Financial analysis of Bridge Quay Pasta Palace's loan eligibility

¶ … financial analysis background on the restaurant 'Bridge Quay Pasta Palace', asking for a loan at this point. Using financial stability, profitability and liquidity as the main areas of analysis, we have been able to determine that the company is using a moderate financial leverage and relying on equity as its main source of finance, that it has excellent profitability an efficiency ratios, which translate in a high dividend yield for its stockholders, and that it can boast short-term financial solvability with an excessively cautious approach in this segment. Most likely, the only complaint that can be made in this financial analysis relates to the fact that the company could potentially lower its current and quick ratios and use more of the accumulated cash for investment.

Introduction (background, purpose & scope)

The aim of this analysis is to give a generous overview of the financial situation at the restaurant 'Bridge Quay Pasta Palace' and to use this overview in order to provide recommendations as to whether a loan can be put out for this business or not. In order to best arrive at this conclusion, we are using three different segments of analysis, determinant in our opinion for the final outcome: profitability (aimed at showing the future perspective for the company), liquidity (aimed at provide an analysis on the company's short-term financial solvability) and financial solvability (with the role of determining the company's financial leverage and ensuring that its capacity to reimburse potential credit is determined). Limitations are given by the fact that this data has been supplied by the company and not directly collected.

Liquidity

The current ratio and the quick ratio are the most common financial indicators used to evaluate the short-term solvency of a company, its ability to honor its short-term financial obligations by using its short-term assets. Usually, financial advisors and theoreticians propose 1 as a reasonable current ratio, with anything under this value being considered a potential unstable short-term financial situation that may cause problems in the future. On the other hand, one also needs to consider the fact that a current ratio that is significantly high, over this value, means that the company is holding too much money in cash instead of using it for investments that could potentially increase its profitability and grow its total assets.

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 of operating profits by interest expense. 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.