1. Financial Analysis Assignment
Financial Analysis AssignmentI. Executive SummaryLa Paloma Restaurant is involved in
restaurant and bar activities, and it was incorporated into service in 2000. The company is
performing well financially, and it has reported positive trend in its operations since
inception. Though the company has been hampered by the financial inadequacies in regard
to the increase in operating expenditure, the profitability of the company is within the range
of the industrial average. The company’ s sales revenue is increasing, and the addition of
new employees in the sector prompted for increased profitability for the organization.
Though the company is not involved in investment strategies, its expansion activities
necessitated increase in revenue outlay, and fostered its competitiveness in the economy.
With these initiatives in place, the investors and the management is assured of increased
profitability of the company in the future. However, the net profit for the company was
hampered by the huge operating expenses associated with wages and salaries and
advertisement costs. In order to be in par with other organizations in the sector, the
management should reduce the advertisement costs, and ensure that the wages and salaries
of employees are harmonized. The employees should be encouraged to increase their
production level in the sector.II. Financial Data Calculationsa) Common Sized Income and
Balance Sheeti) Horizontal Common SizedLa Paloma Restaurant and BarBalance Sheet2008
2009 2010 2011 2012Current AssetsCash 100.00% 101.67% 105.50% 78.05%
65.07%Accounts receivables 100.00% 103.10% 125.26% 131.52% 116.05%Inventory
100.00% 154.65% 210.97% 232.06% 279.42%Investments 100.00% 106.82% 96.83%
65.97% 57.41%Total Current Assets 100.00% 109.94% 117.43% 101.04% 95.95%Fixed
AssetsBuilding (less depr.) 100.00% 96.53% 95.20% 136.34% 132.22%Equip. (less depr.)
100.00% 107.28% 108.95% 125.42% 122.70%Total Fixed Assets 100.00% 99.09% 98.47%
133.75% 129.96%Total Assets 100.00% 103.10% 105.48% 121.64% 117.38%Liabilities
and Owner’ s EquityCurrent LiabilitiesAccounts payable 100.00% 102.19% 107.43%
150.99% 130.43%Current portion oflong-term debt 100.00% 97.47% 94.94% 92.41%
151.90%Other short-termloans 100.00% 96.17% 103.17% 145.22% 113.83%Total Current
Liabilities100.00% 99.45% 103.82% 138.51% 129.15%Long-Term LiabilitiesMortgage
100.00% 98.30% 97.08% 145.06% 138.06%Bank Loans 100.00% 102.86% 105.84%
119.05% 107.86%Total Long-term Liabilities 100.00% 99.53% 99.43% 138.07%
129.94%Net Owner’ s Equity 100.00% 108.50% 112.20% 96.80% 98.98%Total Liabilities
and Equity 100.00% 103.10% 105.48% 121.64% 117.37%La Paloma Restaurant and
BarIncome Statement2008 2009 2010 2011 2012Net Sales 100.00% 112.00% 117.60%
4. Equity2008 = 433,400 / 810,600= 0.532009 = 431,000 / 879,500= 0.492010 = 449,956 /
909,500= 0.492011 = 600,281 / 784,663= 0.762012 = 559,722 / 802,356= 0.70xxi) Fixed
Assets to Owner’ s equity= Fixed Assets/ Owner’ s equity2008 = 1,275,750 / 810,600=
1.572009 = 1,264,100 / 879,500= 1.392010 = 1,256,200 / 909,500= 1.382011 = 1,706,220 /
784,663= 2.172012 = 1,657,950 / 802,356= 2.07III. Financial Analysisa) Trend Analysisi)
Common sized statementsLa Paloma Restaurant and bar financial statements provide
income statements and balance sheet for five years preceding the end of year 2012. The
company’ s net revenue has been increased steadily from 2008, and in 2012 it had reported
an increase of 52.41% from the value it reported in 2008. With such an increase, the
management and investors are confident that the operations of the company would
continue to yield increased revenue over unforeseeable future. Increase in revenues
necessitated an increase in gross profit (by 51.08% since 2008). The figure is directly
proportional to the increase in net sales. In the case of operating expenses for the company,
there was an increase by a considerable margin in 2011 and 2012. This was attributed to
the increase in the number of employees from 40 to 46, which meant that the company had
to restructure its wages and salaries. As such, between 2008 and 2010, the company had an
increase of 18.08% on the total operating expenses, while between 2011 and 2012; there
was a considerable increase in the total operating expenses—
55.38%. However, following
the restructuring of its operations and enacting expansion activities, the management will
be able to offset the expenses in the near future. The increase in expenditure caused the
company to experience a decline in net profit. Though net profit had increased gradually
between 2008 and 2010, expansion strategies forced the company to record a historical law
of 5.72% as compared to that of 2008—
a decrease by 94.28%. In 2012, the company
increased its profitability to 127.96%, which was a relieve to the investors, as they
acknowledged that the company’ s expansion strategies has started to realize success
(Peterson and Fabozzi, 2012).On the other hand, the statement of financial position for the
company showed significant changes in its assets, liabilities and equity for the five year
period. The total assets increased at a slow rate between 2008 and 2011, but it decreased in
2012 by 5.48% as compared to the value of 2011. This is attributed to the company
reducing their investment by 42.59% until 2012. In addition, in 2012, there was a
significant decrease in accounts receivables and cash and cash equivalents by 15.47% and
12.98% respectively as compared to the figures of the previous year. The liabilities
increased significantly in 2011, and it was due to the company focuses on expansion of its
operations. Financing such operations required an additional income; therefore, the
management had to resort to mortgages. The owner’ s equity reduced in 2011 after the
management resorted to mortgage financing, and it has been decreasing since then. With
this trend in place, the company’ s future financial stability is safeguarded, as the figures
show that it is stabilizing following the expansion initiatives.ii) Ratio AnalysisThe working
capital for the company was not consistent over the five-year period, and it is difficult to
ascertain with clarity the future prospects and scenarios of the working capital. Between
2008 and 2010, there was an increase in working capital attributed to the company’ s
increased investment, while in 2011 and 2012, the working capital decreased drastically.
This was due to the company’ s involvement in expansion strategy which necessitated
5. increase in current liabilities. The same scenario was realized in the company’ s current
ratio and quick ratio. For instance, in 2008, the current ratio for La Paloma restaurant and
bar was 1.73 while in 2010 it was 2.00. Following the increase in current liabilities, the
current ratio reduced to 1.26 and 1.28 in the subsequent years—
2011 and 2012. In the case
of quick ratio, there was an increase to 1.59 in 2010 as compared to 1.54 in 2008; however,
the increased liabilities also affected the quick ratio for the company as it reduced to 0.88.
Though the ratio as stagnated in 2012 and it shows improvement from the previous period,
the investors and financial analysis cannot determine the direction of the company’ s
liquidity status.The net profit to owner’ s equity for the company decreased drastically in
2011, due to the increased expenses that hampered the progress and growth of net profits.
In 2012, the ratio increased to 19.4%—
a positive aspect in the company’ s operations. The
net profit to net sales ratio stagnated between 2008 and 2010 (reporting an average of
0.085), but it declined in 2011 before resuming to the normal average of 0.08 in 2012. In the
case of net sales to owner’ s equity, the company reported an increased value since 2008,
and in 2012, it recorded a maximum ever of 2.56. Net sales to fixed assets ratio
demonstrated the company’ s ability to use its fixed assets in the generation of net sales.
The value was consistent in the five-year period for the company, but in 2012, it recorded
the highest value of 1.24. With this trend in place, it is predicted that the company would
continue to utilize the available fixed assets in the generation of net sales.Receivables to
working capital measure the amount of working capital that is comprised in the working
capital. The ratio is increasing and it shows that the company will not effectively cover the
current operations in the firm. Strategies should be undertaken to ensure that the accounts
receivables are collected within a considerable shorter period. Inventory to working capital
indicates the proportion of working capital that comprises inventory (Troy, 2008). The ratio
is increasing, and it is not healthy to the organization, as the time taken to sale inventory
should be smaller. In the case of collection period, the ratio is getting smaller, and this
demonstrates the company’ s ability to collect the debts from the customers. Net sales to
inventory ratio indicates the amount of sales that the company generates when it is
involved in any form of inventory investment. The ratio has decreased since 2008, and it is
not healthy for the organization. Though it has stagnated at 9.09, the management should
improve the ratio to at least 16.67; reported in 2008.Net sales to working capital ratio show
the amount of sales revenue generated from working capital of the firm. As it measures
efficiency of the organization, the company should demonstrate a growth in this ratio
(Beyer, 2010). However, this is not the case as the company has realized a reduction in the
ratio since 2008. In 2012, for instance, the ratio had decreased by 0.19 to 5.24. Long-term
liabilities to working capital show the amount of long-term debt indicating working capital
of the firm. The company’ s long-term debt to working capital ratio is falling denoting the
increased operating efficiency. Debt to owner’ s equity is increasing, and it shows that
company is not financially conservative. Though there is high risk in the case of liquidation,
the management should consider increasing the operation of the company and should not
rely extensively on debt financing. The ratio of current liabilities to owner’ s equity is
stagnating showing that the company is continuing with reliance of current liabilities, like
creditors, to harness its operations. However, the ratio should be getting smaller in order to
6. reduce the financial risk of the entity.Inventory turnover ratio measures the effectiveness of
the company to utilize the available stock in the realization of revenue (Longenecker, 2006).
It shows the frequency of replacing the stock within a stipulated time. Inventory turnover
ratio has been decreasing since 2008, and this is unhealthy for the organization. Unless
coherent strategies are undertaken to increase the sales for the year, the company would
continue to report low turnover. In the case of debt ratio, it has been consistent over the
five-year period, but there was a drastic increase in the ratio in 2011. The company should
not rely extensively on the liabilities to finance its operations rather should channel its
operations to revenue financing. With the increase in number of employees for the company
in 2011, the company aimed at increasing the amount of sales during the subsequent
financial periods. Such target was realized as the amount of sales per employee has been
increasing implying that the company would record high revenue outlay in the near future.
The increase in sales per employee meant that the company’ s profitability was also
increased; though at a small margin.The gross profit margin had decreased in 2011 to 55%,
but with the new initiatives and expansion in place, the company’ s gross profit margin
increased to 57%. The company has stabilized, and there is a probability that the gross
profit margin for the company would continue to increase to unforeseeable future. Finally,
accounts receivables turnover ratio measures the company’ s efficiency in collecting its
average accounts receivables at a particular financial period (Bull, 2008). Though the
company’ s had stagnated in collection of accounts receivables, in 2012, the ratio increased
to 2.19 meaning that the company’ s ability to collect the accounts receivables is increasing.
This will improve the profitability of the company.iii) Raw Financial DataConsidering the
significant changes that the company made to its operations in 2011—
increasing the
number of employees and expanding its operations—
it was evident that the company’ s
financial position would be improved. The net sales for the company have been increasing
since 2008 with an increase of close to 700,000 recorded in 2012. With increase in sales
revenue, the company was assured of increase in gross profit. In 2008, the gross profit was
at 776,250 while in 2012, the value had increased to 1,172,792. The sales revenue is not
expected to decline in the near future and the company would continue to enjoy huge
amount of gross profit. However, with new initiatives in place—
increase in employees and
expansion of business operations—
the company increased its operating expenses over the
five-year period. The worst was realized in 2011 where the company’ s operating expenses
was about to equal the gross profit reported—
936,127. The increase in operating expenses
affected the net profit for La Paloma Company. The net profit decreased from 131,771 in
2010 to a historical low of 6,947 in 2012. However, when the company had stabilized its
operations, it recorded an increased amount to 155,473. It is projected that such an amount
would continue to increase, and the future of the organization shows success.Consequently,
the statement of financial position for the entity shows an improvement in the total assets
as compared to the values of 2008. There has been consistent increase in the amount of
total assets for the company since 2008, but in 2012, the amount dropped slightly. This was
due to the reduction in cash and cash equivalents, accounts receivables, and investments.
Unlike in the prior years, the company used the available cash to meet the increased
liabilities, and it was able to collect accounts receivables (Troy, 2008). Investment projects
7. were reduced after the company reported a massive decline in net profit in the financial
period ending 2011. The same scenario was reported in the total liabilities and owner’ s
equity. The company used the available current assets to meet the company short-term
obligations; hence reduction in the overall amount of liabilities. The intention of the firm is
to meet the short-term obligations with the available current assets, as this will encourage
creditors, including suppliers, to provide the company with credit facilities (Taylor and
Archer, 2005).b) Comparison to Industry Percentagei) RatiosThe industry financial ratios
are given below;Net profit to owner’ s equity 18.4%Net profit to net sales 3.10Net sales to
fixed assets 5.80Current ratio 1.30Net sales to owner’ s equity 7.50Acid test (quick ratio)
1.00Receivables to working capital 1.20Inventory to working capital 0.40Collection period
43.0 daysNet sales to inventory 22.00Inventory turnover rate 6 timesNet sales to working
capital 10.00Long term liabilities to working capital 0.70Debt to owner’ s equity
1.60Current liabilities to owner’ s equity 1.10Fixed assets to owner’ s equity 1.20Debt to
asset ratio 0.80Gross profit margin 58.20%Retrieved from Longenecker (2006).The
working capital and sales per employee ratio depends on the size of the firm and there is no
determined industrial average that can be used to assess the trend in the economy. In the
case of current ratio, the company had a high value in 2010. It meant that it was not utilizing
its available current assets to realize revenues for the company. However, in 2011 and
2012, the current ratio was at 1.3 implying that the company had commenced utilization of
the available current assets. The quick ratio for the industry is given at 1.0, and, in 2008 to
2010, the company had a high quick ratio. In 2011 and 2012, the company utilized the liquid
assets in meeting its short-term obligations and it reduced to 0.9; a realistic value as
compared to the industrial average. Consequently, the inventory turnover for the company
was within the industrial limits of 6 times. There has been drastic decline in the ratio since
2010 and the management should strategize on initiatives to improve this ratio.The
company’ s net profit to owner’ s equity was considerably lower in 2011, at 0.89%, as
compared to the industry average of 18.4%. It was in 2012 that the company realized net
profit to owner’ s equity that was above the industrial level; 19.4%. The net profit to net
sales ratio demonstrated the same trend as the net profit to owner’ s equity ratio. However,
the values were lower than the industrial average depicting a worst scenario in the
company’ s expenditures. Net sales to owner’ s equity ratio have an industrial average of
7.5. The company was affected with restructuring and imminent changes in the operations
of the company, and it recorded lower net sales to owner’ s equity ratio. Though there is
improvement in the ratio, the rate is improving at a gradually, and it will take the
management several years for it to realize the industrial level. The net sales to fixed assets,
on the other hand, denote an industry average of 5.8. Only a small proportion of the
company’ s fixed assets were utilized in the realization of the net sales. It is the mandate of
the organization to incorporate measures that would ensure the fixed assets generate
required sales revenue.In the case of the company’ s receivables to working capital, the
industry average is 1.2. The ratio was higher in 2011 due to the company’ s lack of
collection of accounts receivables. Inventory to working capital for the firm depicted the
necessity for the organization to utilize working capital in inventory generation, and it was
consistent with the industry level of 0.4 (Bull, 2008). For efficiency to be realized, the
8. collection period is stipulated at 43 days, and the company had surpassed the industrial
collection period; which is a healthy trend. The net sales to inventory ratio for the industry
is set at an average of 22.0. In 2008, the company’ s average was at 16.7, but it declined in
the subsequent years. The same scenario was evidenced in net sales to working capital,
which has a reported industrial average of 10.0. Improvement on working capital should be
undertaken by the management. The effect of liabilities, which affected the working capital,
also had an impact on the company’ s long-term liabilities to working capital ratio. The
industrial level for such a ratio is given at 0.7, but the company was not able to realize the
ratio’ s average.The debt ratio for the industry is stipulated at 0.8. La Paloma is not doing
better in regard to financing its operations. It relies extensively on debt financing, which is
unhealthy to any business organization. In the case of the industry average of profitability,
the company is doing better, as it has reported a gross profit margin that is within the range
of the industrial limit. With this trend, the company can realize success, but only if it
reduces the operating expenses that hamper its net profit. The company is doing its best in
collecting its accounts receivables. Though it has not reached the industrial average, with
such trend, it would soon realize the ratio of 2.5. In 2012, the accounts receivable turnover
ratio increased to 2.19, up from 1.61. Where the same trend continues, it is projected that it
will surpass the industry average.ii) Common Sized StatementsIndustry Average Income
StatementSales 100%Cost of Goods Sold 41.80%Gross Profit 58.20%Wages and Salaries
18.85%Rent 7.00%Advertising 2.28%Insurance 7.50%Interest 1.68%Utilities
5.42%Depreciation 3.41%Miscellaneous 4.63%Net Profit 7.43%Retrieved from
http://www.bizstats.com/The income statement portrays a positive in trend in the five-
year period with the company demonstrating an income statement that is higher than the
industrial average. The cost of goods sold for the company is reported at 43% in all the five
years financial periods, which is slightly higher than the industrial average of 41.80%. In the
case of the gross profit, it reported an average of 27% in all the five years. This was within
the industrial level of 58.20%. However, there was inconsistent in the operating expenses
for the company. The industrial average for the total expenditure in the sector is at 50.77%,
the company realized a lower level of operating expenses in all the five years financial
statement except in 2011 where it reported 54%. This hampered the overall net profit for
the company to a historical low of 1% as compared to the industry average of 7.43%. It was
a relief to the investors of the company as in 2012, the company reported net profit ratio of
8%.Industry Average Balance SheetCash 7.93%Receivables 5.02%Inventory 2.35%Other
Current Assets 3.03%Total Current Assets 18.33%Fixed assets 0.00%Other Non-Current
assets 30.39%Total Assets 100.0%Accounts Payable 5.31%Loans/Notes Payable
2.65%Other Current Liabilities 17.66%Other Long-term liabilities 49.30%Total Liabilities
66.95%Net Worth 33.05%Total Liabilities and Net Worth 100.0%Retrieved from
http://www.bizstats.com/La Paloma Restaurant and Bar financial statement is good and it
conforms to the industrial average on the required statement of financial position. In the
case of the total current assets, the industrial average is stipulated at 18.33% while the
entity reported total current assets of more than 30% in the five-year period—
the highest
was in 2010 where it recorded 41%. The liabilities and owner’ s equity also conform to the
industrial average. The total liabilities for the company were 60% (2008), 58% (2009), 57%
9. (2010), 68% (2011), and 66% (2012), which was lower than the industrial average of
66.95%. When the company reports a lower value of total liabilities, it shows the financial
health of the organization.c) Analysis of the RatiosThe financial ratios of the company are
better owing to the fact that it has an improved profitability level as compared to the
industrial average level. The working capital of the firm is increasing meaning that the
company’ s liquidity status is better in the industry. Other factors showing the significance
attributed to the company’ s liquidity status are the current ratio and quick ratio, which are
better than the industrial level. In the case of inventory turnover, the company is doing
better as it has increased the number of times it can transact with its inventory in a given
financial period, as compared to the industrial level. The debt ratio shows the efficiency of
the firm to capitalize in its total liabilities to finance its assets (Longenecker, 2006). In most
cases the debt ratio denotes the company’ s reliance on debt financing, and where its shows
a high figure, it means that the company is at risk of losing its assets to compensate
creditors. As the debt ratio is low, the total assets of the company can easily offset the
liabilities available—
without going into shareholders assets. The gross profit margin for the
company also demonstrates that the company is doing better in its operations. Though
operating expenses have increased in the recent past due to expansionary activities, high
gross profit shows the ability of the company to continue operating in the dynamic
economy.d) Common Sense Analysis of the DataFrom the above analysis, the
