Profitability Analysis Ratios of Restaurant Group Plc - Example

RESTAURANT GROUP PLC. ANALYSIS Name: Lecturer: Course name: Course code: Date: Executive summary The conceptual framework of this paper embrace substantive analysis of the Restaurant Group Plc. financial analysis based on the 2012 and 2013 financial years. The report will express the the company financial performances on the audited financial report in compliance with the standardized framework[Wei10]. The report involve the use of financial analysis models which is a process of scrutinizing the company’s operations in determining the going concern, stability and viability of the company[Pro10]. The Company’s financial performances analysis will unveils the profitability, Efficiency state, liquidity state as well as capital structure and market analysis of the company hence gives a better opinion to the investors, potential investors and the company’s management. Restaurant Group Plc. Company financial report analysis described by the Profitability analysis ratios which comprise of return on equity, return on assets, and profit margin ratios. The Current ratio as well quick asset ratio indicating the Restaurant Group Plc. Company’s liquidity state. Capital structure ratios involves debt ratio, equity ratio, and efficiency ratio including the assets turnover and the debtor’s turnovers days. Table of Contents Executive summary 1 Introduction 4 Profitability ratios 4 Return on equity 4 Return on assets 5 Profit margin 6 Efficiency ratios 8 Asset turnover ratio 8 Days debtors turn over 9 Liquidity ratios 10 Current ratio 11 Quick Ratio 12 Capital Structure ratio 13 Equity ratio 13 Debt ratio 14 Competitor analysis 15 Profitability ratios 16 Return on Equity 16 Return on Assets 17 Profit margin ratio 18 Assets efficiency 19 Assets turnover ratio 19 Debtors turnover ratio 20 Liquidity ratio 21 Current ratio 21 Quick acid ratio 22 Key Performances Indicators 22 Financial operation 23 Products 23 Distribution/ supply 23 People 24 Recommendation Conclusion 24 Bibliography 25 Introduction Restaurant Group Plc. is United Kingdom based company incorporated in 1954 and headquartered in London. Restaurant Group Plc. geographically operates in over 450 restaurants as well as pubs restaurants with its portfolio covering over range of categories such as table service, sandwich retail shops, counter services, as well as pubs and restaurants. Restaurant Group Plc. trades brands such as Chiquito, Garfunkel's, Frankie & Benny's, and Coast to Coast in more than 60 outlets dispersed in through the UK airports, shopping centers, and other transport locations. The company’s restaurants includes Frankie & Benny’s restaurant which serves American-Italian style cuisines. The Chiquito which is based in Mexican as well as Garfunkel’s offering the British and international cuisines. The Coast to Coast restaurant is based in American. Profitability ratios Profitability ratios are financial ratios utilized to assessing the company’s ability of generating earnings relative to the assets, equity, and turnover sales[Hře14]. Profitability ratio evaluates the company’s ability in generating earnings and the cash flows in relative to the firm’s financial investment. This ratio entails returns on equity, return on assets as well as the profit margin. Return on equity Return on equity ratio is profitability ratio utilized in determining the company’s profitability of the in relation to the invested shareholders equity[Cha10]. The company stakeholders and prospective investors are interested in the earnings generated by the company which are distributed as dividends at the financial years earning. Return on Equity ratio is evaluated by dividing the net profit with average shareholder's equity x 100.   Return on Equity   £ Millions Year's 2013 2012 Net profit 56,190 48,227 Shareholder’s Equity 215,965 183,848 Return on Equity 26.02% 26.23% Restaurant Group Plc. Return on Equity ratio describes a significant decrease from 26.23% in 2012 to 26.03% in financial year 2013. This heightens that the company management has no pragmatic measures over the company’s efficiency in making use of the equity invested to generate earnings. However, this describes that management need to enhance managerial control on the equity to promote profitability. Return on assets This ratio refers to the financial ration utilized in assessing the company’s profitability in relation to the average total assets invested for generation of profits[Cly06]. In the case where the return on assets ratio is higher, the company’s operates efficiently while lower ratio’s reveals that the competitors has found strategic models in embracing high operational efficiently which suppresses the company’s’ profitability on the assets. It is evaluated by dividing earnings before interest and tax with average total assets x 100.   Return on Assets   £ Millions Year's 2013 2012 EBIT 74,916 66,435 Total Assets 398,739 360,385 Return on Assets 18.79% 18.43% Restaurant Group Plc. Return on assets ratio reflect an increasing trend from 18.43% in financial 2012 to 18.79% in 2013. This accentuates that company’s operational incentives in effectively making use of assets invested in generating revenue is insignificant emphasize hence resulting to lower increase in earnings[Tho09]. This denotes that management needs to employ substantive procedure to effectively utilize the assets to generate revenue. Profit margin Profit margin profitability ratio utilized in determining sales revenue of a company in relative to the earnings before interest and tax. Profit margin ratio is utilized in assessing the average amount each pound of sales contribute to the company's earnings before interest and tax EBIT[Pro10]. Profit margin ratio is highly considered for decisive models since it give the investors blueprint on the comprehensive company’s profitability. It behooves the investors on the measures taken into consideration on evaluating the company’s performance and earnings distributed on the profits. It is evaluated by dividing the earnings before interest and tax with sales revenue x 100.   Profit Margin Ratio   £ Millions Year 2013 2012 EBIT 74,916 66,435 Sales 579,598 532,541 Profit Margin Ratio 12.93% 12.48% Restaurant Group Plc. profit margin ratio indicate an increasing trend from financial year 2012 1248% to 12.93% in 2013. The increase in the company’s profitability accentuates strategic management initiatives in complying with company’s goals and objectives. According to the sales growth depicted in 2013 annual report represent a slight growth from £532,541 in 2012 to £579,598 in financial year 2013 reflects that the company embraces procedures in substantiating high sales as well as enhancing the operational efficiency[Car13]. However, the management need to enhance on regulation of operating expenses to improves the firm’s profitability. Efficiency ratios The assets efficiency ratios assesses the company’s efficiency in utilizing the assets invested to generate earnings out of sales[Roc12]. Assets efficiency ratios indicates the company’s efficiency in making use of the assets to generate revenues incomes atributable to the company’s shareholders. The efficiency ratio provide a comparative analysis of the company assets in relation to the sales revenue. Asset turnover ratio The assets asset turnover ratio describes the company’s general efficiency in utilizing its assets to generate earnings to the business. Asset turnover ratio ascertains the firm’s efficacy in generating profit that eases the company’s financial situation in meeting their expenses[Cly06]. This ratio reveals the going concern of the company and its capability making profits from assets invested. The potential investors and the shareholders utilize this ratio in making decisive responses on the viability of the company’s for investment. Asset turnover ratio is evaluated by dividing the net sells reported and total assets.   Assets Turnover Ratio   £ Millions Year's 2013 2012 Sale Revenue 579,598 532,541 Total Assets 398,739 360,385 Assets Turnover Ratio 1.45 1.48 Restaurant Group Plc. Assets turnover ratio indicates decreasing efficiency in utilizing the assets to generate revenue through sales from 1.48 in 2012 to 1.45 in financial year 2013. The decrease in the company assets turnover ratio accentuates that management need to embrace pragmatic measures in ensuring that the company’s assets are effectively utilized to enhance full returns. Days debtors turn over Day’s debtors assesses the average time range it takes a company to receive cash from their trade debtors within a financial period[Wei10]. The firms should be collecting the amount owed by its credit customers ‘in a short period of time so as to enhance its financial liquidity in meeting short-term financial obligations. It is evaluated by dividing the average trade debtors by sales revenue x 365 (days).   Debtors turnover Ratio   £ Millions Year's 2013 2012 Trade debtor's 7,794 6,476 Sale Revenue 579,598 532,541 Debtors turnover Ratio 4.91 4.44 Restaurant Group Plc. Debtors turnover ratio describes a decreasing days taken by management to collect cash held in debtors from 4 days to 5 days in 2012 and 2013 financial years respectively[Ecc12]. The decrease in number of days for cash collection reveals that, the company does not give an average time to their debtors before collecting cash enhance signifying poor customer’s relationship which signifies standard less growth in sales revenue. Liquidity ratios Liquidity ratios are financial ratios that are utilized in evaluating the company’s ability in meeting its short term financial liabilities when they fall due for payment[Cly06]. Liquidity ratios indicates the numbers of times that short term financial obligations are gathered for by liquid assets and cash. In cases where the liquidity ratio is greater than one, then it indicates that the firm’s financial is good in meeting the current obligation. The higher the liquidity ratios indicates higher margin of safety that the company have in paying the current financial obligations. Liquidity ratios includes current ratio, and acid test ratio. Current ratio The current ratio is a financial ratio utilized in assessing the company’s ability to meet the short-term financial obligation using the current assets when they fall due. The company used current assets in financing short term liabilities of the business[Pro10]. Current ratio reveals the dollars of current assets the firm has per dollar of current liabilities. Current ratio does not consider the timing of the cash flows thus this ratio can mislead the users. It is evaluate by dividing current assets with current liabilities.   Current Ratio   £ Millions Year's 2013 2012 Current Assets 34,787 40,167 Current liabilities 114,955 105,435 Current Ratio 0.30 0.38 Restaurant Group Plc. current ratio unveils an decreasing ability of the company in meeting the current financial obligation from 0.38 in 2012 to 0.30 in 2013 financial years. This describes the company is in a poor financial state in meeting the current financial obligation s when they fall due[Pro10]. The decreasing trend accentuates that management enhance liquidity incentives to improve substantive controls over regulation of cash and cash equivalent in order to meet the current liability. Quick Ratio The quick ratio refers to the company financial ability to pay the current obligations without making use of the inventories[Avk11]. The higher quick assets ratios describes a substantive company’s financial situation in efficiently converting the quick assets without selling other assets to finance the current liabilities.   Quick Ratio   £ Millions Year's 2013 2012 Current Assets-Inventory 34787-5,085 40167-4,872 Current liabilities 114,955 105,435 Quick acid Ratio 0.26 0.33  Restaurant Group Plc. Quick acid ratio depict a decreasing trend in meeting the current financial liabilities without the use of the company’s inventory[Axe12]. The decreasing trend from 0.33 in financial year 2012 to 0.26 in financial year 2013 denotes that the company management are not effective enough in enhancing company’s liquidity without the use of inventory hence not viable for investment. Capital Structure ratio Capital structure ratio involves combination of both long term sources of finances and short term sources of finances[Car13]. Capital structure ratios evaluate the companies’ long term financial strength which is delineated by the coverage and structural ratios such as debt ratios, debt equity ratios. This ratio reveals the percentage ratio of the debt and firm's equity and provide a benchmark on extend to which the firm utilizes its long term debt. Equity ratio Equity ratio expresses the amount of pounds of equity in every dollar of assets[Tho09]. According to the accounting equation total equity is equal to total assets plus liabilities thus if equity ratio is less than 50%, then it reveal that the company was more dependent on debt funding than equity funding. This reveals that the company had more liabilities over its assets. Equity ratio is evaluated by dividing the total equity with the total assets x 100.   Equity ratio   £ Millions Year's 2013 2012 Shareholder's equity 215,965 183,848 Total Assets 398,739 360,385 Equity Ratio 54.16% 51.01% Restaurant Group Plc. Equity ratio describes that the company is averagely reliable in both debt and equity in 2012 while towards 2013 financial year, the company rely on the debt as compared to the debt since the equity ratio increases from 51.01% in 2012 to 54.16% in 2013. However, the potential investors should consider investing on the company to since it’s equitable enough in financing its investment without using debt. Debt ratio Debt ratio is utilized in determining the amount of liabilities that exist per pound of assets in the firm. Usually if debt ratio is more than 50%, it is considered that the company finances its investments in assets by using debt than the equity available in the firm[Wei10]. It is accounted for as follows= total liabilities / total assets x 100   Debt ratio   £ Millions Year's 2013 2012 Total Liabilities 182,774 176,537 Total Assets 398,739 360,385 Debt Ratio 45.84% 48.99% Restaurant Group Plc. Debt ratio reveal a decreasing trend in from 48.99% in financial year 2012 to 45.84% in the subsequent year 2013. The decrease in debt ratio accentuates the slight increase in relying on equity in financing the company’s investment[Ecc12]. This shows that management embarks on pragmatic measures in ensuring the company’s reliability in debt reduces to promote viability for investment. Competitor analysis 2013 2012 Sales 17,557 16,905 Profit before tax 721 848 Net profit 437 611 Restaurant Group Plc. competitor reflect lower value of sales 17,557 in 2013 and 16,905 in 2012 as compared to Restaurant Group Plc. Sales of 579,598 in 2013 and 532,541 in 2012. The competitors profit before taxes was reported at 721 in 2013 and 848 in 2012 as compared to Restaurant Group Plc. Profit before tax of 74,916 in 2013 and 66,435 in 2012.The competitor’s profit margin is reported at 437 in 2013 and 611 in 2012 as compared to the 56,190 and 48,227 respectively. Profitability ratios Return on Equity The Restaurant Group Plc. Reveals higher efficiency in utilizing the equity invested from an average of 26% in the consecutive 2012 and 2013 financial year. The Compass Group PLC competitor accentuates a lower efficiency in making use of equity to generate income attributable to shareholders hence less viable for investment[Avk11]. Return on Assets The Restaurant Group Plc. Unveils increasing effectiveness in making use of assets to generate income from 18.43% in 2012 to 18.79% in 2013 as compared to its competitor with a decreasing efficiency from 9.19% in 2012 to 7.90% in 2013. However, this shows that The Restaurant Group Plc. is more competitive than Compass Group PLC hence viable for investment[Cly06]. Profit margin ratio Restaurant Group Plc. profit margin ratio indicates that it more competitive as compared to its competitors since it has higher and increasing profit margin ratio from 12.48% in 2012 and 12.93% in 2013 as compared to Compass Group PLC with decreasing profit margin of 5.02% to 4.11%. However, Restaurant Group Plc. describes that it has better measures over the competitor hence viable for investment. Assets efficiency Assets turnover ratio Restaurant Group Plc. reveals a less efficient measures in using its assets to generate revenue through sales as compared to the Compass Group PLC competitor with higher an increasing efficiency if 1.83 in 2012 to 1.92 in 2013[Cha10]. However, the competitor Compass Group PLC has pragmatic measure which employ in effecting its effectiveness in utilizing the assets in generating revenue. Debtors turnover ratio The Restaurant Group Plc. depicts substantive efficiency in collecting cash held in debtors from 4 days to 5 days in 2012 to 2013 respectively. This accentuates harsh measure which does not aloe customers to credibly meet the obligation hence shy off the customers. The competitor reveal average time taken to collect cash from debtors hence accentuating that management has substantive procedure to maintain customer relations hence higher sales as compared to Restaurant Group Plc. Liquidity ratio Current ratio The Compass Group PLC competitor depict a higher and increasing current ratio of 0.90 in 2012 to 0.96 in 2013 as compared to Restaurant Group Plc with a decreasing financial liquidity in meeting the short term obligation from 0.30 to 0.38 % in 2012 2013 financial years. However, this shows that the competitor management has employ substantive procedures to increase cash to meet short-term obligation over the Restaurant Group Plc. Quick acid ratio Restaurant Group Plc. show a lower financial liquidity in utilizing current asset without the inventory to meet the current liability from 0.33 to 0.26 in financial 2012 and 2013. While the competitor shows that it has employed policies in regard to enhancing the company’s liquidity that it’s grows from 0.83 to 0.89 in 2012 and 2013 financial years. Key Performances Indicators The key performance indicators provides the company management incentives out in place to ensure effective performances both financial and operational performances[Ecc12]. The KPI’s accentuates the outlay of the company’s management framework in promoting the shareholders objective and company’s initiatives. The comprehensive analysis of the company’s KPI’s performances evaluation embraces; Financial operation The company revenue operational efficiency accentuates non consistent profitability performances based on the company’s marginal income realized in 2012 and 2013 financial years[Hře14]. According to Restaurant Group Plc. 2013 annual report the target revenue growth was realized with 9% increase from 2012 sales of £532,541to £579,568 2013 financial years. This articulates that substantive performances policies and procedures were adhered that resulted to reduction in the profits margin. Products The Restaurant Group Plc. Product initiative conceptualize of product differentiation portfolio which is emphasize within the performances based measure among the organizational products such as Chiquito, Garfunkel's, Frankie & Benny's, and Coast to Coast along its outlets. The company embraces ideal sourcing measures which entails high quality products to promote the firms competitive strategy as well as increasing operating efficiency and revenue growth of 3.5%. Distribution/ supply The company intensify on 35 new sites opened to increase the supply chain infrastructure which was achieved in 2013. However, the company’s annual report conventionally strategies on the pragmatic initiatives offer the promotion of the 46 to 43 new sites as at 2014 to sustainability meet the demand-full environment[Roc12]. People The Restaurant Group Plc has intensify pipeline of new managers with 64% of junior managers as well as 38% are the area managers which promotes gender diversity as considered in the management framework. Recommendation Conclusion The financial analysis of the Restaurant Group Plc. accentuated through profitability ratios liquidity, efficiency ratio and structural ratio’s describes that Restaurant Group Plc. has several competitive advantages that includes portfolio of strong brands and low production cost that mutually make up a narrow economic moat. However Restaurant Group Plc. needs to conceptualize in consistently in generates returns on invested shareholders capital and enhances continual refreshment of the product portfolio through innovation program that sustains it competitive strength in the market to win over Compass Group PLC competitor. Bibliography Wei10: , (Weistroffer, 2010), Pro10: , (Stickney, 2009), Hře14: , (Hřebíček, 2014), Cha10: , (Gibson, 2010 ), Cly06: , (Clyde Stickney, 2006), Tho09: , (Ittelson, 2009), Car13: , (James Reeve, 2013), Roc12: , (Roca, 2012), Ecc12: , (Eccles, 2012), Avk11: , (Avkiran, 2011), Axe12: , (Tracy, 2012), Read More