Financial Analysis and Interpretation Assessment Answer

Introduction

Ratio analysis is regarded as the analysis of the line items existing in the financial declarations of the corporation. It is basically used to evaluate several factors of the business-like liquidity, asset management, profitability and capital structure of the corporation (Jihadi et al., 2021). The purpose of the assignment is to analyze the financial position and performance of Giant Burgers and Superfry Steakhouse with the help of ratio analysis and make recommendations on investment decisions.

Ratio Analysis and Interpretation

Profitability

Profitability ratios are regarded as the financial metrics used by investors and analysts to measure and assess the capability of the corporation to produce income in relation to revenue, operating costs and balance sheet possessions and equity during the team (Hasanaj & Kuqi, 2019). The gross profit margin and net profit margin, both are higher in the case of Giant Burgers as compared to Superfry Steakhouse. It indicates that Giant Burgers is more competent towards converting sales into profit. A higher gross profit margin signifies that the company has higher efficiency of core operations, meaning that it has enough funds that it can still cover the fixed costs, operating expenses, devaluation and dividends while also providing net income to the corporate. On the other hand, the return on assets and return on equity are higher in the case of Superfry Steakhouse indicating that it is more efficient in making use of assets and equity capital to produce a higher amount of profitability (Husna & Staria, 2019). Overall, it can be claimed that the profitability position of both companies is almost at the same pace.

Liquidity

Liquidity ratios tell about the capability of the company to pay off the debt as and when they arise. It tells how quickly the corporation can convert its current assets into cash so that it can pay off the liabilities on a timely basis (Dirman, 2020). The current ratio of both companies has been computed as more than 1. However, Superfry Steakhouse’s current ratio is 2.29 which signifies that it has $2.29 of current assets for every $1 of current liability. Similarly, its quick ratio is also higher in comparison to Giant Burgers. Both companies have sufficient amount of current assets to pay off their short-term debt commitments. Overall, it can be claimed that the liquidity position of Superfry Steakhouse is higher as compared to Giant Burgers.

Asset Management

Asset management ratios detail how potentially the firm is making use of assets of the company to acquire revenue via several groups of metrics (Vibhakar et al., 2023). The total assets turnover ratio is slightly higher in the case of Giant Burgers at 1.77 and that of Superfry Steakhouse is 1.54. With regard to fixed assets turnover, Giant burgers has 2.21 and Superfry Steakhouse has 2.15. A higher ratio of Giant Burgers signifies that it is making more competent use of both fixed assets and total assets in producing revenue per dollar of assets. The inventory turnover ratio is computed as higher for Giant Burgers at 18.50 which signifies that the corporation has sold its complete inventory 18.5 times in the given time. The receivable turnover ratio helps in evaluating the efficiency with which the corporation is capable to collect its receivables or the credit that it extends to the consumers (Eryatna et al., 2021). This ratio is higher in the case of Giant Burgers at 26.5 whereas, this ratio is calculated as 13.23 for Superfry Steakhouse. This signifies that Giant Burgers is efficient in collecting the receivable amount and that its customers are paying on time. Overall, it can be claimed that asset management efficiency is better for Giant Burgers.

Financial Structure

Financial structure ratios are the financial metrics that measure the long-term stability and structure of the company. The fundamental objective is to measure the financial risk, solvency and profitability of the company which can aid analysts and investors in undertaking informed decisions regarding investing in or lending to the corporation (Nguyen & Nguyen, 2020). The debt-to-equity ratio is computed as 1.58 for Superfry Steakhouse and 0.63 for Giant Burgers. This shows that Superfry Steakhouse is using a higher proportion of debt and a lower proportion of equity. Its solvency position is not good as it has to pay interest expenses on debt at regular intervals affecting its profitability. Similarly, its debt ratio is also higher showing that the major proportion of assets are financed with the help of debt. This raises its debt obligations. Times interest earned ratio is computed as 3.57 for Giant Burgers and 3.13 for Superfry Steakhouse indicating that Giant Burgers is in a better position to pay off interest expenses with help of EBIT with up to 3.57 times.

Market Indicators

Dividend yield is almost similar for the companies at 0.03 indicating that both the companies are paying very less amount of dividends per share. EPS is higher for Superfry Steakhouse at 0.28 indicating that it is more profitable as compared to Giant Burgers. However, higher EPS is not a confirmation of future performance. P/E ratio is computed as 16.67 for Giant Burgers and 7.14 for Superfry Steakhouse. The higher P/E ratio could indicate that the stock of Giant Burgers is overvalued or the investors are assuming higher growth rates in upcoming period.

Recommendation for Investment Decision

From the ratio analysis, it is suggested that the investment must be made in Giant Burgers as it is performing better in terms of profitability, efficiency, and financial structure. It has used a lower amount of debt to fund its business operations and assets which indicates lower liability to pay out the interest expenses. It will fetch superior returns in the future as it is efficient in collecting the amount from debtors and making efficient use of assets to produce higher revenue and profits.

Other Types of Information to Investigate

In addition to the ratio analysis, management quality and growth strategies are required to be evaluated for the company before making the investment. There are various factors that are to be considered before making an investment decision –

Market Analysis

It involves assessing the market trends and economic indicators to recognize the potential investment prospects. This procedure comprises of analyzing the industry trends, assessing competitive analysis and determining market demand and supply (Sabirov et al., 2021). Several tools can be used to undertake market analysis like Porter's five force analysis, SWOT analysis and PESTLE analysis.

Risk Analysis 

It involves the evaluation of the potential risks of the investment opportunities, including credit risk, market risk and liquidity risk. Market risk is regarded as the potential for losses because of market changes, whereas credit risk is regarded as the potential for losses because of the failure of a borrower to repay the loan (Okafor & Fadul, 2019). Liquidity risk is regarded as the potential for losses because of the inability to sell off the investment quickly enough. Companies can use sensitivity analysis to analyze the same.

Return Analysis 

It involves the evaluation of potential returns of the investment opportunity, including dividends, capital gains and interest. this procedure involves investigation of historical returns, assessing potential future returns and comparison of potential returns to other investment opportunities. Discounted cash flow analysis can be conducted to evaluate expected future cash flows.

Ownership Format

Sole Proprietorship 

It is a corporate, owned and measured by a sole individual. The sole proprietor reaps financial rewards and is responsible for all liabilities and risks while performing the business. The sole owner can retain all business-oriented data to themselves as the firm's only decision-maker. A sole owner has entire accountability in terms of undertaking decisions (Doss et al., 2020). It marks in quicker decision-making for businesses as there is no requirement to refer various parties for each main issue. However, if the owner cannot pay liabilities arriving out of corporate from the assets, then his or her individual possessions is also at stake. Also, it is complex to raise a vast amount of capital in an individual proprietorship as associated to a partnership or corporation.

Partnership 

A partnership business comprises two or more persons that combine their capital and resources to establish a business and agree to share profits, losses and risks. The accounting process is normally simple for partnership firms as compared to limited companies. It is easy to get ongoing as there is no necessity to record with Companies House. As compared to operating as a sole trader, by working in partnership firm, one can advantage of companionship and shared support. However, the associates are personally answerable for the debts and losses being incurred (Sergi et al., 2019). Therefore, their assets might be at risk of being detained by creditors. Also, the business partnership has no self-governing legal existence apart from associates.

Limited Liability Company 

It is a form of business entity that prevents its members from being liable for the financial losses and debt obligations of the company. The major benefit of this format is that it safeguards the assets of individual partners and deems the LLC an independent legal entity (Borzaga et al., 2020). The individual assets of the LLC associated cannot be used to satisfy the debts and obligations of the LLC. The weakness is that the company requires to publicly disclose its financial details. Also, the LLC normally costs more to form and upkeep as compared to a sole proprietorship or general partnership firm.

Recommendation on Ownership Format and Conclusion

After analyzing all three formats, it is suggested that Alice Oliver must opt for a Limited Liability Company as it avoids its proprietors from being held personally answerable for the liabilities of the corporation. In case the corporation goes insolvent or is litigated, the private properties of the owner cannot be used. It will allow all the incomes to be agreed on directly to such holders to be taxed as private income. Overall, limited liability companies include limited liability, independent legal existence, simplicity in business operations and flexibility in taxation.

References

Borzaga, C., Galera, G., Franchini, B., Chiomento, S., Nogales, R., & Carini, C. (2020). Social enterprises and their ecosystems in Europe. Comparative synthesis report. Luxembourg: Publications Office of the European Union. Retrieved April 30, 2020.

Dirman, A. (2020). Financial distress: the impacts of profitability, liquidity, leverage, firm size, and free cash flow. International Journal of Business, Economics and Law, 22(1), 17-25.

Doss, C., Kieran, C., & Kilic, T. (2020). Measuring ownership, control, and use of assets. Feminist Economics, 26(3), 144-168.

Eryatna, E. N., Eltivia, N., & Handayawati, K. U. (2021, July). The Effect of Cash Turnover, Receivable Turnover, and Inventory Turnover Towards Profitability of Consumer Goods Companies in Indonesia. In 2nd Annual Management, Business and Economic Conference (AMBEC 2020) (pp. 191-197). Atlantis Press.

Hasanaj, P., & Kuqi, B. (2019). Analysis of financial statements. Humanities and Social Science Research, 2(2), p17-p17.

Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50-54.

Jihadi, M., Vilantika, E., Hashemi, S. M., Arifin, Z., Bachtiar, Y., & Sholichah, F. (2021). The effect of liquidity, leverage, and profitability on firm value: Empirical evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), 423-431.

Nguyen, H. T., & Nguyen, A. H. (2020). The impact of capital structure on firm performance: Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 7(4), 97-105.

Okafor, A., & Fadul, J. (2019). Bank Risks, Regulatory Interventions and Deconstructing the Focus on Credit Risk. Research Journal of Finance and Accounting, 10(8).

Sabirov, O. S., Berdiyarov, B. T., Yusupov, A. S., Absalamov, A. T., & Berdibekov, A. I. U. (2021). Improving Ways to Increase the Attitude of the Investment Environment. Revista Geintec-Gestao Inovacao E Tecnologias, 11(2), 1961-1975.

Sergi, B. S., Popkova, E. G., Borzenko, K. V., & Przhedetskaya, N. V. (2019). Public–private partnerships as a mechanism of financing sustainable development. Financing sustainable development: Key challenges and prospects, 313-339.

Vibhakar, N. N., Tripathi, K. K., Johari, S., & Jha, K. N. (2023). Identification of significant financial performance indicators for the Indian construction companies. International Journal of Construction Management, 23(1), 13-23.

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