RATIO ANALYSIS

As per the requirement of Task 2, a five-year projected income statement and balance sheet has
been prepared as per the specified format. Below is the ratio analysis of the projected Data.
PROFITABILITY RATIOS:
ROA:
ROA measures the efficiency of the company of using its assets in making profit. Higher the
ratio, higher is the efficiency and productivity.
In our case, ROA is increasing from year 1 to year 5 which indicates that we are efficiently using
our assets for generation of profit.

ROA
40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
1 2 3 4 5

ROE:
This ratio is almost similar to ROA except it indicates the usage of equity for the generation and
this interprets the same results as of ROA.
In our scenario, ROE decreases with each year and this is due to increase in debt and liabilities
over the time horizon.
 ROE
60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
1 2 3 4 5

ROS:
Return on sale ratio is the ratio to evaluate the operational efficiency of the company. This ratio
explains the amount of profit earned per dollar of sales. Higher ratio indicates better productivity
and higher efficiency.

ROS
71.0%
70.0%
69.0%
68.0%
67.0%
66.0%
65.0%
64.0%
63.0%
62.0%
61.0%
1 2 3 4 5

In our scenario, our ROS ratio is increasing from year 1 to year 5 which contemplates the
enhancing operational efficiency of the company.
EFFICIENCY RATIOS:
DOS:
Days outstanding sales ratio is the ratio to measure the number of sales in which a
company/entity will be able to convert its receivable into days. Higher the number of days means
that it would take a large number of days to collect its cash from debtors.

DSO
90.00
80.00 76.80 77.36
75.44
70.00 68.25
60.00 58.40
50.00
40.00
30.00
20.00
10.00
-
1 2 3 4 5

In our case, with each passing year our DSO ratio is increasing which means that our collection
time period is increasing but this is justified with payable turnover days which are also
increasing which means our payment time period is also increasing.
Linking this ratio with working capital which is equal to the difference of account payable from
the sum of account receivable and inventory turnover days. Increasing in receivable and
inventory turnover is balancing with increase in payable turnover.
LIQUIDITY RATIOS:
CURRENT RATIO:
Current ratio measures the company’s ability to pay its short-term obligations. An ideal current
ratio is 1:1 which explains that for every short-term liability, we have one current liability. In our
scenario, we have a ratio higher than 1 for all five years which explains that we will be able to
meet our short-term obligations very effectively.

QUICK RATIO:
Quick ratio interprets the same results as of current ratio, the only difference is that this ratio
excludes inventory which means that this undertakes with most liquid assets for meeting short
term obligations.
In our scenario, the quick ratio is less than the current ratio but still positive indicating a better
financial position for payment of obligations.
ASSUMPTIONS RELATED TO REVENUE AND COST FORECAST

For the generation of projected income statements for 5 years, we have assumed that our revenue
in year 1 will be $1,200,000 and will increase by 10% till year. However, the profit margin will
be 10% for the first two years and then will increase by 2% till year 5. As indicated in the
projected income statement, our major expense is payroll which is increasing in line with our
revenue i.e. 10%.