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In the case of 'Bridge Quay Pasta Palace', the current ratio is obviously too high. Indeed, the value has gradually decreased since 2006, but its value is still significantly high. In 2006, the current ratio was 5.69, which is more than 5 times the recommended value of the current ratio. In 2007 and 2008, this has decreased to 4.10 and 4.22 respectively, still significantly above 1.
Looking at the company's balance sheet, the problem seems to be with the accounts receivable and the conclusion that can be drawn is that the company is not collecting its money efficiently. Given the nature of activity of this company, as a restaurant, one can understand that, perhaps, the management is not collecting all dinner bills or something similar. However, the conclusion is that this is something that affects its short-term financial stability.
The quick test, calculated in a similar manner, but removing the inventories from the calculations, reflects similarly high values. The business potentially aims at decreasing this over time, as the trend shows from 2006 to 2008, but, at this point, it remains a problem. The decrease in the quick ratio was caused by a slight decrease in the inventory value over the three-year period analyzed.
Financial
The debt ratio and equity ratio are strictly interrelated and will give a good reflection of the financial leverage at this business. The industry average in terms of the equity ratio is 64.00%, which means that there is a tendency on the market to rely greater on credit and debt in order to finance the operating activities and the development of businesses. On the other hand, this particular restaurant has decided to use less debt and concentrate more of the company in stakeholders' hands. This makes it significantly financially stable and more apt to receive a loan. The equity ratio has gradually decreased over time, but it still remains significantly high and the decrease was only by a couple of percentages.
The low debt ratio can also explain the relatively high times interest rate, calculated as the decision...
Obviously, if the company is not relying so much on debt to finance its activity, the interest associated with that respective debt is also likely to be significantly lower. This assessment follows the evaluations previously made about the way the company is using financial leverage to finance its development.
As for the asset turnover, this shows the company management's effectiveness "with which all assets have been used by assessing the number of revenue dollars generated for each dollar of average assets used during the period." In the case of the restaurant business, this has performed increasingly well since 2006 to 2008. While in 2006, it has generated $4.96 for every dollar of assets, in 2008 it was already generating $5.92. This does not necessarily say much unless we compare this to the industrial average, which amounted to $3.37 in 2008. This means that the restaurant is performing consistently better (this ratio is almost twice that of the industrial average) than its competitors on the market.
Recommendations & conclusion
The company has shown a prudent approach to its liquidity and financial stability, which has reflected into excessively high liquidity ratios values (current and quick ratios) and a low financial leverage. At the same time, its profitability ratios have shown a good performance from the company, encouraging future investors as well and ensuring a positive return on the money invested by stockholders.
Following these conclusions, it makes sense to award a loan to 'Bridge Quay Pasta Palace', which can be used to further develop the business and generated new returns on the capital invested. The financial situation of this business is more than stable and it ratios show the company's capacity to pay back the money borrowed from the bank.
Bibliography
1. Keown, Arthur; Martin, John; Petty. William. Foundations of Finance. Fifth Edition. Pearson Prentice Hall. 2006.
2. Hoggett, Edwards & Medlin. Accounting. John Wiley and Son. Australia, Ltd.…
Bibliography
1. Keown, Arthur; Martin, John; Petty. William. Foundations of Finance. Fifth Edition. Pearson Prentice Hall. 2006.
2. Hoggett, Edwards & Medlin. Accounting. John Wiley and Son. Australia, Ltd. Singapore. 2006
Keown, Arthur; Martin, John; Petty. William. Foundations of Finance. Fifth Edition. Pearson Prentice Hall. 2006.
Hoggett, Edwards & Medlin. Accounting. John Wiley and Son. Australia, Ltd. Singapore. 2006
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