Analysis Of Company Profitability, Liquidity, And Financial Gearing

Rate of Return on Total Assets

Profitability ratios help to measure the profit generating capability of the company. The shareholders and investors can also use it to evaluate the investments in respect to the returns, provided by the companies (Anderson et al. 2015). The profitability position of company is analysed by computing ratios such as return on total assets, return on ordinary equity and profit margin.

Return on total assets of company stood at 14.57% against industry standard of 22%. Hence, it can be inferred that efficiency of company in generating profit is lower compared to industry performance.

Return on ordinary equity is computed at 60.58% that is quite higher than industry standard of 20%. Higher return generated from equity is considered favourable. Profit margin on other hand, stood at 7.93% compared to industry average of 4%. It is indicative of the fact that company is highly efficient in generating income by creating sales. Therefore, profitability position of company is favourable.

Liquidity analysis:

Liquidity ratio helps in determining liquidity position of company by looking at its current assets whether they are sufficient to meet shot-term obligations (Collier 2015). Liquidity position of company is analysed by computing current ratio, quick ratio and time interest earned.

Current ratio of company stood at 2.21 as against industry average of 2.5. It is indicative of the fact that although the value is below industry average, the current assets has the capability of clearing off short-term liabilities of company using them. Quick ratio on other hand stood at 0.99 compared to industry average of 1.3. Value of quick ratio is lower than industry average and depicts that quick assets are not enough for making the payment or meeting short-term obligations. Time interest earned stood at 5.02 compared 6. Therefore, time interest earned for company is lower than industry average indicating the ability of company to make debt ability is less than industry. Creditors prefer higher time interest earned ratio as higher risky depicts less risky business (Salas and Campos 2016). Hence, company is required to increase this particular ratio.

Financial gearing:

Financial gearing ratio of company depicts the proportion of funds that is borrowed by company in relation to its equity. Financial stability of company has been analysed using dent ratio.

Debt ratio of company stood at 53% compared to industry average of 40%. Higher value is indicative of the fact that company is highly leveraged compared to industry and is regarded as risky to creditors and lenders (Tinkelman 2015).

Therefore, from the above figures, it is concluded that financial stability of company is below industry average and it generates higher profit as against industry. Liquidity position is more or less in par with industry.

For the restaurant business, an excellent and fine chef can be regarded as valuable asset if they keep the customers coming back. In this particular regard, chef and their skills are intangible and the goodwill of any restaurant is represented substantially by a part of fine food as cooked by excellent chef. Restaurant selling fine food would attract customers and help in their retention by enhancing customer loyalty. This would result in increasing sales compared to their competitors and consequently scaling up their revenue. A good chef act as goodwill for ant restaurant and customers’ feedback and good experience has the possibility of increasing good will value. Therefore, in this regard, chef can be regarded as an asset of business. Chef can be included in the balance sheet of business as they act as goodwill of restaurant and it will be classified under intangible assets. For including chef in the balance sheet requires valuation of human capital. Valuation of chef can be done in terms of sales and revenue generation of restaurant that keeps them ahead of their competitors (Chen et al. 2013). Moreover, valuation can also be done in terms of salary provided to chef. This is so because representation of human skills and talent in balance sheet requires valuation in numerical terms. Restaurant can project or forecast the sales value and ascertaining the present value of future cash flow will help in such intangible asset valuation. Therefore, it can be inferred from the analysis that chef can be regarded as business asset and they can be included in the balance sheet.

References list:

Anderson, S.B., Brown, J.L., Hodder, L. and Hopkins, P.E., 2015. The effect of alternative accounting measurement bases on investors’ assessments of managers’ stewardship. Accounting, Organizations and Society, 46, pp.100-114.

Chen, W., TAN, H.T. and Wang, E.Y., 2013. Fair value accounting and managers’ hedging decisions. Journal of Accounting Research, 51(1), pp.67-103.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Salas, O.A. and Campos, M.J.S., 2016. Finance and Accounting for Managers (Vol. 28). Profit Editorial.

Tinkelman, D.P., 2015. Introductory Accounting: A Measurement Approach for Managers. Routledge.