The purpose of this study is to develop a conceptual framework which measures the liquidity, profitability and working capital management of restaurants in Cagayan de Oro City for five-year period.
The following studies and views were helpful in this study. This chapter discusses the review of some variables in relation to the profitability, liquidity and working capital management.
Liquidity
“When companies estimate and measure their liquidity, the focus is on bank levels and what funds they have at present” (Lamberg & Vålming, 2009, p.61). Lamberg and Vålming, mentioned that the liquidity ratio information can be used in different ways however this information is more useful for the firm’s creditors and lenders. Also, they have determined the impact of liquidity management on profitability using current ratio and quick ratio as liquidity indicators. Ali and Hassan (2010) pointed out that creditors of the company always want to secure their money by making sure that the company’s liquid assets are higher than its short term liabilities.
In 2007, Bhunia studied the liquidity management of both private and public sectors of steel companies in India. He indicated that the firm with relatively high current ratio signals the ability of the firm to pay its short term creditors in time and that the liquidity position considered as a pre-requisite for the survival of a firm.
One of the commonly used and also the oldest measure of liquidity is current ratio. It was first used to evaluate credit-worthiness of the companies at the end of 19th century (Lamberg & Vålming, 2009, p.29).
Profitability
The level of profitability plays a vital role to attract investors, creditors and suppliers. In finance literature, profitability in...
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...sub-sector includes those which server food and drinks, either offering a self-service or full-service. This composed of fine dining restaurants, fast food outlets, canteens and food courts. (Edralin, D., 2001). There a lot of these components in the country that can be local or international food chains. Based on the 2008 survey of Philippine Business and Industry, there are 2,390 establishments composed of restaurants, bars, canteens and other eating and drinking places and are generating a total of Php71.8 billion revenue. As stated “the restaurant industry is very competitive, the lifestyle changes created by modern living continue to fuel its steady growth. More and more people have less time, resources, and ability to cook for themselves”. This convenience provided by the restaurants leads to the positive trend into the industry. (Virtual Restaurant ,n.d).
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
In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.
Ratio of profitability is distinct to examine a firm’s ability to produce cash flow which is comparative to some metric. This is to establish the amount invested in the company. This ratio analyses and a...
The quick ratio is an alternate calculation of liquidity that does not take account of inventory in the current assets. The quick ratio is the ratio of current assets minus inventory then compared to current liabilities. The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. It is a sign of a business’s short-range convertible assets. The greater the quick ratio the healthier the business's liquidity situation is.
Overall, Horizontal analysis and financial ratios are essential factors that businesses use to monitor its liquidity. Therefore, in order to improve Apple’s ratios and profitability, the company needs to implement a strategy to increase the company’s liquidity. Business owners or managers should monitor current ratio and acid test ratio as these ratios help us to ensure the company has the proper liquid assets to pay current liabilities, to stay in operations and to expand the company. As we noted in our acid test ratio and current ratio for the company, we show a lower ratio for acid test ratio than the current ratio, which means that the company’s current assets rely on inventory. Therefore, the company needs to convert old inventory into
The increasing trend in the quick ratio from 4.7 to 7.7 during 2013 – 2014 shows that its quick assets are more as compared to its current liabilities. This shows that the firm is easily paying off its current liabilities. Similarly, the increasing trend in the current ratio reflects that the firm is easily paying off its current debts by using profits generated from its current operations. Likewise, the increasing trend in the asset turnover ratio means that the firm is using its assets productively.
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
Currently, the quick ratio is 0.45 which clearly shows a lack of ability to cover short term cash needs. The liquidity decreased from the same period a year ago, despite already having weak liquidity to begin with. This would indicate deterioration cash flow.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
The horizontal analysis shows that Woqod’s total current assets increased by 69% and its total current liabilities increased by 102% during 2005. This is largely explained by the increase in receivables, the increase in inventory, the increase in loans, and the increase in payables. The higher increase in total current liabilities than in total current assets explains why the current and acid-test ratios decreased from 1.82 to 1.53 and from 1.74 to 1.48, respectively. The values of the mentioned ratios indicate that Woqod is not highly liquid and that its liquidity is dropping.
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.
If the company is able to meet its obligations, it can be said the company is liquid
The restaurants and mobile food services activities builds up 72.3% of the distribution of accomodation and food service establishments. As we belong to this sector we have the competitive advantage among other food sectors. This pertain to event catering food service activities and beverage serving activities. NCR having the most number of establishment (2,290) as per 2013. Dunkin cups targets to employ 2 people in order to contribute on providing jobs to employees. A total number of 222,285 are employed by the sector in 2013. The food industry pays the highest compensation to it's employees. Restaurants and mobile food services also has the the largest income of 173.5 billion. Among the regions in the Philippines, NCR has earned more than half of all the total income of the sector. In terms of spending the total amount for Restaurants and mobile food services is 140.3 billion or 68% of the whole sector. They have the highest expense in all of the industries. The value added for restaurants and mobile food services reached 62.9 billion or 61.6%. Summarizing all of this values the food industry makes up the highest competitions among other industries. There are many competitors in the food industry specially in the industry our business we are
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.
The restaurant industry has become quite competitive in recent times. In an effort to cut costs restaurants are taking serious measures to improve their performance in relation to their competitors. Two of the most important steps that restaurants have undertaken in recent years are: