The financial performance and ratios of Elephant Bar Restaurant are not favorable, current and quick ratios of Elephant Bar are very much lowabout the ideal ratios. The minimum threshold for the rapid and current ratio is 1:1 and 2:1, these ratios are way behind the perfectratios. This lower quick and current ratio indicates that Elephant Bar doesnâ€™t have enough current assets to meet its current liabilities. Furthermore, theseratios decreased radically in 2002 as compared to 2001, aggressive actions from management should have to be taken to increase the current and quick ratios. Failure to do so will result in an alarming situation.
Profitability ratios of Elephant Bar are also not up to the mark; all the profitability ratios are decreasing except for gross profit margin which is increasing slightly. The net profit margin of Elephant Bar Restaurant is tiny; on the other hand, the gross profit margin is very high, this indicates the high operating expenses. A Little decrease in sales or increase in operating costs will deteriorate the net profit margin which might be very dangerous for Elephant Bar Restaurant. Additionally, the return on assets and return on equity are also very low which means that the management is not using the shareholder’s funds and assets correctly and the shareholder’s reserves and assets are not generating reasonable returns. Further information is needed regarding the industry trends which may be used to assess the performance of Elephant Bar against the industry trends.
The efficiency ratios of Elephant Bar are not so lowwhich; thereceivables turnover ratio is three days while the inventory turnover ratio is stable in both years which is ten days. However, the receivable days are increasing which suggests that the credit control department of Elephant is not performing well as compared to their performance in 2001. As the inventory of Elephant Bar Restaurantmainly consists of food items which can be damaged easily and quickly, further information is neededbefore reaching any conclusion regarding the inventory turnover days.
The Gearing ratio of Elephant Bar is very low which indicates that the company has low debt as compared to the equity reserves. Lower gearing ratio is seen as positive by investors because thethere risk is reduced, another implication of lower gearing ratio is the reduced interest costs, and if the company has ahigh level of debt, and it should have to pay ahigherlevel of interest also.
The revenues of Elephant Bar Restaurant is increasing from the previous year; this increase might be due to the rapid expansion of Elephant Bar and afurtherincrease in revenue is also expected as the management is considering further expansion of the restaurant chain. Similarly, the gross profit margin is also increasing but, the net profit margin is decreasing drastically which indicated the rapid increase in the operating expenses.
Investment decision evaluation:
As per the Black-Scholes option pricing model, the value of aninvestment will move favorably and the value of the share after the maturity period would be approximately $3.5 per share. Investment committee might agree to invest in the Elephant Bar Restaurant byBlack Scholes option pricing model. For calculating the value of option, certain factors are very subjective in nature such as volatility, little change in volatility can alter the value of theoption……………….
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