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BUSINESS FINANCE (ACC501) ASSIGNMENT SOLUTION

(BC220201506)

Question: Below is the Balance Sheet and Income Statement of Ali Corporation for the year ended
December 31, 2023.
Answer:

Let’s start by calculating the required rations:

a) Current Ratio = Current Assets/Current liabilities

= cash + accounts receivable + inventory/Accounts payable + Notes
payable
= 550+250+1200/300+600
=2000/900 = 2.22times

b) Quick Ration = Current Assets – Inventory / Current Liabilities

= 2000-1200/900 = 0.89 times

c) Net Profit Margin = (Net Income / Sales)*100

= (740/6800)*100
=10.88%

d) Return on Assets = (Net Income/total assets) *100

Total Assets= Operating fixed assets + Total liabilities & shareholder equity
= 2950+4950 =7900 millions
ROA= (740/7900)*100
= 9.37%
e) Return on Equity = (Net Income / Total Equity)*100
Total equity=Common stock+Capital Surplus + Retained Earnings
= 1000+750+350 = 2100 millions
ROE= (740/2100)*100
= 35.24%

b) Analysis:

Based on the calculated ratios and industry averages:

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Current Ratio: Ali Corporation’s current ratio of 2.22 times is less than that of the industry
average of 2.5 times, hinting that the company’s liquidity position as measured by its ability to
settle short term obligations using its current assets is a bit weaker relative to the industry mean.

Quick Ratio: Additionally, Ali Corporation has quick ratio of 0.89 times which is below the
industrial norm at 1.2 times thereby implying that it may face some challenges in meeting its
immediate liabilities with its most liquid assets.

Net Profit Margin: Compared to an industry average of 30%, Ali Corporation has net profit
margin about 10.88%. This means that, in terms of net income earned from sales, this company’s
profitability is well below industry levels.

Return on Assets (ROA): The ROA for Ali Corporation stands at 9.37% slightly below the
industrial norm of 10%. It seems therefore like the firm generates somewhat lesser profits from
its assets when compared to other companies within this particular sector.

Return on Equity (ROE): On the other hand, Ali Corporation’s ROE of 35.24% exceeds the
industry average of % indicating that the company’s returns to equity shareholders are better than
those experienced across industries.

Ali Corporation shows strong return on equity, but it has liquidity ratios and profitability margins
below industry averages, which means there are some issues that need to be addressed in respect
of short-term liquidity management and improving profitability.