Darden Restaurants Inc. - Financial Analysis Example

Darden Restaurants Inc. - Financial Analysis Example Darden Restaurants Inc. - Financial Analysis â€" Essay Example > Task: Darden Restaurants Inc. - Financial Analysis Introduction Darden Restaurant Inc. is a Fortune 500 company that operates a chain of restaurants. It is headquartered in Orlando, Florida, U.S. Since it operates one of the world’s largest restaurant chains, the company is dedicated to delivering quality to its customers. This essay presents the company’s financial analysis for five years (from 2010 to 2014) using ratios. The ratios are the current ratio, the return on capital employed and the debt/equity ratio (Darden Restaurant). Return on capital employed (ROCE) - capital employed can be simplified as the total assets minus current liabilities. For this reason, return on capital employed ratio indicates the return generated by every pound invested as capital employed. Concerning Darden Restaurant Inc. , the return on capital employed in the fiscal year 2010, 2011, 2012, 2013 and 2014 is 10.13%, 11.40%, 11.40%, 7.46%, and 5.22% respectively (see table 2). The ratio interpre tation for the year 2014 means that 5.22% of the company’s operating profit was generated by the corporation’s capital employed. A similar argument applies to the rest of the years but with different figures. The trend of the return on capital employed during the five-year period starting 2010 increased, stabled, decreased, and decreased respectively. The trend is attributed to the fluctuations in both the net profit and capital employed (see Table 1). Based on the analysis, the utilization rate of the company’s capital employed decreased for the year 2014. The company should increase the utility rate in order to generate more returns (Peterson and Fabozzi 25-32). Current ratio (CR) - this ratio measures the ability of the business to meet its current obligations using the current assets. It is advisable for the ratio of current assets to current liability to be 2: 1. Concerning Darden Restaurant Inc. , the current ratio for the year 2010 to 2014 has been determined to be 0. 5408 times, 0.5159 times, 0.427 times, 0.54 times, and 1.221 times respectively (see table 2). Considering the ratio for the year 2013, the company had $ 0.54 of current assets to cover every dollar of the current liabilities. The trend for the ratios between the periods shows an increase, decrease, increase and an increase respectively. The increase is attributed to the fluctuations in both the current liabilities and current assets (see Table 1). The ratio clearly shows that from 2010 to 2013, the company was not liquid enough to sufficiently settle its short-term obligations using the current assets. The liquidity levels improved in the year 2014. For this reason, the company should either maintain or increase the cash level. The appropriate strategy of increasing the liquidity level is by increasing the level of cash alongside increasing the investment in marketable securities (Peterson and Fabozzi 25-32). Debt/Equity ratio (D/E) - the ratio indicates the proportion of fixed ch arge capital in the capital structure of a firm and the capability of the company to meet its long run obligations. Concerning Darden Restaurant Inc. , the ratio for 2010 to 2014 has been determined to be 74.38%, 72.68%, 78.92%, 121.20% and 115% respectively (see table 2). For instance, in the year 2010, 74.38% of the company’s capital was fixed charge capital and the other 25.62% was equity. Based on the analysis, the company’s debt ratio steadily increased from the year 2010 to 2013, but, decreased in 2014. The trend is attributed to the fluctuations in the levels of both fixed charge capital and equity (see Table 1). From the analysis, the company’s leverage level is excessively high for the entire period. For this reason, Halfords Group plc faces a high debt risk (Peterson and Fabozzi 25-32). Summary Based on the above ratio analysis, it has been determined that the company’s ROCE decrease toward the year 2014. An increase in the utilization rate of capital employed is advised. Based on the current ratio, the liquidity levels of Darden Restaurant improved in the year 2014. The standard of liquidity should either improve (through investing in cash and other marketable securities) or be maintained. Based on the debt/equity ratio, the company’s gearing level is excessively high, thus, exposes the company to the risk of debt default. The company should, therefore, implement strategies that could lower the gearing level. Works Cited Darden Restaurant 2015. Web. 12 Feb. 2015. http: //www. darden. com/ Darden Restaurant annual report (2010-14). Web. 12 Feb. 2015 http: //investor. darden. com/investors/financial-information/Annual-Reports/default. aspx Peterson, Pamela P, and Frank J. Fabozzi. Analysis of Financial Statements. Hoboken: John Wiley Sons, 2012. Internet resource. Table 1: the balance sheet and income statement used to calculate the ratios Year 2014 2013 2012 2011 2010 Current assets ($ m) 1976.4 764.9 757.6 663.8 678.5 Current liabilities ($ m) 1618.5 1416.4 1774.1 1286.8 1254.6 Net profit ($ m) 286.2 411.9 475.5 476.3 404.5 Net assets ($ m) 5482.2 5520.5 4170.1 4179.8 3992.8 Fixed charge debt ($m) 2481.4 2496.2 1453.7 1407.3 1408.7 Equity ($m) 2156.9 2059.5 1842 1936.2 1894 Source: Darden Restaurant annual report (2010-14) Table 2: the ratio calculations Year 2014 2013 2012 2011 2010 CR = (Current assets/Current liabilities) 1.221 0.54 0.427 0.5159 0.5408 ROCE = (Net profit/Net Assets)*100 5.22% 7.46% 11.40% 11.40% 10.13% D/E = (Fixed charge debt/Equity)*100 115.00% 121.20% 78.92% 72.68% 74.38% Source: (Peterson and Fabozzi 25-32)