Financial Ratio Analysis

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Financial ratios are numerical relationships between financial figures found on the income statement and the balance sheet of a business. When multiple figures are compared, the relationships between those figures help reveal important operational information that, when adjusted, could improve their financial situation (Kim & Avoun, 2005). Unfortunately, few organizations within the hospitality industry commonly use financial ratios to determine the health of their business (Kim & Avoun, 2005). The most common ratios are categorized into market ratios, liquidity ratios, asset management ratios, leverage ratios, and profit ratios. This paper seeks to compare and examine the financial ratios of Harlequin and Brine, an upscale-casual restaurant, …show more content…
Liquidity ratios are the best way of determining whether or not a company can pay obligations when they arise (Kim & Avoun, 2005). The most common liquidity ratios include current ratio and the quick ratio (Adelman & Marks, 2014). Quick ratios are calculated as quick ratio= (cash +accounts receivable +marketable securities) / current liabilities. A general rule for most industries is that a current ratio should be 2.0 or higher and a quick ratio should be 1.0 or higher, however, for restaurants 0.95 and 0.66 are the industry averages (Wang, 2012). Harlequin and Brine has a quick ratio of 0.74, meaning that it able to pay its short-term creditors faster than the average restaurant. This has been done purposefully and strategically because positive cash flow is vitally important in the early stages of a …show more content…
Profitability ratios can also be used to determine how a company fares compared to its competition. Through profitability ratios, owners can learn how well they use sales, assets, and equity to generate profits (Kim & Avoun, 2005). The most common profitability ratios are gross profit margin, net profit margin, and return on investment. Their restaurant industry averages are 0.22, 0.02, and 0.06 (Wang, 2012). Net profit margin is calculated as: Net profit margin = Earnings after taxes / sales. Harlequin and Brine net profit margin is 0.04, doubling the industry average. This has been achieved by selecting a high traffic yet low rent area where the sales are increased and the operational costs are

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