Solution

1. Current Ratio:

Current Ratio = Current Assets / Current Liabilities

= 2,000 / 900
Current Ratio = 2.22 Times

2. Quick Ratio:

Quick Ratio = Quick Assets / Current Liabilities

= (Cash + Accounts Receivable) / Current Liabilities
= (550 + 250) / 900
= 800 / 900
Quick Ratio = 0.89 Times

3. Net Profit Margin:

Net Profit Margin = Net Profit / Sales

= 740 / 6,800
Net Profit Margin = 0.11 or 11%

4. Return on Assets (ROA): The solution by considering “Net Total

Assets (Total Fixed Assets – Accumulated
Depreciation) for calculating ROA
Return on Assets = Net Income / Total Assets
would also be considered as correct.
= 740 / 4,950 ROA = Net Income / Net Total Assets
Return on Assets = 0.15 or 15% ROA = 740 / (2,000 + 2,950 – 1400)
ROA = 0.21 or 21%

5. Return on Equity (ROE):

Return on Equity = Net Income / Shareholders’ Equity

= 740 / 2,100
Return on Equity = 0.35 or 35%
Part B:

Sr. # Ratios Ali Corporation Industry Averages

1 Current Ratio 2.22 times 2.5 times
2 Quick Ratio 0.89 times 1.2 time
3 Net Profit Margin 11% 30%
4 Return on Assets 15% (or 21%) 10%
5 Return on Equity 35% 25%

Overall, based on the analysis of liquidity (Current Ratio and Quick Ratio) and profitability (Profit
Margin, Return on Assets and Return on Equity) ratios, Ali Corporation appears to have a liquidity
position below the industry average, however, it does have current assets doubled as compared
with its current liabilities. By looking at the result of Current Ratio, the company can meet its
short-term obligations, but it still needs to improve its liquidity position to meet (or surpass) the
industry average. As far as the result for quick ratio (below 1) is concerned, it represents that the
company has stuck its current assets in inventory and if it is not sold quickly, the company may
face problems in meeting its short-term obligations. In terms of profitability, Ali Corporation
generates a profit margin far below the industry average, which suggests that the company needs
to minimize its costs and expenses to increase the profit and profit margin thereof. While other
profitability measures reveal that the company is generating a reasonable return on its assets and
total equity as compared with industry averages.