Ratio Analysis and Performance of Regency Blue Ribbon Restaurant Company - Case Study Example

Introduction The objective of this financial ratio analysis report is to measure the general performance of Regency Blue Ribbon Restaurant Company. The report will provide an in-depth understanding of the company to the users. It will give the restaurant financial stability, profitability and the efficiency with which the company utilizes its asset to generate sale revenue (Gibson, 2010). This report will also provide management with tangible information that will help them to improve on poor areas and maintain good performances. The intended users are the management of the restaurant, government, customers and employees. The sources of the data used have been published financial statements i .e. the Profit and loss accounts and the balance sheets of the past four years. The restaurant specializes in the sale of foods and drinks to a wide range of customers (Moyer, McGuigan, & Kretlow, 2008). Analysis and Discussion of the historical ratios Comparison of year by year and industry averages Net Profit Margin 2007 2008 2009 2010 Net profit 107,719 97,226 40,326 (11,526) sales 1,725,576 1,750,597 1,482,057 2,154,659 Ratio 6.24% 5.55% 2.72% negative Industry average 9.1% 9.1% 9.1% 9.1% The analysis indicates a decline of performance for the company. In the four year period the company reported a better performance in the year 2007 (6.24%). There was a subsequent decline in the performance in the year 2008 (5.55%), 2009 (2.72%) and negative outcome in the year 2010. The performance for the company in every year is much below the industry average of 9.1%. The situation is worsening year after year. This indicates that the company is being face out of the industry by stiff competition in the industry. Gross Profit Margin ratio 2007 2008 2009 2010 Gross profit 1,163,422 1,176,903 973,070 1,268,495 sale 1,725,576 1,750,597 1,482,057 2,154,659 Ratio (%) 67.74% 67.22 65.56% 58.87% Industry average 62% 62% 62% 62% From this analysis the company was efficient in managing its raw material and direct labor in the year 2007 (67.74%) compared to the year 2008 (67.22), 2009 (65.56%) and the year 2010 (58.87%). The analysis shows a decline in the ability of the company to control the efficiency. Compared to the industry average the company performed better in the year 2007 (67.74%), 2008 (67.22) and 2009 (65.56%). In the year 2010 the company performance was below the industry average. Return on asset ratio Return on Total Assets = Net profits after taxes / total assets*100 2007 2008 2009 2010 2011 2012 Net profit 107,719 97,226 40,326 (11,526) 445,500 29,390 Total asset 513,548 586,654 536,708 483,494 483,494 483,494 Ratio (%) 20.97% 16.57% 7.51% negative 0.92 0.06 This analysis indicate a similar declining trend on how the company utilizes it asset. The year 2007 show a better efficiency in the use of the asset compared to year 2008 (16.57%), 2009 (7.51%) and year 2010 (negative). For the same problem of the return on equity has decreased in the year 2008, 2009 and 2010 compared to 2007 for Regency Blue Ribbon Restaurant. It means the company is losing efficiency in production process and also this falls in return on equity has a bad affect in common stock holder. It give that the measurement for evaluating the efficient use of resources by a company in producing earnings for its shareholders. The forecasted performance in the year 2011 and 2012 indicates poor performance, so the company should put in place a mechanism the check on this worrying trend. Working Capital/Current ratio 2007 2008 2009 2010 Current asset 64,498 77,425 45,926 20,125 Current liabilities 12350 54,930 38,158 21,470 Ratio 5.2 1.5 1.2 0.9 Industry average 0.95 0.95 0.95 0.95 The analysis indicates that in the year 2007 the company had huge current asset. The ratio is far much above the recommended level. The company is aught to have invested on a long term investment asset. In the year 2008 and 2009 the company is operating with the recommended level of 1.2 and 2.0 limit. In the year 2011 the company is operating below the recommended level and there are high chances that the company is likely to encounter a problem in meeting it current obligation. In comparison to the industry, the company is performing much better in the year 2007, 2008, and 2009. In the year 2010 the company is at the same level with the industry. This indicates that the company is declining in it performance compared with the industry. Debt 2007 2008 2009 2010 Total debt 248,550 274,430 209,158 169,470 Total asset 513,548 586,654 536,708 483,494 Ratio (%) 0.5 0.47 0.38 0.35 Industry average 0.75 0.75 0.75 0.75 From the analysis the company is strong in its financial position. In the four year period the company is enjoying a stable financial position and the trend is positive. The ratio is reducing all along the four years. As compared to the industry, the company is performing much better in terms of debt management. The analyzed results reveal that the company is generating a decreasing proportionate return on equity. The company shows a better return on equity and this indicates that the company is utilizing shareholders equity well on the competitive environment. In the year 2010 the company uses every shareholder dollar to generate a better return to the shareholders. In the same year the company uses shareholder equity efficiently to gain a better competitive edge than the year 2010 and 2009. Turn over of the inventory 2007 2008 2009 2010 sales 1,725,576 1,750,579 1,482,057 2, 154,659 stock 12,748 43,600 18,076 8,500 turnover 137 40 40 253 Account receivable turnover 2007 2008 2009 2010 sales 1,725,576 1,750,579 1,482,057 2, 154,659 a/c receivable 12,748 43,600 18,076 8,500 turnover 137 40 40 253 Industry average 26.75 days 26.75 days 26.75 days 26.75 days From this ratio analysis we acquire that the ratio is continuously increasing from 2007 to 2008 in Regency Blue Ribbon Restaurant. It means that Account receivable is increasing day by day which is very bad position for company because it has make up a lot of cash money, for this reason the company must be invested by other sector., So the higher turnover means that the company is inefficient in managing its Account receivable . Actions for improvements Net profit margin trend is worrying, so management must come with immediate strategy to curve this trend. Areas that management should focus on are marketing and cost management. They must come up with marketing strategies that place them a head of the competitors in the industry and they must give the operation cost low as much as possible. I am recommending the management to use the best allocation method to appropriate all the cost to the end product. The success of implementing a minimising cost strategy is to give all the stakeholders objective approach that aims to minimize cost at any one point. I am also recommending the management to actively engage in personal marketing such as reaching out to potential client through various means. The management should establish a brand that clearly distinct them from the competitor for a competitive edge in the market. Gross Profit Margin ratio analysis indicates a good performance for the company but the management must note with a lot of concern the declining trend. I recommend that management should come up with clear standard that will assist the company in meeting it objective all times. The standards should be well elaborated and issued to all staff members for individual appraisal. References Gibson, H 2010, Financial Reporting & Analysis: Using Financial Accounting Information, New York: Cengage Learning. Constantinides, G., Harris, M & Stulz, M 2003, Capital Assets Pricing Model, Corporations-- Finance, North-Holland: Elsevier. Eugene F. Brigham, J, Daves, R 2009, Intermediate Financial Management, New York: Cengage Learning. Moyer, R., McGuigan, R & Kretlow, J 2008, Management. New York: Cengage Learning. Tamari, M 1978, financial ratios: analysis and prediction. P. Elek: Indiana University. http://www.investopedia.com/terms/i/inventoryturnover.asp#ixzz1d8woItEB Appendices Balance Sheet for Regency Blue Ribbon Restaurant As at 30 June 2006 Assets $ $ $ Current Assets Cash 25,500 Accounts Receivable 10,053 Inventory 36,852 Pre-Paid Expenses 1,200 73,605 Non Current Assets Building 250,000 Motor Vehicles 85,500 less – Accum. Dep’n 15,550 69,950 Plant and Equipment 229,500 less – Accum. Dep’n 85,900 143,600 463,550 Total Assets 537,155 Less Liabilities Current Liabilities Bank Overdraft 8,000 Accounts Payable 10,600 Accrued expenses 1,590 20,190 Non Current Liabilities Mortgage 210,000 Car Loan 65,000 275,000 Total Liabilities 295,190 Net Assets $241,965 Owner’s Equity Capital 112,363 less Drawings 20,000 92,363 Net Profit/Loss 149,602 Total Owner’s Equity $241,965 Balance Sheet for Regency Blue Ribbon Restaurant As at 30 June 2010 Assets $ $ $ Current Assets Cash 2,000 Accounts Receivable 8,500 Inventory 9,300 Pre-Paid Expenses 325 20,125 Non Current Assets Building 250,000 Motor Vehicles 155,269 less – Accum. Dep’n 35,300 119,969 Plant and Equipment 229,500 less – Accum. Dep’n 136,100 93,400 463,369 Total Assets 483,494 Less Liabilities Current Liabilities Bank Overdraft 8,000 Accounts payable 12,350 Accrued expenses 1,120 21,470 Non Current Liabilities Mortgage 105,000 Car Loan 43,000 148,000 Total Liabilities 169,470 Net Assets $314,024 Owner’s Equity Capital 327,550 less Drawings 2,000 325,550 Net Profit/Loss (11,526) Total Owner’s Equity $314,024 Balance Sheet for Regency Blue Ribbon Restaurant As at 30 June 2008 Assets $ $ $ Current Assets Cash 21,000 Accounts Receivable 43,600 Inventory 12,500 Pre-Paid Expenses 325 77,425 Non Current Assets Building 250,000 Motor Vehicles 155,269 less – Accum. Dep’n 19,400 135,869 Plant and Equipment 229,500 less – Accum. Dep’n 106,140 123,360 509,229 Total Assets 586,654 Less Liabilities Current Liabilities Bank Overdraft 27,500 Accounts payable 25,430 Accrued expenses 2,000 54,930 Non Current Liabilities Mortgage 175,000 Car Loan 44,500 219,500 Total Liabilities 274,430 Net Assets $312,224 Owner’s Equity Capital 264,998 less Drawings 50,000 214,998 Net Profit/Loss 97,226 Total Owner’s Equity $312,224 Balance Sheet for Regency Blue Ribbon Restaurant As at 30 June 2009 Assets $ $ $ Current Assets Cash 16,500 Accounts Receivable 18,076 Inventory 11,200 Pre-Paid Expenses 150 45,926 Non Current Assets Building 250,000 Motor Vehicles 155,269 less – Accum. Dep’n 22,600 132,669 Plant and Equipment 229,500 less – Accum. Dep’n 121,387 108,113 490,782 Total Assets 536,708 Less Liabilities Current Liabilities Bank Overdraft 22,195 Accounts payable 13,423 Accrued expenses 2,540 38,158 Non Current Liabilities Mortgage 125,000 Car Loan 46,000 171,000 Total Liabilities 209,158 Net Assets $327,550 Owner’s Equity Capital 312,224 less Drawings 25,000 287,224 Net Profit/Loss 40,326 Total Owner’s Equity $327,550 Read More