 2022 2023 2024

Total Assets 250,000,000 280,000,000 320,000,000 360,000,000 400,000,000

Current Assets 90,000,000 100,000,000 115,000,000 130,000,000 145,000,000

Inventories 30,000,000 33,000,000 36,000,000 40,000,000 60,000,000

Receivables 25,000,000 28,000,000 35,000,000 40,000,000 50,000,000

Cash & Equivalents 20,000,000 25,000,000 28,000,000 30,000,000 25,000,000

Total Liabilities 120,000,000 130,000,000 140,000,000 155,000,000 173,000,000

Current Liabilities 45,000,000 50,000,000 58,000,000 65,000,000 78,000,000

Equity 130,000,000 150,000,000 180,000,000 205,000,000 232,000,000

REQUIRED

1. Use the AlphaTech Ltd Summarized Financial statement provided and calculate financial
ratios of the company for five year (i.e from 2020 to 2024) and comment on the performance
of AlphaTech Ltd company.

31