Fundamentals of Business Finance - Cohort: Jan 23 – Level 4

From: (Your Name)

To: Christina Hansen (Operations manager)

Subject: Business Finance

Introductio

This case study report’s aim is to evaluate and explain the financial position of the 7 Seas Onboard Restaurants Ltd for the last five financial years. Thus, the assessment of the financial statements and ratios will reveal the company’s efficiency, liquidity, profitability, and risk. The purpose is to assist the operations manager in the preparation of a comprehensive report on the company’s financial position to the senior management, especially with a view the information could be more helpful in the framing of future business strategies.

Financial Information

Financial information refers to the information generated by the financial activities of an organisation, and is reported typically in the form of the income statement, balance sheet and statement of cash flow. It is used for evaluating organisational performance and making some prognosis or forecasting along with fundamental analysis of the company’s financial situation. It helps stakeholders make necessary decisions about investment, lending and the regulatory standards to be complied with (Harianto, 2023).

Stakeholder Motives for Financial Information

Different stakeholders are interested in the financial information of 7 Seas Onboard Restaurants for various reasons:

Government (HMRC): Taxes are therefore paid to the government based on figures that the company has declared in its financial statements. Another is that correct financial records should be provided to determine the right amount of corporate tax to be paid. HMRC is concerned with how the company conducts its business and whether it is following the country’s laws on tax payments as well as transparency (Sadiq, 2021).

DFDS Seaways: DFDS Seaways is in partnership with 7 Seas Restaurants and as a partner and client, legal requirement necessitates that 7 Seas Restaurants be as financially viable and profitable as it is. It means that such a service provider’s capability to fulfil its responsibilities and deliver a steady service on DFDS ferry routes is valuable to DFDS’s operation.

Suppliers of Raw Materials: This is another major factor where suppliers depend on the financial data that determines whether the company is credit-worthy enough to sustain itself and honour the long-term contracts entered into with it. Knowledge about the company’s liquidity and credit standing is useful to the suppliers to minimise their credit risk (Joya, 2022).

Potential Investors: Holders of 7 Seas Onboard Restaurants want to know whether the investment in the company is going to be profitable or not. They use the financial performance to evaluate the ROI to establish the company’s expansion and viability status.

Banks and Financial Institutions: Analysts, like bank lenders, employ this info to establish the firm’s capacity to service its liabilities. They use liquidity ratios, leverage, and profitability ratios to reach decisions concerning the extension of loan and interest structures (Broby, 2021).

Purpose of Financial Information

Financial information plays several essential functions for various parties because it helps them to make correct decisions related to the analysed enterprise’s financial condition and potential further development.

Decision-Making: First of all, it is important to have accurate and on-time financial information for members of all categories of stakeholders to make the right decisions. It is used by investors to invest or divest while lenders use it to evaluate credit worthiness of the company and supplier to decide whether or when to enter into business relations with the company.

Performance Evaluation: For the benefit of the company’s stakeholders such as DFDS Seaways as well as suppliers, it reveals 7 Seas Onboard Restaurants’ past period performance evaluation. For instance, they can evaluate it in terms of profitability, liquidity and efficiency whereby they can tell whether the company is expanding, in a state of balance or declining.

Regulatory Compliance: Bodies such as HMRC the taxpayers’ money for the companies to confirm whether they are paying the right amount of tax and at what period. Managerial accounting is very essential in the provision of financial reports in compliance with legal requirements and regulations (Matthews, 2021). 

Risk Assessment: It can also be noted that the data on financial performance are crucial for banks and other financial institutions that are willing to give credit to the company. It is also used by potential investors to make assessments about risks involved in the expenditure in the business such as the debt levels, or the liquidity position of the business.

Characteristics of Good Financial Information.

Relevance: Financial data has to be relevant and useful in the decision-making processes that are at hand. For instance, the Gross Profit Ratio or Net Profit Ratio can be informative for investors targeting the company’s profitability (Sa?uga et al., 2020).

Reliability: Reliability and credibility of financial information are very important. As for HMRC, it needs accurate and devoid of mistake information to compute the taxes that the company must pay. Reliability also makes it possible for the users of the financial statements to have confidence in what is being presented to them.

Comparability: Such information must be presented in a format that enables users to do comparisons between different periods or with other competitor firms (Glaeser and Lang, 2024). For example, it may compare the 7 Seas with other enterprises using the ferry routes that are provided by DFDS Seaways.

Timeliness: Meanwhile, financial information that is reported should be issued without delay to enable users to carry out decision-making based on the latest information available in circulation (Guo et al., 2022). For example, banks and other financial institutions require up-to-date information to make decisions about whether to offer credit or not. Incorrect data are often generalised and can represent the company’s financial position in the wrong way if the data is old.

Consistency: The information that stakeholders require includes financial data which is consistent and reliable to make comparisons. Any changes in the manner in which accounting methods or reporting is done should be revealed to retain the public’s trust.

Ratios Analysis- 7 Seas Onboard Restaurants

Now, let's calculate these ratios using the data provided in the table:

Analysis of Company's Performance:

1. What does each ratio generally explain about a company?

Gross Profit Ratio: This metric helps in understanding how efficient a company has been in their cost management as a producer of the said revenue. A higher value indicates that the company is in a position to effectively manage its costs while other operation costs will take a smaller portion out of it (Rounaghi, Jarrar, and Dana, 2021).

Operating Profit Ratio: This ratio shows the efficiency of the firm in managing its operational costs about sales. Operating profit implies the implication of cost controls or the overheads on operations; hence, a higher operating profit ratio depicts better operational efficiency.

Net Profit Ratio: This ratio establishes the amount of profit a company can make after all costs have been incurred, and tax and interest have been paid. When the net profit ratio is high then profitability is good; if the net profit ratio is low then the company is not well equipped to deal with total costs commonly known as total expenses.

Return on Investment (ROI): This ratio depicts the returns which the company is capable of realising from all the accumulated assets. With a high ROI, it signfies that the organisation is profitable with its assets in the generation of income, a measure of success for the firm (Burcovich, 2021).

Return on Equity (ROE): ROE aims at establishing how efficiently the company utilises the shareholders’ equity to generate profits. A higher ROE gives the signal that the company has done well in terms of returns to the investors on the amount invested in them, which also gives a signal of proper utilisation of invested capital (Supriyadi and Terbuka, 2021).

Assets Turnover Ratio: This ratio shows how effectively or otherwise the company can utilise its assets for sales making. Higher signifies that the company is efficiently employing its resources in a bid to increase revenues.

Current Ratio: This ratio determines how well the company is placed to honour short-term commitments employing current assets. A higher reading (normally above 1) and therefore good liquidity is the ability to readily cover most of the short-term obligations.

Quick Ratio: The quick ratio is a stricter measure of liquidity as it excludes inventory from current assets. This ratio gives a good idea of the company’s potential to fulfil its immediate liabilities without relying on inventory sales.

Equity Ratio: This ratio indicates the proportion of the company’s assets financed by equity rather than debt. A high equity ratio suggests lower financial risk, as the company relies more on internal financing than external borrowing (Nukala and Prasada Rao, 2021).

Debt Ratio: This ratio measures the extent to which the company’s assets are financed by debt. A lower debt ratio indicates reduced reliance on external debt, thus minimising financial risk.

2. Development of the Ratios: Insights into the Company’s Progress

An analysis of 7 Seas Onboard Restaurants’ financial ratios over the five years from 2019 to 2023 reveals significant improvements in its financial wealth.

Profitability: In 2019 and 2020, the share of Gross, Operating, and Net Profit Margins were negative, which indicates the company’s high cost and low efficiency. In 2021 the Gross Profit Ratio increased and during 2023 was 62% and the Operating Profit Ratio was at 34%, showing much better control over costs and efficiency of operations. The net Profit Ratio also rose similarly, attaining 24% in 2023, which presses a sound profit certification.

Returns: Here also ROI and ROE were negative in the years up to 2020 but turned the corner in the subsequent years starting from 2021. ROE, especially, increased to 10 levels. It has set an average industry return on assets of 35% by 2023, implying that British Telecom will optimise its assets thus enabling shareholders to gain more returns on investment.

Liquidity: The company’s liquidity position: is good and getting better. The Current Ratio and the Quick Ratio showed values above 1 till 2022 which proves the company’s ability to manage current assets for the settlement of the short-term liabilities and better cash flow management.

Efficiency: The Asset Turnover Ratio progressively rose in the five-year period, which indicates the company’s improved ability to convert assets into sales (Ridita, 2021)

Limitation of the Ratios Analysis

Historical Data: Such ratios are affected by historical performance and therefore do not give a clear indication of future results. Future trends can be affected by changes in market environment, competition or other economic indicators which make historical figures less reliable.

Industry Comparisons: The comparison of ratios to a benchmark may be done with difficulties, if the company operates in a rather narrow field of business. For example, 7 Seas Restaurants is based in the environment of an onboard company making the competition comparison meaningful only to a limited extent (Czerwi?ska-Kayzer et al., 2021).

Non-Financial Factors: The information presented in financial ratios does not incorporate certain factors such as quality aspects, for example, satisfaction levels of the customers, morale of the employee, and reputation of the brand, which are essential to determine the sustainability of the firm (Zarzycka, and Krasodomska, 2022).

Accounting Policies: There are certain ratios which can be distorted due to differences in, for instance, depreciation or inventory policies. It also complicates the evaluation of companies' benchmarking performance or any other analysis done over time (Zaslavskaya, 2022).

Conclusion

Overall, based on the analysis of 7 Seas Onboard Restaurants Company the table above shows that the Company has recorded a high level of improvement in profitability and efficiency of production in the five years. The company has been able to move from operation loss to good profit status and this is due to improved cost control measures and operations strategies. The liquidity position is still healthy and with a decrease in the proportion of equity financing, the credit risk is also minimised. However, it is essential to use these ratios with care that they only reflect historic figures have low predictive capability on future results and exclude non-financial aspects. In the future, the company ought to be vigilant about operational changes on various routes of the company and at the same time strive to remain profitable.

References

Broby, D., (2021). Financial technology and the future of banking. Financial Innovation, 7(1), p.47.

Burcovich, L., (2021). Value-Based Management: Performance Indicators of Value Creation. Alternative Measures to Assess Shareholder Returns.

Czerwi?ska-Kayzer, D., Florek, J., Staniszewski, R. and Kayzer, D., (2021). Application of canonical variate analysis to compare different groups of food industry companies in terms of financial liquidity and profitability. Energies, 14(15), p.4701.

Glaeser, S. and Lang, M., (2024). Measuring innovation and navigating its unique information issues: A review of the accounting literature on innovation. Journal of Accounting and Economics, p.101720.

Guo, L., Chen, J., Li, S., Li, Y. and Lu, J., (2022). A blockchain and IoT-based lightweight framework for enabling information transparency in supply chain finance. Digital Communications and Networks, 8(4), pp.576-587.

Harianto, A., (2023). The Analysis of Statement of Cash Flow in Assessing the Financial Performance at PT Akasha Wira International TBK. Jurnal Kolaboratif Sains, 6(7), pp.863-871.

Joya, N.A., (2022). Effectiveness of the tools and techniques used for the marketing of supply chain finance products of IDLC.

Matthews, A., (2021). Taxpayers' rights to just administrative action under tax audits: a South African perspective (Doctoral dissertation, North-West University (South Africa)).

Nukala, V.B. and Prasada Rao, S.S., (2021). Role of debt-to-equity ratio in project investment valuation, assessing risk and return in capital markets. Future Business Journal, 7(1), p.13.

Ridita, R.I., (2021). Financial Performance Analysis of RAK Ceramics Bangladesh Limited.

Rounaghi, M.M., Jarrar, H. and Dana, L.P., (2021). Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability. Future Business Journal, 7, pp.1-8.

Sadiq, M., (2021). IMPACT OF MAKING TAX DIGITAL ON SMALL BUSINESSES. Arabian Journal of Business and Management Review (Kuwait Chapter), 10(3), pp.123-134.

Sa?uga, P.W., Szczepa?ska-Woszczyna, K., Mi?kiewicz, R. and Ch??d, M., (2020). Cost of equity of coal-fired power generation projects in Poland: Its importance for the management of decision-making process. Energies, 13(18), p.4833.

Supriyadi, T. and Terbuka, U., (2021). Effect of return on assets (ROA), return on equity (ROE), and net profit margin (NPM) on the company’s value in manufacturing companies listed on the exchange Indonesia securities year 2016-2019. International Journal of Economics, Business and Management Research, 5(04), p.2021.

Zarzycka, E. and Krasodomska, J., (2022). Non-financial key performance indicators: what determines the differences in the quality and quantity of the disclosures? Journal of Applied Accounting Research, 23(1), pp.139-162.

Zaslavskaya, I., (2022). Treatment of the elements of depreciation of fixed assets in the Accounting Policy. In E3S Web of Conferences (Vol. 363, p. 01017). EDP Sciences.