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QUESTION
Projected Financial Ratios and Retained Earnings
Part IV: Projected Financial Ratios
In 50-100 words, provide an analysis overview for this part. Also explain how the projected ratios compare to the prior year ratios. Explain the importance of this comparison.
Part V: Retained Earnings
In 50-100 words, provide an analysis overview for this part.
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Answer
Financial Statements Analysis
Part 4
The quick ratio and current ratios show in the years 2019 and 2020 are less than 2. This is an indication that the company has not been able to meet its short-term obligations effectively in the past. This will slightly improve in the years 2021, 2022 and 2023, since the projected ratios are higher. The leverage ratios shows that most of the company’s activities are financed by non-owner funds, a state which is projected to persist. The company’s profit margin and assets turnover are however, higher, which is an indication of efficiency in using assets to generate sales. These are projected to be better in the year 2021 onwards.
Part 5
As per the projection, the company is expecting to grow its net profit margins consistently in the coming three years. This is an indication of a projected efficiency in usage of assets to generate sales, while minimizing costs (Dowdell, Klamm & Andersen,2020). consequently, the company will be able to report a consistent growth on its retained earnings in the coming three years. The growth in retained earnings will improve the net value of the firm and equity value (Karaömer & Özbirecikli, 2019). Consequently, the firm will be less levered, as most of its activities will be financed through owners’ funds.
References
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Dowdell, T. D., Klamm, B. K., & Andersen, M. L. (2020). Internal Controls and Financial Statement Analysis. Journal of Theoretical Accounting Research, 15(2), 34–57.
KARAÖMER, Y., & ÖZBİRECİKLİ, M. (2019). Effects of Financial Reporting Differences In Between BOBI FRS And MSUGT On Financial Statement Analysis: An Investigation on Financial Structure Ratios. Muhasebe ve Vergi Uygulamalari Dergisi (MUVU) / Journal of Accounting & Taxation Studies (JATS), 233–250.
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