Small Business Management: Analysis of Financial Ratios

This document provides an analysis of financial ratios for All-American BarBeQue, a small business in the restaurant industry. The ratios include profitability, liquidity, efficiency, and investment ratios for the years 2008-2015. The analysis shows that the business is in compliance with industry standards, but needs to keep a check on its debt level.

Running head: SMALL BUSINESS MANAGEMENT
Small Business Management
Name of the Student
Name of the University
Authors Note
Course ID

1SMALL BUSINESS MANAGEMENT
Table of Contents
Answer to question 8:.................................................................................................................2
Answer to question 9:.................................................................................................................5
Answer to question 10:...............................................................................................................6
References:.................................................................................................................................9

2SMALL BUSINESS MANAGEMENT
Answer to question 8:
Profitability Ratios:
Profitability Ratios 2008 2009 2010
Sales 1637610 1696564 1793268
Gross Profit 851557 909358 943259
Gross Profit Margin 52.00 53.60 52.60
Opearing Profit Margin 2008 2009 2010
Operating Expenses 542080 577315 600408
Gross Profit 851557 909358 943259
Operating Profit 309477 332043 342851
Sales 1637610 1696564 1793268
Opearing Profit Margin 18.90 19.57 19.12
Return on Capital Employed 2008 2009 2010
Net Operating Profit 309477 332043 342851
Employed Capital 468577 403194 474975
ROCE 0.66 0.82 0.72
Liquidity Ratios:
Liquidity Ratios 2008 2009 2010
Current Assets 772275 686291 726715
Current Liabilities 407422 346178 354650
Current Ratio 1.90 1.98 2.05
Quick Ratio 2008 2009 2010
Current Assets 772275 686291 726715
Less: Inventories 391238 331045 345678
Quick Assets 381037 355246 381037
Current Liabilities 407422 346178 354650
Quick Ratio 0.94 1.03 1.07

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Efficiency Ratios:
Efficiency Ratios 2008 2009 2010
Current Borrowings 170000 150000 135000
Long term borrowings 220000 190000 175000
Total Debts 390000 340000 310000
Total Assets 1095999 939372 1004625
Debt to Asset Ratio 0.36 0.36 0.31
Asset Turnover Ratios 2008 2009 2010
Net Sales 1637610 1696564 1793268
Average Total Assets 1095999 1017686 971999
Asset Turnover Ratios 1.49 1.67 1.84
Working Capital Ratios 2008 2009 2010
Current Assets 772275 686291 726715
Current Liabilities 407422 346178 354650
Working Capital Ratios 1.90 1.98 2.05
Investment Ratios:
Investment Ratios 2008 2009 2010
Net Income 111739 93817 112861
Shareholders Equity 468577 403194 474975
ROE 0.24 0.23 0.24
Return on Assets 2008 2009 2010
Net Income 111739 93817 112861
Average Total Assets 1095999 1017686 971999
ROA 0.10 0.09 0.12
Analysis of Trends:
On the basis of the ratios computed an analysis of the liquidity ratio has been
considered in context of the All-American BarBeQue for the financial year ranging 2008-10
has been performed. Liquidity ratios are referred as the financial metrics that is used to
determine the ability of the debtors to meet its present dent obligations without raising any
further external capital (Henderson et al. 2015).

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Current Ratios: Current ratio measures the ability of the company to meet its short term
debt obligations (Khan 2015). To determine the trends of All-American BarBeQue it is
noticed that the current ratio for the company represented a rising trend which better signifies
that financial position of the business is more favourable. In other words, the current ratio in
2008 reported stood 1.90 while in 2010 it improved significantly to stand at 2.05. This
signifies that the All-American BarBeQue can easily pay its current liabilities whenever it
becomes due without the need of selling its long term revenues producing assets.
Quick Ratios: The quick ratio is better known as the liquidity ratio that assesses whether the
company has the sufficient amount of quick assets to quickly pay its current liabilities when
they become due (Macve 2015). As evident from the figures report the quick ratio for the
company stood 0.94 in 2010 while in 2010 it increased to 1.07 representing a rising trend.
This implies that the All-American BarBeQue has sufficient amount of quick assets that can
be easily converted to meet pay off its creditors.
2008 2009 2010
0.00
0.50
1.00
1.50
2.00
2.50
1.90 1.98 2.05
0.94 1.03 1.07
Liquidity Ratios
Current Ratio Linear (Current Ratio) Quick Ratio
Figure 1: Figure stating Liquidity Ratios
(Source: As Created by Authors)

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Answer to question 9:
As per the industry standard the quick ratio stands 0.61 for the restaurant industry
(Weygandt, Kimmel and Kieso 2015). However, All-American BarBeQue reported the quick
ratio of 1.07 which is beyond the current restaurant industry standard. This signifies that the
company the company has the sufficient amount of liquidity to meet its short term debt
obligations.
Besides this the gross margin ratio for the restaurant industry stood 53.3% while the
gross margin for the All-American BarBeQue is 52.60%. This implies that the company is in
accordance with the industry standards of gross profitability. The operating profit margin for
the restaurant industry stands 17.66%. On the other hand, the operating profit margin reported
by All-American BarBeQue stood 19.57% representing that the company is in accordance
with the industry standards and demonstrates the ability of the company to produce sufficient
revenue to cover the non-operating costs such as interest expenses.
Gauging into the asset turnover ratio for the restaurant industry, the industry stands
reports 1.51 whereas All-American BarBeQue reported the asset turnover ratios of 1.84
signifying that the company has the better ability of producing the sales from the assets in
comparison to its average total assets.
The net working capital ratio as per the industry standards 1.24 while the All-
American BarBeQue reported the working capital ratio of 2.05. On the overall the company
has been in compliant with the industry standard of the ratios reported that shows the
liquidity position of the company has the better ability of paying its current liabilities.

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Answer to question 10:
Profitability Ratios:
Profitability Ratios 2011 2012 2013 2014 2015
Sales 4191683 4585163 4904564 5253740 5636277
Gross Profit 1975839 2171983 2330782 2504369 2694838
Gross Profit Margin 47.14 47.37 47.52 47.67 47.81
Opearing Profit Margin 2011 2012 2013 2014 2015
Operating Expenses 675760 449340 399450 403050 379165
Gross Profit 1975839 2171983 2330782 2504369 2694838
Operating Profit 1300079 1722643 1931332 2101319 2315673
Sales 4191683 4585163 4904564 5253740 5636277
Opearing Profit Margin 31.02 37.57 39.38 40.00 41.09
Return on Capital Employed 2011 2012 2013 2014 2015
Net Operating Profit 1300079 1722643 1931332 2101319 2315673
Employed Capital 1354402 2535755 3866002 5315239 6914524
ROCE 0.96 0.68 0.50 0.40 0.33
Liquidity Ratios:
Liquidity Ratios 2011 2012 2013 2014 2015
Current Assets 1523636 2566983 3909241 5375249 6995341
Current Liabilities 344745 294338 306350 323120 343926
Current Ratio 4.42 8.72 12.76 16.64 20.34
Quick Ratio 2011 2012 2013 2014 2015
Current Assets 1523636 2566983 3909241 5375249 6995341
Less: Inventories 72421 79197 109296 117245 125954
Quick Assets 1451215 2487786 3799945 5258004 6869387
Current Liabilities 344745 294338 306350 323120 343926
Quick Ratio 4.21 8.45 12.40 16.27 19.97

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Efficiency Ratios:
Efficiency Ratios 2011 2012 2013 2014 2015
Current Borrowings 135000 135000 135000 135000 135000
Long term borrowings 262400 174800 174800 174800 174800
Total Debts 397400 309800 309800 309800 309800
Total Assets 1961546 3004893 4347151 5813159 7433251
Debt to Asset Ratio 0.20 0.10 0.07 0.05 0.04
Asset Turnover Ratios 2011 2012 2013 2014 2015
Net Sales 4191683 4585163 4904564 5253740 5636277
Average Total Assets 1483086 2483220 3676022 5080155 6623205
Asset Turnover Ratios 2.83 1.85 1.33 1.03 0.85
Working Capital Ratios 2011 2012 2013 2014 2015
Current Assets 1523636 2566983 3909241 5375249 6995341
Current Liabilities 344745 294338 306350 323120 343926
Working Capital Ratios 4.42 8.72 12.76 16.64 20.34
Investment Ratios:
Investment Ratios 2011 2012 2013 2014 2015
Net Income 879427 1181354 1330246 1449237 1599285
Shareholders Equity 1354402 2535755 3866002 5315239 6914524
ROE 0.65 0.47 0.34 0.27 0.23
Return on Assets 2011 2012 2013 2014 2015
Net Income 879427 1181354 1330246 1449237 1599285
Average Total Assets 1483086 2483220 3676022 5080155 6623205
ROA 0.59 0.48 0.36 0.29 0.24
As evident from the above stated ratios the profitability ratios for the company
reported a rising trend with the operating profit margin has represented a rising a trend over
the five-year span (Trotman and Carson 2018). The operating profit during 2011 stood 31.02
while in 2015 it stood 41.09 representing an improvement in the five-year span. However, an
important trend is noticed for the return on capital employed is the as in 2011 the ratio stood
0.96 while in 2015 it declined to stand 0.33.

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The liquidity portion however reported a rising trend as the current ratio increasingly
stood 20.34 while the quick ratio also stood similar to the current ratio of 19.97. This
signifies that All-American BarBeQue has maintained a sufficient level of cash and current
assets to successfully pay its short term debt obligations as and when it arises.
The efficiency ratios are measured for the All-American BarBeQue and it is noticed
that the debt to asset ratio has declined in the last five-year span since the ratio stood 0.20 in
2011 while in 0.04 in 2015 (Narayanaswamy 2017). The declining trend of the ratio is mainly
because of the higher portion of total debts in correspondence to its total assets.
Overall, the projected performance of the business appears viable in terms of the
industry standard however the business must keep a check on the debt level to reduce the
level of debt.

9SMALL BUSINESS MANAGEMENT
References:
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Narayanaswamy, R., 2017. Financial Accounting: A Managerial Perspective. PHI Learning
Pvt. Ltd..
Trotman, K. and Carson, E., 2018. Financial accounting: an integrated approach. Cengage
AU.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.