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The paper "Ratio Analysis and Performance of Regency Blue Ribbon Restaurant Company" is a perfect example of a case study on finance and accounting. 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…
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Extract of sample "Ratio Analysis and Performance of Regency Blue Ribbon Restaurant Company"
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
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