HRTM 421-001 - Ratio analysis ch. 3 Liquidity ratios 1) Current Ratio= Current assets/current liabilities 2) Average Receivable Turnover=Total revenue/average accounts receivable 3) Average collection period= 365 days/accounts receivable turnover 4) Operating cash to current liabilities operating cash/average current liabilities Solvency ratios 1) Operating cash flow to long-term debt operating cash/average long-term debt 2) Long-term debt to total capitalization=long-term liabilities/ (total liabilities + total equity) 3) Debt-to-equity Ratios total long-term liabilities/total equity 4) Times interest earned (TIE) = earnings before interest expense and income tax (EBIT)/ interest expense 5) Fixed charge coverage= (net income + interest expense + rent expense/ (interest expense + rent expense) Activity ratios 1) Food inventory Turnover cost of food sold/average food inventory 2) Beverage inventory turnovera cost of beverages sold/average beverage Inventory 3) Fixed asset turnovera total revenue/average fixed assets 4) Total asset turnover- total revenue/average total assets Operating ratios 1) Food cost percentage= cost of food/food sales 2) Beverage cost percentage= cost of beverages sold/beverage sales 3) Labor cost percentage= labor cost/total sales Profitability ratios 1) Profit margins net income/total revenue 2) Return on assets (ROA)= net income/total assets 3) Return on investment (ROI) or Return on equity (ROE) cash flow/total equlty or net income/total equity Ms. Sarah Blackwell is a financial analyst who specializes in restaurant companies, and one of the companies in her portfolio is Larry's Luncheon Spot. Larry's is a public company, and analysts tend to keep a watchful eye on financial ratios to determine the strength of the company. . QUESTIONS 1. Utilizing the income statement and balance shoot provided, assist Ms. Blackwell with her analysis by calculating the following ratios for 2008. Current ratio Accounts receivable turnover Average collection period Food inventory turnover Fixed asset turnover Total asset turnover Profit margin Return on assets Return on equity Long-term debt to total capitalization Debt-to-equity ratio Time Interest earned Fixed charge coverago Food cost percentage Labor cost percentage 2. Utilizing the calculations in question 1, analyze the ratice for Larry's Luncheon Spot. Address any ratios that appear high or low, and explain why you think this is the case. 3. Based on your analysis, would you recommend that investors buy stock in this company? Plise explain your answer. NO . Larry's Luncheon Spot Income Statement For the Month Ended September 30, 2008 Percent 100.0 Revenues: Food @s6 @DO Cost of Sales: Food sochet $412,000,000 $101,352,000 24.6 75.4 Gross Profit $310,648,000 Operating (Controllable) Expenses Salaries and Wages Employee Benefits $107, 120,000 23,484,000 26.0 5.7 86 CHAPTER 2 ANALYZING FINANCIAL STATEMENTS Accounts Payable Accrued Payroll Accrued Taxes Total Current Liabilities $ 14,000.00 9,450.00 8,560.00 32,010.00 $ 12,460.00 8,000.00 6,980.00 27,440.00 12,500.00 20,000.00 Long-term Debt Owner's Equity Retained Earnings Total Owner's Equity 30,490.00 30,000.00 *60,490.00 29,860.00 48,680.00 78,540.00 Total Liabilities and Owner's Equity $ 105,000.00 $125,980.00 1. Perform a vertical analysis of the T Resort's 2008 Income statement. 2. Perform a vertical analysis of the T Resort's December 31, 2007, balance sheet. 3. Perform a vertical analysis of the T Resort's December 31, 2008, balance sheet. 4. Perform a horizontal analysis of the T Resort's 2007 and 2008 balance sheets. 5. Is the T Resort too heavily in debt? How can you evaluate its debt structure? 6. What is the projected current ratio for the T Resort as of December 31, 2007, and 2008? Are the ratios favorable? 7. What are the projected profit margin, and return on equity for The T in 2008? 8. What will be the inventory turnover rate for The T in 20087 9. ETHICS * Macy, a friend of yours, started a small restaurant five years ago. She was doing well until last year. She is looking into selling the restaurant and would like your opinion on how she should prepare the restaurant's financial statements. You notico sho has a large amount of current liabilities that are way overdue. She also shows a large cash balance on the books, Something tells you she is not being honest ath you and is trying to make her statements look better than they should. What should you tell her? 10. EXPLORING THE WEB * Search the Internet for information regarding SAS 99 or Statement on Auditing Standards No. 99. What is BAS 90, and how does it address the Issues relating to window dressing? 88- CHAPTER 3. ANALYZING FINANCIAL STATEMENTS Direct Operating Expenses Marketing Utilities Administrative and General Repairs and Maintenance Total Operating Expenses 76,045, 230 13,678,400 12,318,800 17,950,000 5,850,400 $256,448,830 18.5 3.3 3.0 4.4 1.4 62.2 $ 54,201,170 13.2 Operating Income 5.5 4.0 Other Noncontrollable) Expenses Rent Depreciation Interest Total Other Expenses $ 22,660,000 16,502,000 8,450,000 $ 47,612,000 2.1 11.6 $ 6,589,170 1.6 Income Boforo Income Taxes $ 4,944,000 1.2 Los Income Taxes $ 1,845,170 0.4 Not Income Larry's Luncheon Spot Balance Sheets As of Month Ended September 30, 2012 Cash Accounts Receivable Short-term Investments Food Inventory Prepaid Rent Total Current Assets 2008 $ 1,502,153 2.985,000 3,850,000 2,034,000 1,100,000 $ 114335- 2007 Change 1.255.1055 237,048 2,805,800 0,200 468,500 3,301,500 1.810.000 224,000 2,850,000 (1.750,000 9.200,405 2,181,748 Furniture, Foxtures, and Equipment FF&E) Accumulated Depreciation (FFAE) Building Long-term investments Long-term Aneta $ 120,300,000 $ 105,060,000 $ 15,250,000 (160,000,000 (158,000,000 11.400,000 190,200,000 15,600,000 5.600,000 45.600 637,000 (141.400 $ 151,085,600 $ 142,077.000 $100,600 Total Assets $162,556,753 $152.264,405 810,290,34 89 ANALYSIS OF FINANCIAL STATEMENTS Accounts Payable $ 12,500,000 $ 14,500,000 $ (2,000,000) Accrued Payroll 23,900,500 25,000,000 (1,107,500) Accrued Taxes 118,050 173,000 (54,950) Total Current Liabilities o $ 38,518,550 $ 39,681,000 $ (3,162,450) Long-term Debt $ 28,000,000 $ 21,000,000 $ 7,000,000 Shareholder's Equity $ 8,771,000 $ 8,769,000 $ 2,000 Retained Earnings 89,267,203 82,816,405 6,450,798 Total Shareholder's Equity $ 98,038,203 S 91,585,405 $ 6,452,798 Total Liabilities and Shareholder's Equity $162,556,753 $162,266,405 $10,290,348 ncept Check Crescendo se Crescendo is a full-service hotel located in a city with a population of 450,000. The hotel cently underwent a major renovation in which all of the guest rooms, the lobby, and meeting oms were brought up to date. The owner of the property thought the renovation would boost e business, but so far the hotel is not meeting budgeted goals. The owner has challenged the urrent management to shape up, or he will find a new management company who can meet s expectations. Ms. Beth Samuelson, the current general manager, is worried she may lose her job if she res not meet the projected goals, so she has turned to her fellow managers for help. The ntroller mentioned she should look into profit flexing and cost-volume-profit analysis. STIONS 1. 2. Ure the profit flexing method to analyze the Crescendo Hotels income statement provided. Explain how the company can reduce expenses or incrocrvence to meet budgeted goals Ure con-volume-profit analysis to determine how many room you would need to sell to reach the budgeted revenue goal of $150 per room. Forced costs for the hotel w $470,000 per room, and the labor cost to maintain each room is $40. Now pretend you are Ms. Samuelson and the owner route that you not open pro to $300,000. Is this attainable if the Crescendo Hotel only he 125 room in the dood volume calculation) 3. HRTM 421-001 - Ratio analysis ch. 3 Liquidity ratios 1) Current Ratio= Current assets/current liabilities 2) Average Receivable Turnover=Total revenue/average accounts receivable 3) Average collection period= 365 days/accounts receivable turnover 4) Operating cash to current liabilities operating cash/average current liabilities Solvency ratios 1) Operating cash flow to long-term debt operating cash/average long-term debt 2) Long-term debt to total capitalization=long-term liabilities/ (total liabilities + total equity) 3) Debt-to-equity Ratios total long-term liabilities/total equity 4) Times interest earned (TIE) = earnings before interest expense and income tax (EBIT)/ interest expense 5) Fixed charge coverage= (net income + interest expense + rent expense/ (interest expense + rent expense) Activity ratios 1) Food inventory Turnover cost of food sold/average food inventory 2) Beverage inventory turnovera cost of beverages sold/average beverage Inventory 3) Fixed asset turnovera total revenue/average fixed assets 4) Total asset turnover- total revenue/average total assets Operating ratios 1) Food cost percentage= cost of food/food sales 2) Beverage cost percentage= cost of beverages sold/beverage sales 3) Labor cost percentage= labor cost/total sales Profitability ratios 1) Profit margins net income/total revenue 2) Return on assets (ROA)= net income/total assets 3) Return on investment (ROI) or Return on equity (ROE) cash flow/total equlty or net income/total equity Ms. Sarah Blackwell is a financial analyst who specializes in restaurant companies, and one of the companies in her portfolio is Larry's Luncheon Spot. Larry's is a public company, and analysts tend to keep a watchful eye on financial ratios to determine the strength of the company. . QUESTIONS 1. Utilizing the income statement and balance shoot provided, assist Ms. Blackwell with her analysis by calculating the following ratios for 2008. Current ratio Accounts receivable turnover Average collection period Food inventory turnover Fixed asset turnover Total asset turnover Profit margin Return on assets Return on equity Long-term debt to total capitalization Debt-to-equity ratio Time Interest earned Fixed charge coverago Food cost percentage Labor cost percentage 2. Utilizing the calculations in question 1, analyze the ratice for Larry's Luncheon Spot. Address any ratios that appear high or low, and explain why you think this is the case. 3. Based on your analysis, would you recommend that investors buy stock in this company? Plise explain your answer. NO . Larry's Luncheon Spot Income Statement For the Month Ended September 30, 2008 Percent 100.0 Revenues: Food @s6 @DO Cost of Sales: Food sochet $412,000,000 $101,352,000 24.6 75.4 Gross Profit $310,648,000 Operating (Controllable) Expenses Salaries and Wages Employee Benefits $107, 120,000 23,484,000 26.0 5.7 86 CHAPTER 2 ANALYZING FINANCIAL STATEMENTS Accounts Payable Accrued Payroll Accrued Taxes Total Current Liabilities $ 14,000.00 9,450.00 8,560.00 32,010.00 $ 12,460.00 8,000.00 6,980.00 27,440.00 12,500.00 20,000.00 Long-term Debt Owner's Equity Retained Earnings Total Owner's Equity 30,490.00 30,000.00 *60,490.00 29,860.00 48,680.00 78,540.00 Total Liabilities and Owner's Equity $ 105,000.00 $125,980.00 1. Perform a vertical analysis of the T Resort's 2008 Income statement. 2. Perform a vertical analysis of the T Resort's December 31, 2007, balance sheet. 3. Perform a vertical analysis of the T Resort's December 31, 2008, balance sheet. 4. Perform a horizontal analysis of the T Resort's 2007 and 2008 balance sheets. 5. Is the T Resort too heavily in debt? How can you evaluate its debt structure? 6. What is the projected current ratio for the T Resort as of December 31, 2007, and 2008? Are the ratios favorable? 7. What are the projected profit margin, and return on equity for The T in 2008? 8. What will be the inventory turnover rate for The T in 20087 9. ETHICS * Macy, a friend of yours, started a small restaurant five years ago. She was doing well until last year. She is looking into selling the restaurant and would like your opinion on how she should prepare the restaurant's financial statements. You notico sho has a large amount of current liabilities that are way overdue. She also shows a large cash balance on the books, Something tells you she is not being honest ath you and is trying to make her statements look better than they should. What should you tell her? 10. EXPLORING THE WEB * Search the Internet for information regarding SAS 99 or Statement on Auditing Standards No. 99. What is BAS 90, and how does it address the Issues relating to window dressing? 88- CHAPTER 3. ANALYZING FINANCIAL STATEMENTS Direct Operating Expenses Marketing Utilities Administrative and General Repairs and Maintenance Total Operating Expenses 76,045, 230 13,678,400 12,318,800 17,950,000 5,850,400 $256,448,830 18.5 3.3 3.0 4.4 1.4 62.2 $ 54,201,170 13.2 Operating Income 5.5 4.0 Other Noncontrollable) Expenses Rent Depreciation Interest Total Other Expenses $ 22,660,000 16,502,000 8,450,000 $ 47,612,000 2.1 11.6 $ 6,589,170 1.6 Income Boforo Income Taxes $ 4,944,000 1.2 Los Income Taxes $ 1,845,170 0.4 Not Income Larry's Luncheon Spot Balance Sheets As of Month Ended September 30, 2012 Cash Accounts Receivable Short-term Investments Food Inventory Prepaid Rent Total Current Assets 2008 $ 1,502,153 2.985,000 3,850,000 2,034,000 1,100,000 $ 114335- 2007 Change 1.255.1055 237,048 2,805,800 0,200 468,500 3,301,500 1.810.000 224,000 2,850,000 (1.750,000 9.200,405 2,181,748 Furniture, Foxtures, and Equipment FF&E) Accumulated Depreciation (FFAE) Building Long-term investments Long-term Aneta $ 120,300,000 $ 105,060,000 $ 15,250,000 (160,000,000 (158,000,000 11.400,000 190,200,000 15,600,000 5.600,000 45.600 637,000 (141.400 $ 151,085,600 $ 142,077.000 $100,600 Total Assets $162,556,753 $152.264,405 810,290,34 89 ANALYSIS OF FINANCIAL STATEMENTS Accounts Payable $ 12,500,000 $ 14,500,000 $ (2,000,000) Accrued Payroll 23,900,500 25,000,000 (1,107,500) Accrued Taxes 118,050 173,000 (54,950) Total Current Liabilities o $ 38,518,550 $ 39,681,000 $ (3,162,450) Long-term Debt $ 28,000,000 $ 21,000,000 $ 7,000,000 Shareholder's Equity $ 8,771,000 $ 8,769,000 $ 2,000 Retained Earnings 89,267,203 82,816,405 6,450,798 Total Shareholder's Equity $ 98,038,203 S 91,585,405 $ 6,452,798 Total Liabilities and Shareholder's Equity $162,556,753 $162,266,405 $10,290,348 ncept Check Crescendo se Crescendo is a full-service hotel located in a city with a population of 450,000. The hotel cently underwent a major renovation in which all of the guest rooms, the lobby, and meeting oms were brought up to date. The owner of the property thought the renovation would boost e business, but so far the hotel is not meeting budgeted goals. The owner has challenged the urrent management to shape up, or he will find a new management company who can meet s expectations. Ms. Beth Samuelson, the current general manager, is worried she may lose her job if she res not meet the projected goals, so she has turned to her fellow managers for help. The ntroller mentioned she should look into profit flexing and cost-volume-profit analysis. STIONS 1. 2. Ure the profit flexing method to analyze the Crescendo Hotels income statement provided. Explain how the company can reduce expenses or incrocrvence to meet budgeted goals Ure con-volume-profit analysis to determine how many room you would need to sell to reach the budgeted revenue goal of $150 per room. Forced costs for the hotel w $470,000 per room, and the labor cost to maintain each room is $40. Now pretend you are Ms. Samuelson and the owner route that you not open pro to $300,000. Is this attainable if the Crescendo Hotel only he 125 room in the dood volume calculation) 3