Financial Analysis of Regency Blue Ribbon Restaurant on Basis of the Major Trends - Example

Table of Contents Particulars Page No 1.0 Introduction 2 2.0 Ratio Analysis 3 2.1 Gross profit 3 2.2 Net Profit 5 2.3 Return on Investment 6 2.4 Working Capital 7 2.5 Debt Ratio 8 2.6 Inventory Turnover Ratio 8 2.7Accounts Receivable Turnover Ratio in Days 10 3.0. Forecast 11 4.0. Recommendations 12 5.0 Conclusion 12 6.0 References 13 7.0 Appendix 14 1.0 Introduction This report looks to provide readers with a complete understanding of financial analysis of Regency Blue Ribbon Restaurant on basis of the major trends shown by its performance evaluation in terms of its ratio calculated for the period 2010-2103 and expected sales and profitability forecast made for the year 2014 and 2015. The report looks to present a ratio analysis for the restaurant and compare the same with industry standards and future forecast so as to enable readers with a better understanding of the financial performance of Regency Blue Ribbon Restaurant. 2.0 Ratio Analysis Ratio analysis is a significant financial measurement tool used by both organizations and investors to decide upon the performance of the company. It is a key financial measurement tool which indicates the firm’s current and past financial performance in several key areas like profitability, solvency, gearing, efficiency, asset management, market value etc. It is also an important indication of the trend in the financial performance as the same can be compared with a firm’s past performance, competitor and industry to identify the areas where the performance of the firm has enhanced, stable or deteriorated. The ratio analysis of Regency Blue Ribbon Restaurant for the financial year 2010 to 2013 along with future forecast of 2014 and 2015 is analysed and discussed as below. 2.1 Gross Profit Gross profit margin ratio is a key financial profitability indicator of a firm’s performance. It measures the firm’s manufacturing and distribution efficiency during its production process. Let us have a look at the chart indicating the gross profit margin for Regency Blue Ribbon Restaurant for the period 2010 to 2013. Fig 1: GP Ratio for the period 2010-2013. The above graph clearly indicates a sharp dip in the gross profit margin of Regency Blue Ribbon Restaurant in the year 2013 which is an alarming threat to the company. The fall may be on account of two major reasons decline in sales or rise in cost of goods sold or both. The restaurant during its initial phase has been performing well to maintain a gross profit margin of 66% and above which was above the industry standard of 62% indicating better revenue and growth performance however the sharp dip in gross profit margin ratio in the year 2013 to 59% is certainly the current managerial issue (Padachi, 2006, p. 55). Furthermore, the future forecast for 2014 indicates a rise in the industry business of restaurant and Regency Blue Ribbon Restaurant is anticipating an abnormal rise in its revenue of food by 15% and beverages by 23% which shall once again boost up the gross margin ratio. To add to the concern the abnormal gain shall have a negative effect in 2015 where again the business shall face declines revenues and rising production overhead making it difficult for the firm to maintain a stable gross margin ratio. The manager in context to same should look to focus on more maintaining a stable growth rate by implementing new marketing strategies in the coming year so as to nullify the negative impact of abnormal gain in 2015. The firm can look upon new product lines in its current product portfolio and set aside reserve funds to give discounts and happy meal services in 2015 for ensuring a better business performance in coming years. 2.2 Net Profit Ratio Net profit ratio is also one of the key financial measurement indicators which measure the profitability of a firm performance. It measures the actual profit of the after taking into consideration all direct and indirect expenses into account. A declining net profit ratio is a threat to the company indicating rising indirect expenses or declining sales or both. Fig 2: Net Profit Margin Ratio for the period 2010 to 2013 Regency Blue Ribbon Ratio has been experiencing a declining trend in its net profit margin which is clearly evident from the graph indicated above. The firm has been establishing a declining sale which has directly impacted the net profits of the company along with rising direct expenses (Saleem & Rehman, 2011, p. 95). The firm has witnessed a net loss in the year 2013 which is an alarming threat to the going concern assumption of its business and the management needs to seriously look upon the same as the need of the hour. Furthermore the firm has never in the past has been able to achieve the industry standard of 9.1% and has a continuous decline in its net profits from its very inception indicating signs of poor management and low demand of its products and services offered. The firm in order to boost up its sales and maintain a healthy net profit margin should look upon promotional tools and new and unique products and services then offered by its existing and potential customers along with maintenance of customer satisfaction in its services offered. 2.3 Return on Investment (ROI) Return on Investment (ROI) is generally defined as the earning power of the asset measured as a ratio to its net income. It is one of the key financial measurement tool eyed upon by both existing and potential investors as it reflects the firm’s ability of effectively utilising its available resources. Let us have a look at the graph showing ROI of Regency Blue Ribbon Restaurant for the period 2010 to 2013. Fig 3: ROI for the period 2010 to 2013 Regency Blue Ribbon Restaurant has been able to effectively utilize its available resources during its early stage and witness a superb ROI of 42.5 % in 2010 which was much above the industry standards of 12.1%, the firm then established a declining trend but however was able to hold on its ROI at 16.8% in 2011 which was again above the industry standard. The real concern for the company today is the negative ROI of -1.8% which makes the firm an unsuitable investment for investors. The decline in its ROI is majorly on account of poor sales and poor revenue generated from the business (Eljelly, 2004, p.54). Furthermore with negative ROI the existing owners and investors are witnessing negative returns on their investment which needs to be evaluated and management steps should be taken on a short term goal setting basis to ensure better returns for the investors. The anticipated forecast of rising sales and revenue in 2014 shall certainly help the firm to bring back its ROI on a positive trend but however the same is to be regarded as just an abnormal gain during which the management should look to build upon core competencies for future failing to which might even lead to complete shutdown of the business. 2.4 Working Capital Working Capital ratio is an important financial tool which measures a firm short term ability to measure its financial liability. It is calculated as a proportion of current assets: current liability. The significance of this ratio implies that a company with a very low working capital ratio is always at the threat and risk of bankruptcy whereas a firm with a high working capital ratio signifies inefficient utilisation of its current assets and other resources available. Let us have a look at the working capital ratio interpretation of Regency Blue Ribbon Restaurant for the year 2010 to 2013. Regency Blue Ribbon Ratio during its initial stage of operation in 2010 had a very high working capital ratio of 5.2:1 signifying inefficient utilisation of its current assets and low debt in form of short term liabilities in its capital structure however, overtime the company management has been able to achieve a working capital ratio of 0.94:1 in 2013 which is as per the industry norms of 0.95:1 showing efficient utilisation of its assets and correct composition of current assets and current liabilities so as to meet its short term obligation and eliminating the risk of bankruptcy (Deloof, 2003, p. 539). Furthermore with positive anticipation of sales and revenue in 2014, the restaurant can look upon maintaining a smooth flow its working capital requirements and meet its short term obligations at ease making it easier for the company to ensure better performance of its daily operations. 2.5 Debt Ratio Debt Ratio is considered is an important solvency ratio and signifies the total debt to total asset composition in a firm’s capital structure. In simply meaning its highlights the proportion of a firm’s assets financed through debts. Let us have a look at the debt ratio performance of Regency Blue Ribbon Restaurant overtime. Regency Blue Ribbon Restaurant has shown a declining trend in its debt ratio over the years from 2010 to 2013. Currently the firm establishes a debt ratio of 0.35:1 which is much below the industry average of 0.75: 1 which implies the firm relies less on borrowings or debt as compared to equity for financing its assets establishing a strong equity finance back up over its assets and ample scope to enlarge its business via debt and achieve a better leverage (Antony, 2004, p. 43). The management can certainly look upon more debt financing to promote its business and ensure better revenues and sales in future. Certainly the firm has an opportunity here to make use of debts and solve many critical issues related to profitability and growth of the business. 2.6 Inventory Turnover Ratio Inventory Turnover Ratio in days is an important efficiency ratio which measures the efficiency of a firm in handling the goods its manufacture or buys for selling. Here the inventory or stock turnover has been explained differently for both foods and beverages. The Regency Blue Ribbon Restaurant has been able to lower its inventory food ratio from 10.6 days in 2010 to 3.3 days in 2013 which is much below the industry standards of 7 days showing effective inventory planning by the management. The firm has been able to quickly turn its inventory into sales and no major stock pile indicating fresh food for its customers (Filbeck & Krueger, 2005, p.15). However the same below the industry average is a threat in cases of contingency and emergency situation which is more likely to occur in 2014 as per the forecast of management and the firm need to maintain a steady inventory for meeting its rising anticipated sales in 2014. The beverage inventory turnover in days has also shown a declining trend from 29.6 days in 2010 to 6.1 days in 2013 which is near to the industry standards of 7 days and the management has been excellently churning its stock and the management can look to continue upon the same for smooth flow of its business in future years to come. 2.7 Accounts Receivable Turnover Ratio in Days Accounts Receivable Turnover Ratio in Days is again an efficiency ratio which measures how quickly a firm is able to convert its receivables into cash. A lower ratio is always preferable as it implies better credit management by the firm and ability of the firm to converts its short term debtors into ready cash on a quicker note. Let us have a look at the performance of Regency Blue Ribbon Restaurant in terms of its Accounts Receivable Turnover Ratio in Days overtime. The firm here has shown more of ups and downs in maintaining its accounts receivable turnover in days. The restaurant had witnessed the same as 24.1 days in 2010 which showed an increasing trend and reached 58.74 days and 78.95 days in 2011 and 2012 showing inefficiency of the management to convert its debtors into cash and large credit system. However, the management has been able to bring back the same to 22.5 days in 2013 which is below the industry average of 26.75 days showing signs of better credit management and excellent convertibility of its short term debtors to cash (Lyroudi & Lazaridis, 2000). The firm should look to maintain the same in future years so as to ensure high liquidity to meet its working capital requirement and smooth flow of business operations. 3.0. Forecast Regency Blue Ribbon Restaurant future depends a lot on the manner they are able to improve their profitability and control their turnover ratios. This will help the business to gain better leverage and will provide the required opportunity through which better results will be achieved. The financials also shows chances of improving by working on smaller areas and highlights the manner in which the business will be in a position to control their business and provide better returns to the stakeholders. 4.0 Recommendations The report highlights the ratio analysis of Regency Blue Ribbon Restaurant where it has been witnessed the company has been able to maintain efficiency in terms of its receivable turnover and inventory turnover ratio in days however the firm has been under real threat of declining sales and profitability which are much below industry standards. The management can look upon to introduce more of debt to ensure leverage in its capital structure and grab the anticipated forecast of abnormal gain in sales and profitability in 2014 for strengthening its promotional tools and introduce more products in its existing product and service portfolio so as to eliminate the threat of its going concern issues. 5.0. Conclusion The report thereby carries out a financial analysis for Regency Blue Ribbon Restaurant and highlights the strengths and weaknesses. It also brings forward the different areas and aspect that they need to work on and the manner in which the future performances can be improved. It shows the manner in which the return for the shareholders can improve and the entire mechanism which will help the business to get better returns. 6.0 References Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 7.0 Appendix You need to put the ratios which you have calculated Read More