Financial Ratio Analysis - Problem Solving Sample

2021-07-20 13:39:27
3 pages
811 words
University/College: 
Carnegie Mellon University
Type of paper: 
Problem solving
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The following are the key ratios analyzed derived from the years 2015 and 2016 financial reports. US Foods Holding Corps corresponding data has also been obtained to aid in making industry comparisons in the analysis.

CHIPOTLE MEXICAN GRILL

2016 2015

Profitability Profit margin 0.59% 10.57%

Return on Equity 1.13% 17.45%

Liquidity Current ratio 1.85 2.91

Acid-test (quick) ratio 1.80 2.86

Efficiency Inventory Turnover Ratio 90.85 99.02

Solvency Ratio Debt/Equity 0 0

US Food Holding Corp

2016 2015

Profitability Profit margin 1.80% 0.80%

Return on Equity 9.51% 9.59%

Liquidity Current ratio 1.55 1.52

Acid-test (quick) ratio 0.93 0.82

Efficiency Inventory Turnover Ratio 16.15 167.67

Solvency Ratio Debt to Equity 1.55 2.52

Profit Margin Ratio

The profit margin ratio gives a comparison of Chipotles net income to net sales and a measurement of the companys ability to generate profits from sales.

It is therefore calculated as (Net income/Net sales) x 100.

This has been obtained as per the above data as follows:

The year 2016 - 0.59%

The year 2015 10.57%

The following can be noted from this ratio.

Chipotles profit margin drastically dropped from 10.57% to 0.59% from 2015 to 2016. This was due to reduced revenue in 2016 by 13% without a corresponding reduction in operating expenses which increased by 3%.

US Foods on the other hand have recorded improved profit margin from 0.8% to 1.8 % which represent the industry trend.

This is a worrying trend and therefore corrective measures should be taken either ton increase revenue of reduce operating expenses.

Return on Equity (ROE)

This ratio is obtained by dividing net income by the entitys shareholders equity. This ratio shows the income generated by an entity per dollar invested by the shareholder. It is calculated as follows:

(Net Income/shareholders Equity) x100

This was obtained as follows for the two years under study:

The year 2016 1.13

The year 2015 - 17.45

The following graph show the trend

The ROE sharply declined owing to declined revenue and increased operations expenses as explained above.

Current Ratio

Current ratio gives a comparison of the current assets to that of the current liabilities and gives a measurement on the ability to make current liabilities payment.

2015 Current Ratio = 2.91

2016 Current Ratio =1.85

The ratio indicates that Chipotle Mexican Grill has declined its current ratio by 1.01 times. The current ratio is however higher than its peer (US Foods Holding Corp at 1.52 and 1.55 respectively in the year 2015 and 2016.

Inventory Turnover Ratio

The ratio gives a comparison of the cost of goods sold to the average inventory and a measurement of the ability selling the inventory.

Cost of Goods Sold/Average Inventory

(Average inventory = Beginning Inventory + Ending Inventory/2)

2015 = 90.85

2016 =99.02

This shows a slight improvement from 2015 to 2016 by 9 times.

Compared to the industry this shows that Chipotle utilized their inventories more efficiently to generate revenue.

This has been possible because the company can purchase products like meat and vegetables and use them before expiring. The move helps the company to have fewer inventories on hand.

Inventory Turnover Ratio

This ratio gives a comparison of the cost of goods sold to the average inventory and a measurement of the ability of selling the inventory.

Cost of Goods Sold/Average Inventory

(Average inventory = Beginning Inventory + Ending Inventory/2)

2015 = 90.85

2016 =99.02

This shows a slight improvement from 2015 to 2016 by 9 times.

Compared to the industry this shows that Chipotle utilized their inventories more efficiently to generate revenue.

This has been possible because the company has a capacity to purchase products like meat and vegetables while still fresh and make use of them before expiring.

Debt to Equity Ratio

The ratio gives a comparison of the total liabilities of a company to that of the total equity and a measurement of the companys capital structure and financial leverage. The Company has no either short term or long term at the moment and this therefore means that the ratio is zero for both years

Total Liabilities/Total Equity

2015=0

2016 =0

This therefore means that Chipotle is a low risk company compared to its peers at 2.52 1 and 1.47 times in the two years under consideration. This however may expose them to the high cost of funds due to reliant on equity alone.

Chipotles Overall Performance

Chipotles revenues have declined 13% hence causing a dip in the net income. Operating expenses have however increased and therefore caused further decline in the net income and also the ROE which is far less than the industry; currently at above 9.5% as opposed to 1.13% recorded in 2016. Drastic measures need to be taken to ensure that this situation is corrected going forward.

Chipotle has a healthy Current ratio of 1.85 times compared to its peer (US Foods at 0.83%). This means that they are in a better position to meet their current obligation even with the declining profitability.

Chipotle are also very efficient in utilizing their inventories and currently turn 99 times which is above their peers in the market.

Overall therefore Chipotle are financially efficient with very low risk due to their low levels of debt. They however need to drive more sales revenues to get back to a growth trajectory. They also need to consider taking a some debt to reduce the cost of funds due to over reliant on Equity as a mode of financing.

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