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Earnings per Share (Earnings per share = Net Income / Weighed Average Common Shares Outstanding) Earnings per share measures the amount of net income earned on each share of common stock, a very important measurement, that the shareholders of a firm’s stock like to see trending upward. (NetMBA. com, 2007) Return on Assets (Return on Assets = Net Income / Average Assets) Return on Assets is a measurement of the overall profitability of a firm. It measures the rate of return on each dollar invested in assets. (NetMBA. om, 2007) As can be seen by the return on asset ratios for Landry’s, the firm invested less money in 2003 in its asset base than it invested in 2002. Current Ratio (Current Ratio = Current Assets / Current Liabilities) Liquidity ratios, like the current ratio, provide information about a firm’s ability to meet its short time financial obligations. Short-term creditors seek a high current ratio from prospective clients since it reduces their risk. For investors in a company, such as shareholders, a lower ratio is sought, so that more of a firm’s assets are working to grow the business. NetMBA. com, 2007) Times Interest Earned (Times Interest Earned = (Income Before Income Taxes + Interest Expense) / Interest Expense) The times interest earned ratio measures a company’s ability to meet interest payments as they become due. (NetMBA. com, 2007) Because of the increasing amount of long-term debt obligations that Landry’s has been carrying from 2002 to 2003, the company’s ability to meet the associated interest expenses been carrying from 2002 to 2003, the company’s ability to meet the associated interest expenses has also decreased.
Asset Turnover (Asset Turnover Ratio = Net Sales / Average Assets) Asset turnover measures how efficiently a company uses its assets to create sales (NetMBA. com, 2007). From the calculated asset turnover ratios for the fiscal years 2002 and 2003, Landry has maintained its effectiveness at using its assets to generate sales. Debt to Total Assets (Debt to Total Assets Ratio = Total Debt / Total Assets) The debt to total assets ratio measures the percentage of total assets provided by creditors (NetMBA. com, 2007).
The increase in Landry’s debt to total asset ratio denotes that the firm has increasingly turned to creditors as a source of generating cash. Current Cash Debt Coverage (Current Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities / Average Current Liabilities) The current cash debt coverage ratio measures a company’s liquidity. It also has the benefit of using the net cash supplied by operating activities. (NetMBA. com, 2007) As one can see by the current cash debt coverage ratio, the percentage of cash that Landry’s has to pay off its short-term (current) liabilities increased significantly from 2002 to 2003.
Cash Debt Coverage (Cash Debt Coverage = (cash flow from operations – dividends) / total debt) The cash debt coverage ratio shows the percentage of debt that a company’s current cash flow can retire (NetMBA. com, 2007). Because of the large amount of (long-term) debt that Landry’s is carrying (which increased from 2002 to 2003), the company can only retire 23. 84% of its total debt in a year (for the fiscal year ending 2003). Free Cash Flow (Cash Flow Ratio = (Current Assets – Cash & Cash Equivalents) / (Current Liabilities – Short-term Debt))
The operating cash flow ratio can determine a company’s liquidity in the short term. Using cash flow instead of income is sometimes a better indication of liquidity because cash is how bills are typically paid off. (NetMBA. com, 2007) Appendix A is attached which contains the financial ratio analysis for Landry’s Restaurants financial statements. What does this analysis tell us about Landry’s financial performance? A company with a positive free cash flow is good for investors because after paying off all current expenses, the company has enough to make capital xpenditures for future growth. Although Landry’s has increased its long-term debt obligations over the past two years in order to finance its investment activities, the firm has been very effective in managing and utilizing its free cash flow in order to ensure the company’s continued prosperity and positioned the firm to take advantage of presented opportunities for future growth. References NetMBA. com. (2007). Finance: Financial Ratios. Retrieved February 6, 2010 from http://www. netmba. com/finance/financial/ratios/ Phillips, F. Libby, R. & Libby, P. (2005). Fundamentals of financial accounting. Retrieved February 6, 2010 from University of Phoenix Materials. Appendix A Financial Statement Ratio Analysis 20032002Impact Earnings per share$1. 66$1. 60Positive Return on assets4. 51%5. 12%Negative Current ratio0. 760. 62Positive Times interest earned7. 0013. 04Negative Asset turnover1. 091. 10Positive Debt to total assets0. 450. 39Negative Current Cash Debt Coverage21. 654. 63Positive Cash debt coverage23. 84%30. 44%Negative Free Cash Flow0. 540. 50Positive