Financial Statements Paper Part II
Financial Statements Paper Part II
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Financial Statements Paper Part II
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Financial Statements Paper Part II
Analyzing the company’s condition one has to utilize different tools such as those
presented in the appendices, which shows that the company may have difficulty funding
its proposed expansion program. Although management has outlined the available
financing sources such as cash flows from operations, available cash on hand, and
availability of credit facilities, these sources of financing, primarily the cash flows from
operations, might be needed to pay the short term liabilities as they come due. Based on
the company’s liquidity ratios, current assets are not sufficient in order to pay off current
liabilities. Therefore, management needs to explore the additional financing options such
as issuing long term debts and having additional equity.
Even though, these options may have negative consequences. Seeing that the cost
of borrowing may be comparatively higher as the interest coverage ratio is extremely low
even if total debt are still less than half of total assets. Besides the additional borrowings
could increase total debt’s percentage compared to total equity which could result to
higher borrowing costs. The issuance of additional equity may not be approved by
stockholders for this alternative could have a considerable impact on earnings per share,
dividends per share and stock prices therefore if management fails to justify the
expansion it will increase the shareholder wealth. In addition, the extra issuance of
common stock for a financing source could possible is difficult at this time since the
company issued new stocks in 2002.
In simpler terms if the expansion takes place then the expected returns on the
planned expansion should be comparatively higher than the company’s projected
weighted average cost of capital. Therefore, management needs to analyze the working
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capital management policies and practices for areas that may need improvement. In
looking at the long term financial feasibility of Landry’s to be promising their short term
survivability must be guaranteed first. Therefore it would be useless if the company has
the money for expansion, but does not have enough cash to finance its operations.
The most intriguing part of the analysis is in Landry’s Restaurant’s management’s
assessment of the financial condition of the company in which, its discussion on
increased restaurant pre-operating expenses in 2003 from $4.6 million to $8.7 million.
Management stated that the increase was recognized by the increase in units opened 2003
from those in 2002 that is 283 in 2003 and 267 in 2002. When computed in a per
restaurant basis, the restaurant pre-operating expenses shows a considerable increase in
which could not explained by the number of restaurants opened during the year which
was not a significant increase. As shown in Appendix 3, the 2003 restaurant preoperating expenses per restaurant opened is about $16 thousand while it was nearly $10
thousand in 2002. This represents a 60% increase per restaurant.
The significant increase in assets impairment increased by roughly 500% as
shown in Appendix 2 which is shows an area of concern. According to Landry’s
Restaurant’s management, this increase is due to the sales revenue and profitability
deterioration of several restaurants as these restaurants’ deterioration are due to their
market area and/or specific location. This is a concern not only because of its amount, but
because of its implication in the operations of Landry’s as a whole. For example, since
these restaurants’ market deteriorated and supposing that other restaurants of Landry
serve the same market although in different locations, the operations and profitability of
these other restaurants might also be affected. Therefore further disclosure needs to be
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addressed regarding the number of restaurants operating within the same market by
Landry’s so that investors and other stakeholders can reasonably assess the future impact
of this information.
The company’s management did not explain why several development projects
were discarded in 2003 which resulted in the significant increase in other expenses for the
year. The cost of abandonment of projects is based on the information provided within
the annual report which estimated around $2 million. On the other hand, the entire cost of
dropping these projects is greater than this especially if the total amount invested in these
projects was taken into account.
Another weakness and concern that was not discussed by management is the
revenues per employee. In the discussion on the increase in general and administrative
expenses, management justified this by attributing the increase to the higher number of
personnel necessary to run each expanded restaurant. However, management failed to
rationalize this increase in the number of employees by a corresponding with the increase
in productivity as indicated by revenues per employee.
Another concern is that although management discussed the components of
income individually and identified what components increased and decreased during the
year, there was no further explanation on why net income, as a whole, decreased as a
percentage of total revenues (see Appendix 3). In 2003, profit margin is 4.2% in 2002 it
was 4.6% although in dollar amount the net income increased from $42 million to $46
million. This decrease in profit margin may have been due to several components such as
unproductive pricing strategy and operations management for the restaurants. This can
also be in inconsistency with management proclamation that its operations have not been
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significantly affected by inflation as the restaurants can always pass on increase in costs
to menu prices. Therefore the increase in different direct costs to the restaurants such as
cost of revenues, restaurant labor and other restaurant operating expenses must lower
than the increase in revenues, but according to the trend analysis the revenues increased
somewhat lower than the increase in the cost of revenues and restaurant labor.
Management did not discuss its plans on how to pay for its long-term debt. The
careful analysis of the company’s statement of cash flows shows that the intended
expansion and payment of the debt together could not be supported by the company’s
cash flows or by its operating activities.
In conclusion, management failed to discuss the different business and economic
risks within the restaurant’s operating environment. Management even failed to discuss
its perception of the company’s business environment in the near future which could have
been done as it discussed the planned expansion. A simple discussion of what
management requests to do in the future without a corresponding discussion on why it
does, does not give sufficient information for stockholders to assess if continuing
investing in the company’s business is the best course of action.
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Appendix 1: Vertical Analysis
Vertical Analysis
2003
2002
Assets
Cash and cash equivalents
Accounts receivables - trade and other
Inventories
Deferred taxes
Other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Accrued liabilities
Income taxes payable
Current portion of long-term notes and other obligations
Total current liabilities
Long-term notes, net of current portion
Deferred taxes
Other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Common stock
Additional paid-in capital
Deferred compensation
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
Revenues
Operating costs and expenses
Cost of revenues
Restaurant labor
Other restaurant operating expenses
General and administrative expenses
Depreciation and amortization
Asset impairment expenses
Restaurant pre-opening expenses
Total operating costs and expenses
Operating income
Other expenses
Interest expense, net
Other, net
Income before income taxes
Provision for income taxes
Net income
3.19%
2.11%
4.33%
0.62%
0.68%
10.94%
87.56%
0.68%
0.82%
100.00%
1.49%
2.13%
4.38%
0.67%
1.26%
9.93%
89.06%
0.26%
0.75%
100.00%
7.52%
6.76%
0.02%
0.18%
14.47%
27.18%
2.12%
1.41%
45.18%
7.69%
7.96%
0.06%
0.19%
15.90%
20.30%
1.24%
1.78%
39.22%
0.03%
39.86%
-0.17%
15.10%
54.82%
100.00%
0.03%
47.30%
0.00%
13.45%
60.78%
100.00%
Vertical Analysis
2003
2002
100.00%
100.00%
2001
100.00%
29.10%
29.24%
24.41%
4.68%
4.42%
1.19%
0.78%
93.81%
6.19%
28.83%
28.97%
24.89%
4.85%
4.52%
0.25%
0.51%
92.82%
7.18%
29.42%
28.88%
24.80%
5.09%
4.65%
0.32%
0.35%
93.52%
6.48%
0.86%
0.13%
1.00%
5.19%
1.04%
4.15%
0.56%
-0.10%
0.46%
6.73%
2.08%
4.64%
1.26%
-0.01%
1.25%
5.23%
1.62%
3.61%
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Appendix 2: Trend Analysis
Trend Analysis
2003
Assets
Cash and cash equivalents
Accounts receivables - trade and other
Inventories
Deferred taxes
Other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Accrued liabilities
Income taxes payable
Current portion of long-term notes and other obligations
Total current liabilities
Long-term notes, net of current portion
Deferred taxes
Other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Common stock
Additional paid-in capital
Deferred compensation
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
Revenues
Operating costs and expenses
Cost of revenues
Restaurant labor
Other restaurant operating expenses
General and administrative expenses
Depreciation and amortization
Asset impairment expenses
Restaurant pre-opening expenses
Total operating costs and expenses
Operating income
Other expenses
Interest expense, net
Other, net
Income before income taxes
Provision for income taxes
Net income
153.72%
16.89%
16.86%
10.13%
-36.38%
30.14%
16.20%
209.20%
30.04%
18.20%
15.53%
0.37%
-63.88%
10.08%
7.57%
58.25%
102.73%
-6.72%
36.15%
-0.42%
-0.39%
NA
32.73%
6.61%
18.20%
Trend Analysis
2003
2002
23.58%
19.84%
24.75%
24.72%
21.21%
19.18%
20.61%
497.47%
88.42%
24.90%
6.42%
17.42%
20.19%
20.26%
14.16%
16.48%
-8.12%
76.69%
18.94%
32.93%
91.34%
-264.94%
168.20%
-4.63%
-38.40%
10.55%
-46.85%
1475.30%
-56.02%
54.24%
54.22%
54.24%
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Appendix 3: Ratio Analysis
Ratio Analysis
2003
Liquidity ratios
Current ratio
Quick ratio
Cash ratio
Asset turnover ratios
Receivable turnover
Average collection period
Inventory turnover
Inventory period
Payable turnover
Average payment period
Financial leverage ratios
Debt ratio
Debt-to-equity ratio
Interest coverage
Profitability ratios
Gross profit margin
Profit margin
Return on assets
Return on equity
0.76
0.46
0.22
0.62
0.35
0.09
47.51
7.68
6.74
54.19
3.88
94.03
44.94
8.12
6.31
57.85
3.60
101.53
0.45
0.82
7.00
0.39
0.65
13.04
2001
5.15
70.9%
4.2%
4.2%
7.6%
71.2%
4.6%
4.5%
7.3%
1.66
1.62
1.60
1.54
EPS, basic
EPS, diluted
Stores opened
Restaurant pre-opening expenses, per store
2002
287
15,996.42
267
9,731.43
70.6%
3.6%
1.24
1.19
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Reference
Phillips, F., Libby, B., and Libby, P. (2006). Fundamentals of Financial
Accounting, 1e. Copyright 2006 the McGraw Hills Company. Retrieved on Aug 17, 2009
from www.ecampus.phoenix.edu