From:
(Your Name)
To:
Christina Hansen (Operations manager)
Subject:
Business Finance
Introduction:
The
main focus of this report is to evaluate the financial position of
7 Seas On-board Restaurants, popular buffet restaurant On-board
DFDS Seaways. From its financial statements, the restaurant has
recorded growth and downs within the past five years of the
analysis period. This case involves a company and analyses the
income statements and balance sheets of the company and further
analyse various financial ratios to understand its profitability,
liquidity position and other related factors.
Financial
Information
Every
business requires various financial information to make the right
decisions such as income statements, balance sheets, and cash flow
statements. This information assists interested parties, including
investors and creditors, as well as regulatory agencies, to judge
the company’s performance and decide on the approach they should
undertake in dealing with the company. This paper shall be
utilizing key financial ratios and the changes that have been
observed within the five-year period, to establish the efficiency
of 7 Seas On-board Restaurants’ financial strategies.
Motives
of the Stakeholders for
Financial Information
There
are various users of financial information of 7 Seas On-board
Restaurants and they use the information in different ways because
of their motive towards the business.
Government
(HMRC): The
government, especially the tax age entities such as HMRC, needs
the financial information in order to check the company’s tax
obligations. Correct financial statements assist the government to
ensure compliance with the required levels of taxation, fight
against tax evasion, and determine the amount of corporation tax
depending on the company’s profits (McGowan, 2023, p. 147). This
information is essential to HMRC to ensure that the company is
compliant with the laws and rules and regulations.
DFDS
Seaways: DFDS
Seaways being the parent company and a partner incurs the general
well-being of 7 Seas On-board Restaurants. As seen, those
financial data affect DFDS’s operations making them more stable
and perpetually profitable. The restaurant’s performance in
terms of revenues, expenses and profitability is also evaluated by
DFDS to determine whether the restaurant has potential to be
valuable.
Suppliers
of Raw Materials: Suppliers
on their part are interested with the cash flow positions and
capacity of the company to honour payment commitments. The ratios
of the current and quick tests in our analysis of 7 Seas helps in
understanding the fluidity of payments to ensure timely supplier
order release.
Potential
Investors: Clients
want profits and, preferably, the company’s steady development.
Financial ratios such as ROI and ROE indicate not only the
profitability of a company but also evaluate the feasibility of
the company to invest. The factors which are attractive to the
possible investors include steady profits and increasing stock (De
Luca and De Luca, 2018, p. 46).
Banks
and Financial Institutions:
Banks are closely concerned with such factors as the company’s
solvency, and its capacity to repay credit obligations. We also
apply the debt ratio and a liquidity ratio to determine if 7 Seas
On-board Restaurants is financially sound and/or capable of paying
of its debts.
Every
stakeholder uses financial information to make decisions regarding
the level of interaction with this company.
Purpose
of Financial Information
Financial
information is very important in the running of a business
organization as well as in decision-making. It has a range of uses
and helps a number of interested parties involved, such as
investors and creditors, government institutions, and the
company’s internal leadership. First of all, financial
information is prepared with the aim to present the facts of the
company’s financial state and achieve an objective, which is to
help the stakeholders attain an effective decision making (Lev,
2018, p. 467). These documents involve income statements, balance
sheets, cash flow statements, among others that depict aspects of
profit Liquidities and solvency.
To
the management and other stakeholders of 7 Seas On-board
Restaurants, financial information provides past general and
specific performance, current operational, and probable future
performances. It helps in managerial decision making activities
for example in matters concerning budgeting, planning and use of
resources, besides in the compliance of the law in the submission
of taxes and other reports. However, it plays a critical role in
acquiring financial resources since financial statement are
necessary for banks and other financial organizations that
evaluate credit worthiness of the company.
Characteristics
of
good Financial Information
For
financial information to be useful and deemed credible for use in
decision making it has to meet the following characteristics:
Relevance:
The financial data has to be materiality to the needs of the users
of the financial statement. This is because in the case of 7 Seas
On-board Restaurants, income statements and balance sheets that
are highly detailed assist the users in evaluating the performance
of the firm as well as its financial strength or otherwise (Kimmel
et al., 2020, p. 121). For instance, a company such as the DFDS
Seaways requires the actual turnover numbers to strategies on
their operations; investors on the other hand may require the
company’s profit margins, return ratios, and others.
Reliability:
Business data must be free from a material error. Such data is
useful for the government especially the department of HMRC to
ensure that right amount of taxes are paid and to the banks which
need to know whether the company is capable of repaying the loans
given. A financial report enables one to make good financial
decisions hence the need to make it as reliable as possible.
Comparability:
These participants will find it necessary to make a comparison of
the business’ performance between the current period and
previous periods or with those of other businesses in the
industry. Analysing the financial statements of the 7 Seas
On-board Restaurants for five years it is possible to determine
trends in the changes in its profitability, liquidity and solvency
and thus evaluate how the company has changed financially.
Consistency:
There is also the requirement of consistency of presentation of
financial information where companies have to maintain the
consistency of the accounting policies throughout the year to
allow users to make effective comparison between the current and
past data (Gelinas et al., 2018, p. 177). This makes it easier for
the stakeholders such as investors and suppliers to identify
future performances based on past performances.
Understand
ability:
In loading and analysing financial information, it is necessary
to find ways whereby each of the constituents may access such
information and decode it as desired. Clear and concise reports
enable some other interest groups like the government or suppliers
to come up with right decisions.
Ratios
Analysis-
7
Seas Onboard Restaurants
Based
on the five years’ financial statements for 7 Seas On-board
Restaurants the following financial ratios have been calculated.
1.
Gross Profit Ratio
Gross
Profit Ratio =
×100
2019
=
×100 = - 9.05%
2020
=
×100 = - 14.78%
2021
=
×100 = -54.31%
2022
=
×100 = 62.19%
2023=
×100 = 56.21%
2.
Operating Profit Ration
Operating
Profit Ration =
×100
2019
=
×100 = - 52.16%
2020
=
×100 = - 49.26%
2021
=
×100 = 28.56%
2022
=
×100 = 35.44%
2023=
×100 = 33.68%
3.
Net Profit Ratio
Net
Profit Ratio =
×100
2019
=
×100 = - 43.97%
2020
=
×100 = - 40.64%
2021
=
×100 = 19.26%
2022
=
×100 = 24.56%
2023=
×100 = 23.57%
4.
Return on Investment (ROI)
Return
on Investment =
×100
2019
=
×100 = - 3.76%
2020
=
×100 = - 4.52%
2021
=
×100 = 3.03%
2022
=
×100 = 5.00%
2023=
×100 = 6.59%
5.
Return on Equity (ROE)
Return
on Equity =
×100
2019
=
×100 = - 7.33%
2020
=
×100 = - 10.14
2021
=
×100 = 8.25%
2022
=
×100 = 7.92%
2023=
×100 = 10.36%
6.
Asset Turnover Ratio
Asset
Turnover Ratio =
2019
=
= 0.085
2020
=
= 0.111
2021
=
= 0.157
2022
=
= 0.204
2023=
= 0.280
7.
Current Ratio
Current
Ratio =
2019
=
= 0.87
2020
=
= 0.85
2021
=
= 1.01
2022
=
= 2.06
2023=
= 1.88
8.
Quick Ratio
Quick
Ration =
2019
=
= 0.87
2020
=
= 0.85
2021
=
= 1.01
2022
=
= 2.06
2023=
= 1.88
9.
Equity Ratio
Equity
Ratio =
×100
2019
=
× 100 = 51.27%
2020
=
× 100 = 44.55%
2021
=
× 100 = 36.75%
2022
=
× 100 = 63.17%
2023=
× 100 = 63.68%
10.
Debt Ratio
Debt
Ratio =
×100
2019
=
× 100 = 51.27%
2020
=
× 100 = 44.55%
2021
=
× 100 = 36.75%
2022
=
× 100 = 63.17%
2023=
× 100 = 63.68%
Limitation of
the Ratios
Analysis
As
mentioned earlier, ratio analysis is one of the most effective
methods of analysing a company’s financial performance but it
also has some drawbacks. Firstly, ratios are calculated on the
basis of historical data which are not necessarily assumed to be
the current or even future value of the company.
This
makes the usefulness of ratios restricted because performance can
be significantly affected by the change in the economic
conditions, market demands, or any other occurrence.
Secondly,
ratio analysis also fail to take into consideration factors such
as; quality management, morale of the employees, competition and
so on. They can greatly affect the performance of a company but
are not included in financial ratios (Restianti and Agustina,
2018, p. 27). For instance, even though, 7 Seas On-board
Restaurants appear to have good financial ratios, such as
profitability, efficiency, liquidity ratios, etc, there might be
problems like, customer satisfaction, operational efficiency, etc
which ratios do not clearly reveal.
Also,
accounting standards and procedures are not standardized which
allows different businesses to use different ratios. There might
be differences in the methods that are used to write off assets,
stock valuation or revenue recognition criteria, which can skew
comparisons. Another problem is that the accounting practices can
change over time making the comparison of ratios of the same
company difficult even within the same period. Furthermore, ratios
are based mainly on the financial performance of a firm and do not
take into account macroeconomic factors or industry trends or
changes. For example, low-profit margin may not be an issue if the
company belongs to a competitive or low-margin industry (Olayinka,
2022, p. 57). Likewise, the overall profitability of 7 Seas
On-board Restaurants could be affected by trends that may not be
apparent from the ratios.
Last,
the ratios in particular may be deceiving and above all the ratio
analysis may mean the overly simplified generalization of the
financial information. However, ratios should be used in
combination with other financial instruments and quality measures
in order to get a complete picture of the company’s performance.
Conclusion
It
is clear that the company’s financial status has improved
notably over the period of five years especially after the year
2020 as evident from the financial metrics analysis of 7 Seas
On-board Restaurants. Therefore, analysing the gross and net
profit ratios, ROI and ROE show that there is a positive change in
the financial aspect of the company. Nonetheless, there are areas,
which are still problematic, for instance, liquidity management
depicted by erratic current and quick ratios for the fiscal years.
However, the equity ratio has improved over time and the company
needs to maintain a tight rein on it other than increasing the
debts which can have an adverse effect on the financial stability
of the company. In general, 7 Seas On-board Restaurants is in the
process of improvement but further efforts are crucial to maintain
the company’s growth and increase its financial strength.
Signature
and Date
Reference:
De
Luca, P. and De Luca, P. (2018) ‘Company profitability
analysis.’ Analytical
Corporate Valuation: Fundamental Analysis, Asset Pricing, and
Company Valuation,
pp.43-76. Available at:
https://link.springer.com/chapter/10.1007/978-3-319-93551-5_2
Gelinas,
U.J., Dull, R.B. and Wheeler, P. (2018) ‘Accounting
information systems.’
Cengage AU. Available at:
https://books.google.co.in/books?hl=en&lr=&id=gAxtDwAAQBAJ&oi=fnd&pg=PR1&dq=consistency+of+presentation+of+financial+information+where+companies+have+to+maintain+the+consistency+of+the+accounting+policies+throughout+the+year+to+allow+users+to+make+effective+comparison+&ots=LUYNB_wpNt&sig=Is7YNcaRgYt1O7kvuLjvG5zM-58&redir_esc=y#v=onepage&q&f=false
Kimmel,
P.D., Weygandt, J.J. and Kieso, D.E. (2020) ‘Financial
accounting: Tools for business decision making.’
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https://books.google.co.in/books?hl=en&lr=&id=oPdPEAAAQBAJ&oi=fnd&pg=PA5&dq=consistency+of+presentation+of+financial+information+where+companies+have+to+maintain+the+consistency+of+the+accounting+policies+throughout+the+year+to+allow+users+to+make+effective+comparison+&ots=242zexpnYj&sig=RxEbm0d3Rj04VE-PWQ79fdAA6I0&redir_esc=y#v=onepage&q&f=false
Lev,
B. (2018) ‘The deteriorating usefulness of financial report
information and how to reverse it.’ Accounting
and Business Research, 48(5),
pp.465-493. Available at:
https://www.tandfonline.com/doi/full/10.1080/00014788.2018.1470138
McGowan,
M. (2023) ‘Classifying Entities and the Meaning of'tax
Transparency': The UK Perspective. Available at:
https://www.torrossa.com/it/resources/an/5629189
Olayinka,
A.A. (2022) ‘Financial statement analysis as a tool for
investment decisions and assessment of companies’
performance.’ International
Journal of Financial, Accounting, and Management, 4(1),
pp.49-66. Available at:
https://goodwoodpub.com/index.php/ijfam/article/view/852
Restianti,
T. and Agustina, L. (2018) ‘The effect of financial ratios on
financial distress conditions in sub industrial sector
company.’ Accounting
Analysis Journal, 7(1),
pp.25-33. Available at:
https://journal.unnes.ac.id/sju/aaj/article/view/18996
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