Below are the computations for the required ratios for 2021 and 2020. All figures are derived from the provided financial statements. Explanations for each ratio include the formula and step-by-step calculations.

• Gross Profit Margin
  Formula: (Gross Profit / Revenue) × 100
  This ratio measures the percentage of revenue remaining after deducting direct costs, indicating pricing strategy and cost control efficiency.
  2021: (3,733,532 / 11,180,208) × 100 = 33.40%
  Step-by-step: Divide gross profit by revenue (3,733,532 ÷ 11,180,208 ≈ 0.3340), then multiply by 100 to get the percentage.
  2020: (3,253,999 / 12,957,649) × 100 = 25.11%
  Step-by-step: 3,253,999 ÷ 12,957,649 ≈ 0.2511, × 100 = 25.11%.
• Return on Capital Employed (ROCE)
  Formula: (Operating Profit / Capital Employed) × 100
  Capital Employed = Shareholders’ Equity + Non-Current Liabilities (this represents the long-term funds invested in the business).
  This ratio assesses how efficiently the company uses its capital to generate profits.
  2021: Capital Employed = 4,070,815 + 133,611 = 4,204,426
  ROCE = (565,298 / 4,204,426) × 100 ≈ 13.45%
  Step-by-step: Add equity and non-current liabilities to get capital employed, divide operating profit by this amount (565,298 ÷ 4,204,426 ≈ 0.1345), then multiply by 100.
  2020: Capital Employed = 3,646,842 + 137,594 = 3,784,436
  ROCE = (793,955 / 3,784,436) × 100 ≈ 20.98%
  Step-by-step: 793,955 ÷ 3,784,436 ≈ 0.2098, × 100 = 20.98%.
• Acid Test Ratio (Quick Ratio)
  Formula: (Current Assets – Inventories) / Current Liabilities
  This ratio evaluates short-term liquidity excluding inventories, which may not be quickly convertible to cash.
  2021: (5,639,881 – 2,284,401) / 1,874,086 = 3,355,480 / 1,874,086 ≈ 1.79:1
  Step-by-step: Subtract inventories from current assets (5,639,881 – 2,284,401 = 3,355,480), then divide by current liabilities.
  2020: (5,955,179 – 2,409,650) / 2,998,953 = 3,545,529 / 2,998,953 ≈ 1.18:1
  Step-by-step: 5,955,179 – 2,409,650 = 3,545,529, ÷ 2,998,953 ≈ 1.18.
• Payable Period (Creditors Payment Period)
  Formula: (Accounts Payable / Direct Cost) × 365
  This measures the average days taken to pay suppliers, using direct cost as a proxy for cost of sales (assuming direct cost represents purchases or cost of goods sold).
  2021: (1,843,574 / 7,446,676) × 365 ≈ 90.4 days
  Step-by-step: Divide payable by direct cost (1,843,574 ÷ 7,446,676 ≈ 0.2477), multiply by 365 (0.2477 × 365 ≈ 90.4).
  2020: (2,869,489 / 9,703,650) × 365 ≈ 108.0 days
  Step-by-step: 2,869,489 ÷ 9,703,650 ≈ 0.2958, × 365 ≈ 108.0.
• Debt to Equity
  Formula: Total Liabilities / Shareholders’ Equity
  This ratio indicates the company’s financial leverage, showing the proportion of debt financing relative to equity.
  2021: 2,007,697 / 4,070,815 ≈ 0.49:1
  Step-by-step: Divide total liabilities by equity (2,007,697 ÷ 4,070,815 ≈ 0.49).
  2020: 3,136,547 / 3,646,842 ≈ 0.86:1
  Step-by-step: 3,136,547 ÷ 3,646,842 ≈ 0.86.

ii. Report to the Head of Credit

Report on the Financial Performance Analysis of Alpha Technology Solutions Limited for 2020 and 2021

To: Head of Credit, TCB Bank
From: Credit Officer
Date: August 04, 2025
Subject: Analysis of Alpha Technology Solutions Limited’s Performance for Loan Application of GHS 5 Million

Introduction
This report analyzes the financial performance of Alpha Technology Solutions Limited based on its statements for the years ended December 31, 2020, and 2021. The analysis focuses on key ratios: Gross Profit Margin, Return on Capital Employed (ROCE), Acid Test Ratio, Payable Period, and Debt to Equity. These ratios are explained, computed, and compared year-over-year to assess trends, strengths, and risks in the context of the company’s loan application. Overall, the company shows improved liquidity and reduced leverage but declining profitability, which may impact its ability to service new debt under Ghanaian banking regulations like the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), emphasizing prudent lending based on financial health.

Explanation and Analysis of Ratios

• Gross Profit Margin: This ratio measures the efficiency of cost management in production/sales, calculated as (Gross Profit / Revenue) × 100. In 2021, it improved to 33.40% from 25.11% in 2020, despite a revenue drop from GHS 12,957,649 to GHS 11,180,208. This suggests better cost control on direct expenses (reduced from GHS 9,703,650 to GHS 7,446,676), possibly due to supply chain optimizations or pricing adjustments. The improvement indicates resilience, but the revenue decline could signal market challenges, warranting scrutiny in a post-2017 banking cleanup environment where BoG stresses sustainable revenue for loan approvals.
• Return on Capital Employed (ROCE): ROCE evaluates profit generation from invested capital, using (Operating Profit / Capital Employed) × 100, where Capital Employed is Equity + Non-Current Liabilities. It declined from 20.98% in 2020 to 13.45% in 2021, driven by lower operating profit (GHS 793,955 to GHS 565,298) amid rising administrative expenses (GHS 2,483,480 to GHS 3,168,234). This drop highlights reduced efficiency, potentially from operational inefficiencies or economic pressures like Ghana’s 2022 DDEP impacts on costs. Compared to 2020, this weakens the case for new borrowing, as BoG’s Capital Requirements Directive prioritizes strong returns for risk management.
• Acid Test Ratio: This liquidity measure, (Current Assets – Inventories) / Current Liabilities, assesses ability to meet short-term obligations without selling stock. It rose from 1.18:1 in 2020 to 1.79:1 in 2021, due to lower current liabilities (GHS 2,998,953 to GHS 1,874,086) and stable quick assets. This improvement enhances short-term solvency, aligning with BoG’s Liquidity Risk Management Guidelines, reducing default risk on the proposed loan.
• Payable Period: Calculated as (Accounts Payable / Direct Cost) × 365, it shows supplier payment timelines. It decreased from 108.0 days in 2020 to 90.4 days in 2021, indicating faster payments (payables fell from GHS 2,869,489 to GHS 1,843,574). This could reflect better cash management but might strain working capital if not matched by receivables collection. Relative to 2020, it’s positive for supplier relations but requires monitoring under Basel III-adapted standards in Ghana.
• Debt to Equity: This leverage ratio, Total Liabilities / Shareholders’ Equity, fell from 0.86:1 in 2020 to 0.49:1 in 2021, as liabilities decreased (GHS 3,136,547 to GHS 2,007,697) while equity grew via retained earnings. This lower gearing reduces financial risk, complying with BoG’s Corporate Governance Directive 2018 for balanced capital structures, making the company more attractive for lending.

Overall Performance Analysis
Alpha Technology Solutions Limited’s performance shows mixed trends: profitability metrics (Gross Profit Margin up, but ROCE down) reflect cost efficiencies offset by revenue and expense pressures, possibly from Ghana’s economic volatility post-2017 cleanup and DDEP. Liquidity strengthened (higher Acid Test Ratio, shorter Payable Period), and leverage improved (lower Debt to Equity), indicating better financial stability than 2020. Profit after tax declined from GHS 595,466 to GHS 423,973, but equity growth supports resilience. For the GHS 5 million loan, positives include enhanced liquidity for repayment, but declining ROCE raises concerns on profit generation. Recommend approval with covenants on revenue growth, aligned with BoG directives, and further due diligence on cash flows.

Recommendations

• Monitor revenue trends quarterly.
• Assess impact of administrative cost increases.
• Proceed with loan if stress-tested under BoG’s operational risk standards.

Regards,
Credit Officer
TCB Bank