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Review of literature on financial performance in ratio analysis
Ratio analysis review of literature
Review of literature on financial performance in ratio analysis
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Ratio analyses can be used for performance evaluation, analyzing trends, assessing industry benchmarks, and forecasting growth within a company (Knežević, Rakočević, & Đurić, 2011). Additionally, investors use financial ratios to make decisions about the viability of investments, the company’s potential growth, how a company manages its debt, and how effectively a company manages its liquidity (Gibson, 2011). Prior to investing in any company, investors should also evaluate the potential investment’s leverage. The company’s earnings ratios, yields on dividends, and book value per share should also be assessed.
This paper introduces a regional restaurant chain, Frisch’s Restaurants, Inc. (Frisch’s) and discusses the various ratios relevant to investors interested in Frisch’s, such as degree of financial leverage, price to earnings ratio, percentage of earnings retained, dividend yield, and book value per share. Moreover it contains a section including a vertical common-size analysis for gross profit and operating profit as a function of sales. Additionally, throughout the paper discussions will detail the findings and outline what investors might use in a decision with regard to investing in Frisch’s.
Frisch’s are operated regionally in Ohio, Kentucky, and Indiana (Frisch’s, n.d.). It “operates full service family-style restaurants under the name ‘Frisch’s Big Boy’” (Frisch’s, n.d., “Business Description” para. 1), and it offers drive-thru services as well. At the end of its 2013 fiscal year (which occurred on May 28th), the company operated 95 Frisch’s Big Boy restaurants and had licensed 25 additional restaurants to other operators (Frisch’s, 2013). Frisch’s (2013) reported having 5,800 employees at the end of fiscal year 2013, and it also was noted to have paid its 210th consecutive quarterly cash dividend at that time.
The use of a company’s debt is referred to as its financial leverage (Gibson, 2011). One measure of the use of debt can be found in a company’s degree of financial leverage ratio. This measure shows the relationship between the operating income of a company (earnings before interest and taxes) and its earnings per share (Gibson, 2011). As Exhibit 1 shows, Frisch’s degree of financial leverage was 1.20 in 2006 and 1.21 in 2007. This indicates that in 2006, for every $1 increase in operating income, there is a change of 1.21 times in earnings before interest and taxes. Similarly, in 2007, an increase of $1 in operating income would result in a 1.20 times increase in earnings before interest and taxes.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
Another observation is that GM looks to use more debt financing that equity financing for funding their activities. The debt to equity ratio has steadily decreased over the past five years and is higher that the industry average. Also, the current and quick ratios are much lower than the industry averages. This again can pose so...
Financial leverage ratio that is the most appropriate is the Debt to Equity Ratio. The Debt to Equity ratio measures the amount of debt a company uses to finance their assets relative to the amount of shareholder’s equity. The higher the debt to equity the more debt is used to finance the business. Boeing obtained a ratio of 1.5728 and the Industry has a 1.7587 or in other words Boeing uses 18.59% less debt to finance their company.
1. Context: In early September’08 Giant Consumer Products, Inc. (GCP) realized that Frozen food division, which had been growing at 2.8% (compounded annual growth) rate since 2003 to 2007 and accounted for almost 33% of GCP’s overall business volume, is not doing well now. The sales as well revenue volume is around 3.9% behind the target. Most specifically marketing margin (key parameter for GCP business) was also under plan by 4.1%. GCP had been doing well in wall-street but performance of past couple of quarters has increased the worries of GCP i.e. whether GCP will able to maintain its profitable growth.
Assessing the capital structure of any firm is important for investors attempting to determine if...
Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
Frito-Lay is one of the top producers in the snacking industry and the name rings all too familiar among consumers. What consumers are not familiar with is the competition among Frito-Lay and their numerous competitors such as “ConAgra (DAVID Seeds, Crunch n’ Munch, Orville Redenbacher), Kraft Foods (Nabisco, Honey Maid) and Procter & Gamble (Pringles)” (Sloan, Marshall & Stuart, 2012 p. 443). The lovable corn chip snacks got their beginning in 1932 when C.E. Doolin began selling them in San Antonio, Texas. Coincidentally in the same year Herman W. Lay founded his business with Lay’s potato chips in Nashville, Tennessee. Subsequently in 1961 the two chip retailers merged to become Frito-Lay, Inc. However, by 1965 Frito-Lay, Inc merged with
Monea, M. (2009). Financial ratios – Reveal how a business is doing? Annals of the University Of Petrosani Economics, 9(2), 137-144. Retrieved from http://www.upet.ro/eng
This bar graph is showing that the trend is sporadic from year to year. This ratio shows the company’s total sales that are available for financing and supporting the company’s ongoing operations. Large ratios are needed to show that the company is in a better place to develop than its rivals. Kraft Food Group has room to grow in this
The financial position of a company offers great insight on the performance of the company on short-term and long-term basis. This work argues that Facebook Inc. is a company with a subjective investment portfolio. The purpose of this paper is to use ratio analysis to determine the position of the Facebook as an investment destination. The first section explores two ratios and their implications to a potential investor. The second part evaluates whether Facebook is bankrupt. The succeeding section offers advice to potential investors. The work culminates by highlighting key points and making necessary recommendations.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound. Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
Many customers will buy more package food in the future as it is cheaper and more convenience because customers can buy it in high volume and keep it for the long time.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
The debt ratios increased by 2.7% to 57% more than double the industry standard of 24.5%. The long term debt increased from $700,000 to $ 1,165,250 an increment of 66.5% in the year 2002. The company is currently highly leveraged thus it needs to work on reducing long term debts and continue to increase assets. The times interest earned ratio dropped by 0.3 to 1.6 in the year 2003. The company could face difficulties making interest payments in case of a sales slump.