Business Finance (ACC501)

Assignment 01 Solution
Solution:
Sure, let's compute the required ratios for Ali Corporation and then compare them with the
industry averages.
a) Compute the Ratios:
1. Current Ratio
Current Ratio = Current Assets / Current Liabilities
Current Assets:
 Cash: Rs. 550 million
 Account Receivables: Rs. 250 million
 Inventory: Rs. 1,200 million

Total Current Assets:

550 + 250 + 1200 = Rs. 2000 million
Current Liabilities:
 Accounts Payable: Rs. 300 million
 Notes Payable: Rs. 600 million

Total Current Liabilities:

300 + 600 = Rs. 900 million
Current Ratio = 2000 / 900 = 2.22 times

2. Quick Ratio:
Quick Ratio = Current Assets – Inventory / Current Liabilities

Quick Assets:
 Cash: Rs. 550 million
 Account Receivables: Rs. 250 million
Total Quick Assets:
550 + 250 = Rs. 800 million
Quick Ratio = 800 / 900 = 0.88 times

3. Net Profit Margin

Net Profit Margin = Net Income / Sales
Net Income = Rs. 740 million
Sales = Rs. 6800 million

Net Profit Margin = 740 / 6800 = 10.88%

4. Return on Assets (ROA)

Return on Assets = Net Income / Total Assets
Total Assets = Rs. 4950 million

ROA = 740 / 4950 = 14.94%

5. Return on Equity (ROE)

Return on Equity = Net Income / Total Equity
Equity:
 Common Stock: Rs. 1000 million
 Capital Surplus: Rs. 750 million
 Retained Earnings: Rs. 350 million

Total Equity:
Shareholders' Equity: Common Stock + Capital Surplus + Retained Earnings
1000 + 750 + 350 = Rs. 2100 million
ROE = 740 / 2100 = 35.23%
b) Comment on the liquidity and Profitability:

Liquidity Ratios:
1. Current Ratio:
 Ali Corporation: 2.22 times
 Industry Average: 2.5 times

Comment: Ali Corporation's current ratio is slightly below the industry average, indicating that it
might have a bit less liquidity compared to the industry standard. However, it is still close to the
average, suggesting a reasonable level of short-term financial health.

2. Quick Ratio:
 Ali Corporation: 0.88 times
 Industry Average: 1.2 times

Comment: The quick ratio of Ali Corporation is below the industry average, which indicates that
the company might have lower liquidity in terms of its most liquid assets. This could be a
potential concern for meeting short-term obligations without relying on inventory sales.

Profitability Ratios:
3. Net Profit Margin:
 Ali Corporation: 10.88%
 Industry Average: 30%

Comment: Ali Corporation's net profit margin is significantly lower than the industry average.
This indicates that the company is less efficient in converting sales into actual profit compared to
its industry peers.
4. Return on Assets (ROA):
 Ali Corporation: 14.94%
 Industry Average: 10%

Comment: Ali Corporation's ROA is above the industry average, which indicates that the
company is efficient in using its assets to generate profit.

5. Return on Equity (ROE):

 Ali Corporation: 35.23%
 Industry Average: 25%

Comment: Ali Corporation's ROE is also above the industry average, suggesting that the
company is highly effective in generating returns on the equity invested by shareholders.

Summary:
Liquidity: Ali Corporation's liquidity ratios (current and quick ratios) are below the industry
averages, suggesting potential challenges in meeting short-term obligations.
Profitability: The profitability ratios show a mixed picture. While the net profit margin is
significantly below the industry average, indicating lower efficiency in profit generation, both
ROA and ROE are above industry averages, indicating effective use of assets and equity to
generate returns.