Managerial accounting paper/ financial analysis

St. Thomas University

Miami Gardens, Florida.

Term Fl2 / Fall, 2019

December 12, 2019

Table of Contents

I. Introduction

a. Objective

b. Scope

c. Methodology/Organization

II. Business history and future

a. Industry

b. Darden Restaurants

c. Flanigan’s Enterprises

III. Financial analysis

a. Ratio Analysis Explanation

i. Liquidity Ratios

ii. Activity Ratios

iii. Solvency Ratios

iv. Profitability Ratios

b. Horizontal and Vertical Analysis

i. Overview

ii. Complimentary Application

IV. Liquidity analysis

. Industry

b. Darden Restaurants

c. Flanigan’s Enterprises

V. Activity analysis

. Industry

b. Darden Restaurants

c. Flanigan’s Enterprises

VI. Solvency analysis

. Industry

b. Darden Restaurants

c. Flanigan’s Enterprises

VII. Profitability analysis

. Industry

b. Darden Restaurants

c. Flanigan’s Enterprises

VIII. Horizontal and Vertical Analysis

IX. Comparative analysis

. Credit Worthiness Analysis

i. Short Term

ii. Long Term

b. Investment Attractiveness Analysis

c. Recommendations / Current Developments

X. Summary and Conclusions

XI. References / Bibliography

XII. Appendices

a. Horizontal Analysis Tables

b. Vertical Analysis Tables

I. Introduction

This paper will focus on the two restaurants, Darden Restaurants and Flanigan’s enterprises by looking at how they have managed to remain in business for such a long period. The analysis of these companies will entail financial analysis which seeks to determine which of the two companies has the best financial status and health compared to the other. The economic analysis will follow a trend whereby each company's financial ratios will be analyzed to determine its financial performance in the market.

A. Objective of the study

This paper aims to provide a comparative financial analysis of Flanigan's Enterprises and Darden Restaurants to assess the financial health of either company. According to Tuovila (2019), financial analysis helps in evaluating the suitability of a business or project by analyzing its financial health in an attempt to determine its performance. For financial analysts, the solvency, liquidity, and stability of a company are essential when looking for investment opportunities. The only way for business analysts to know whether a company has a good investment portfolio is by looking at its financial statements and comparing it with other available companies. Financial analyst of a company can either be conducted internally or externally. When it is done privately, it helps the company's management team to make strategic decisions that will help the company to improve in areas that they are underperforming in.

moreover, internal financial analysis helps the company to study the trends of the company by comparing past performance to the current performance of the company. When the economic analysis is done externally by other bodies, the information obtained can be used by the public to determine investment opportunities. Additionally, the profitability of the two companies will be analyzed, and any underperforming area will be addressed through recommendations.

B. Scope of the Study

The financial analysis will not be limited to Flanigan’s Enterprises and Darden Restaurants. The two companies will be used throughout this paper by looking at their financial statements for the last five years. However, their performance will be scrutinized against some of the best-performing companies in the industry.

C. Methodology of the Study

This analysis will be done by looking at the financial reports of both companies. The information will be obtained from online sources and databases that contain the financial statements of public companies in the US. Once this information is collected, the economic analysis of each company will follow by looking at some of the financial ratios. Moreover, vertical and horizontal studies will be done to see the changes that occur in each company's accounts over the five years. The findings from these analyses will form the basis for any future recommendations directed to either company.

II. Business History and Future

A. Industry

The history of restaurants can be traced to France, where the first establishment of this foodservice industry took place. Many studies have claimed that the restaurant industry began in the 18th century as a place where people came together to eat meat broths. During this period, most people who dwelt in cities and urban centers did not have eating places during their working hours, and so many people relied on food that was sold by vendors in the streets. Boulanger has been credited with the restaurant idea which began as a soup business though no historical records mention him as the originator of restaurants. "La Grande Taverne de Londres" is considered as the first real restaurant to be established. This restaurant was the first to use waiters who were dressed modestly as they served cooked food to customers. A modern-day restaurant is a place where people go to get food which is always listed on the menu. Many buildings have put along the highways and major traffic areas to appeal to the needs of people who are either having a tight schedule and cannot rush back home to get food or a group of people who want to enjoy their meals while catching up with friends or loved ones. Either way, restaurants offer food services to these groups of people who may choose to eat their meals within the premises of the restaurants or ask for take-away.

Moreover, restaurants are also known to offer door to door food delivery to customers. Dealing in fast foods has been the trend in most restaurants; however, some offer specialized dishes to its customers. The emergence and growth of restaurants in the US come as a relief to many people, especially in busy urban areas. Most people are always caught up in between a heavy workload which prompts them to use nearby restaurants for food. Moreover, the development of the transport system has enabled massive movement of people from one place to another, thereby creating an enormous demand for food which the restaurants gladly serve. Hence the restaurant industry continues to grow each passing day, and as long as people are available, the production cannot be phased out.

B. Darden restaurants

Darden Restaurants is an American company that specializes in food and hospitality. The company owns diners across the United States and has been serving the country through creating employment to the citizens and generating revenue through tax. The company has been in operation since 1938 when William Darden founded it. Majoring in red lobster business, Darden went ahead to form the seafood restaurant in Lakeland Florida which flourished into other centers. Today Darden Restaurants has a chain of restaurants across the US with their headquarters being in Orlando. Some studies have found that Darden Restaurants is one of the largest restaurant chains in the world with over 1500 restaurants operating under its umbrella. The company has continued to flourish, growing through different phases of development and expansion to reach the status they boast today. Initially, the company used to register low sales until the management was changed in 2015. The new regime came up with new management and marketing strategies that saw the company record-high profits (Ballard, 2019). Moving into the fiscal year 2019/2020, the company has already registered incredible growth in terms of profit. The two major chains of Darden Restaurants, Longhorn and Olive Garden, recorded a combined growth which resulted in $2.13 billion in sales (Ballard, 2019). Therefore, going into the future, the company is likely to flourish, but that is subject to the financial analysis that will be done in the subsequent sections.

C. Flanigan’s Enterprises

Flanigan's Enterprises operates as a cocktail and liquor store that doubles as a restaurant dealing with seafood products. This company owned a series of clubs and entertainment lounges and was founded in the year 1959 by Flanigan. The company has operated in Florida since its incorporation in 1959 dealing with both retail and wholesale liquor business. Flanigan’s Enterprises has diversified its operation by dealing with both food and beverages as well as different brands of liquor which customers are served with at their discretion. The company is segmented into two, whereby one segment handles the restaurant business while the other side deals with liquor. Big Daddy's Liquors is the household name for the company’s liquor business while Flanigan's Seafood Bar and Grill represent the restaurant side of the business. In addition to the foodservice offered by Flanigan's enterprises, the company also provides liquor to customers.

Moreover, there is an adult entertainment club registered under the company's name. By way of diversifying its business, Flanigan’s enterprises have managed to expand their operation in south Florida, Georgia, and Pennsylvania. The company went through a series of financial problems that resulted in the company filing for bankruptcy in 1985. However, the storm came to pass, and the company went back to full operation mode in the year 1987. Some of the challenges that led to the bankruptcy of the company were due to poor decisions by Flanigan himself who chose to venture into the real estate business by leasing some of his properties. The idea came back to sting him since the company realized losses from the lease-back schemes. In the 90s, the company began converting the lounges to full-service restaurants that have been operating from that time onwards (“Flanigan's Enterprises, Inc.", 2019). It is evident that the company has gone through hard times in the past, but it has remained resilient in its operation in Florida. Therefore its financial health will be analyzed to determine its viability in the restaurant industry.

Financial Analysis

Ratio analysis explanations

Financial ratios are used in determining the liquidity, solvency, and profitability of a business organization. There are different types of rates that can be applied in gauging the performance of a business entity in comparison to other businesses within the same industry. For purposes of this analysis, the paper will look at four types of ratios: liquidity, profitability, activity and solvency ratios.

Liquidity Ratios

Generally, the liquidity ratios are grouped into two: the current rate and the quick or acid test ratio. Existing assets current liabilities determineratio. Existing assets refer to the types of assets that a company expects to convert into cash within one year. They are usually short-lived assets.

On the contrary, current liabilities refer to the expenses and costs that a business has to pay within a year. For example, the money owed to suppliers is a current liability because it must be cleared at the end of the financial year. Thus current ratios are used to determine the liquidity of a company by looking at its transactions within a given year. The acid test ratio is got by taking. Quick assets are significant cash and other assets that can be turned into money whenever needed. Examples of smart assets include money at hand, shares, and pay at a bank, among others.

Activity Ratios

The activity ratios help a business to determine its effectiveness in using assets by converting them into cash. These ratios help in understanding how well a company is run. There are four types of activity ratios: total assets turnover ratio, accounts receivables turnover ratios, inventory turnover ratios, and fixed asset turnover ratios. The inventory turnover ratio indicates the number of times that inventory is sold within one accounting period. It is determined by getting. Therefore for a business to operate, the cost of sales should be higher than the price of inventory which will translate to a higher inventory turnover ratio.

The fixed assets turnover ratio measures the ability of a business to use its available fixed assets efficiently. It is got by getting the rate of sales to fixed assets, that is. A low fixed assets turnover ratio means that there is over-investment in the company’s assets. On the contrary, the total assets turnover ratio deals with all the available company assets. It is got by dividing sales by average total assets,. A company needs to have high total assets turnover ratios as they indicate excellent business performance. The accounts receivables turnover ratio is used in determining the effectiveness of a business organization to give credit to customers and collect them as expected. Net credit sales average accounts receivables calculate ratio. A high accounts receivables turnover ratio means that customers pay their debts to the company in time which ensures good cash flow and ultimately better operations.

Solvency Ratio

The solvency ratios are used to determine the sustainability of a business organization. It draws a comparison between debts and equities, earnings and assets. Moreover, the solvency ratio provides a forecast on the ability of the business to pay its expenses in the future. For a company to remain operational, there should be a good flow of cash which will enable the company to meet its obligatory liabilities. Thus the solvency ratio is calculated as follows. (Kenton, 2019). A company needs to have a high solvency ratio so that it stays on the safe side. Otherwise, the debts may be too much for the business to handle, leading to losses and thus poor performance.

Profitability Ratios

The profitability ratios are used to determine how best a company utilizes its assets in generating profits. The amount of profit generated is relative to the type of investment/ assets used. There are different types of profitability ratios including Return on Equity (ROE), Return on Investment (ROI), gross profit margin (GPM), Return on Assets (ROA), and operating margin (OM) among others. The gross profit margin is used to indicate the cost used in the production of goods and services. Mathematically, gross profit margin=.The ratio, return on assets is used to determine the efficiency of the business in generating revenue from its assets. Return on Assets (ROA)= Operating margin (OM) is used to determine the cost incurred in the production of other indirect goods and services. Operating Margin (OM) = . The return on equity is used to assess how much the company makes from each investors’ assets. It is calculated as, ROE=.

Horizontal and Vertical Analysis

The parallel analysis of financial statements is used by the company to study a specific trend in the financial statement over a given period. An aspect can be analyzed by comparing it through a given period, say five years. For example, if an analyst decides to look at sales in the first quarter of each fiscal year by way of comparing them, then the analysis is called horizontal analysis. It is a parallel analysis because it involves looking at one variable in the financial statements and analyzing how the company performs in that aspect for a specified period.

The vertical analysis is done by the company to get a more comprehensive standpoint of the company by analyzing various factors within the financial statements. The vertical analysis may be done quarterly to determine the direction that the company is headed in terms of its performance in the market. Therefore vertical report entails different variables within the financial statements and how they affect the operation and the sustainability of the business. These variables may include sales, profit margins, and net sales, among others. The combination of both the horizontal and the vertical analysis is vital for determining the viability of the business therefore at all times these analyses should always provide positive results for a company to be healthy in its operation.

Liquidity Analysis

Industry

The following data represents the reported current ratios of restaurants within the United States

Data obtained from macrotrends.

From the above data, it is clear that the restaurant industry has registered an average current ratio of 1.33. This means that most companies in the restaurant business can pay for current liabilities by converting their existing assets into cash.

Liquidity Ratios

The liquidity ratio above shows the current rates of the restaurant industry alongside the performance of Darden Restaurants and Flanigan's Enterprises for the period between 2015 and 2018. From the table above, it is clear that Darden Restaurants had a bad current ratio below 1.0. This means that the company has not been able to pay off its current liabilities due to a low number of existing assets. On the contrary, Flanigan's Enterprises registered a current ratio of above 1.2, which is almost the same as the average ratio obtained by other companies in the industry. The current rates of Darden Restaurants were below the industries' ordinary meaning that the company incurs more expenses in paying current liabilities.

The quick ratio measures the ability of a business to cater to its obligations. The low quick ratio in Darden indicates that the company has struggled in the past in terms of growing its sales. The flat rate may also mean that the company does not collect its receivables as expected. When compared to other restaurants in the country, Darden Restaurants registers a quick flat rate. On the contrary, Flanigan’s Enterprises have maintained a healthy quick ratio which means that they have been able to foot their bills by having enough sales within each financial year.

Activity ratios

Industry

The activity ratios show the efficiency of the company in converting assets into cash. The average inventory turnover of the restaurant industry was found to be 24 in 2018, 26 in 2017 and 29 in 2016. The inventory turnover has been reducing gradually, meaning that most companies find it hard converting their assets into cash.

Darden Restaurant

Looking at the inventory turnover of Darden restaurant, it is clear that the company is making progress by converting most of its current assets into cash. In 2016, the inventory turnover was found to be 31,79. This ratio reduced in 2017 by some small figure and then rose again in 2018. Moreover, Darden Restaurant had a higher inventory turnover than the average industry ratio. This means that Darden is useful in converting its assets in liquid cash.

Flanigan’s Enterprises

Flanigan’s enterprises had an inventory turnover of 28.39 in 2018, 29.91 in 2017 and 31,13 in 20166. The three ratios were higher than the industry ratios, meaning that Flanigan’s enterprises, just like Darden, has an efficient way of a working system that helps in the sale of short term inventories within the company.

Solvency ratios

Industry

Looking at the solvency ratios of Restaurants industries within the US, the debt ratio in 2018 and 2017 was found to be above 50%, meaning that most companies relied on debts to run their companies rather than they are on their equities. This is an indicator that most organizations rely on mortgages to operate. This is a cause for concern for most investors because it is hard to invest in a company that struggles to sustain itself.

Darden Restaurants

Darden registered a debt of 42% in 2018, 45% in 2017 and 23% in 2016. Looking at the three ratios, it can be deduced that Darden Restaurants have managed to keep their business running without relying on debts. Thus the market can be sustained with minimal debt obligations. Moreover, the times' interest ratio of the company is less favorable, which is an indicator that Darden Restaurants is highly solvent and thus can attract investors.

Flanigan’s Enterprises

In the case of Flanigan's enterprises, the solvency ratios are even more precise and easy to interpret because they are way lower compared to the industry ratios. The low rates in the computation of debts show that Flanigan's Enterprises is mindful of its obligations to debtors, thereby limiting their involvement with debt in the business.

Profitability ratios

Industry

The food and restaurant industries have made profits in the past and continue to do so each passing day. Even though many factors like stiff competition and the dynamic nature of the consumer is changing, the sales that are reported annually have been profitable to most companies. The gross profit margin was recorded as 20%, 23% and 25% in 2018, 2017 and 2016 respectively. A gross profit of 20% may seem low, but this number represents hundreds of companies within the United States, both small and large.

Darden

The profitability of Darden can be seen in its ability to invest with shareholders in the company. The return on equity is found to be higher in 2018 than it was in 2017. An indicator that the management is utilizing shareholders' assets in the market. There was a decline in the return on investment in 2018 as compared to 2017.

Flanigan’s Enterprises

The company fared relatively well, especially its gross profit margin. The gross profit margin was relatively higher than that of Darden's and the industry at large. A more considerable gross profit margin is a show of profitability for the company; thus, any investor will go for a company that produces significant results in terms of profits.

Horizontal and vertical analysis

Darden financial report

Comparative analysis

Short term

The evaluation of the creditworthiness of both Darden Restaurant and Flanigan's enterprises can be determined by looking at their liquidity ratios. The liquidity ratios deal with the short term obligations of the company. Looking at the current proportions of the two companies, it is evident that Darden Restaurants had a low ongoing rate compared to Flanigan's enterprises.

Moreover, Darden failed to meet the industry standards as far as short term liabilities are concerned. On the contrary, Flanigan’s enterprises maintained operational standards by meeting the industry standards which required companies to have current ratios that are above 1.0. Therefore by comparing the two companies, Flanigan's enterprises have a better chance of meeting its future liabilities because they can convert their current assets into cash, thereby allowing cash flow into the business.

Long-term

The creditworthiness of these two companies can also be estimated by looking at long term liabilities. The long term liabilities of the companies are obtained from the data available about the company’s debts as well as the returns earned from sales. Both companies were found to have low debts obligations which means that they can be able their operations without necessarily borrowing from financial lenders or institutions. The burden of debts can weigh down on the company and thus should be avoided.

Recommendations

From the analysis of the two companies, it is clear that the two companies differ in terms of their performance in the financial markets. Some of the factors have been mentioned that may hinder these two industries from being competitive in the market. The two companies need to carry out more sales by marketing their foodstuffs through adverts. Darden needs to look for better ways of trading its current assets so that money can circulate within the business. Both companies need to collect receivables from creditors to avoid overwhelming expenditures. Additionally, each company needs to come with strategies to ensure that they do internal analysis to help them decide on the best course of action to take so that the two companies can perform well in the market.

Conclusion

The discussion above has used comparative analysis to discuss the Darden Restaurants chain and Flanigan’s Enterprises. These companies fall under the foodservice industry in the US. The study done above has shown some of the weaknesses and strengths that each company has as far as financial analysis is concerned. The two companies have performed reasonably well in the market. However, there are some areas that they need to improve to remain relevant in the foodservice industry. Such regions include increasing sales and limiting debts.

References