After twelve (12) years, your business is wildly successful with  multiple locations throughout the region. You are now ready to think  really big. You want to purchase a huge competitor. (Note: You

Running head: FINANCIAL MATRICS CAFÉ GRILL 6

Financial Metrics Café Grill

Crystal Messer

The proforma financial models have anticipated outcomes of a transaction. Café Grill proforma balance sheet gives a summary of the projected future of the business after all the transactions based on the current financial status. Café Grill short total assets, both short term, and long term equate to total liabilities in the future, and hence the future balance sheet is realistic. The next business profitability and risks are given out in the proforma balance sheet. Solvency and liquidity of the business dare calculated in risk analysis. Café Grill has enough cash to meet all its obligations as portrayed in the balance sheet. Its assets equate to the liabilities. The business solvency depicts whether the company can be able to recover from losses. The proforma balance sheet also looks into the future profitability analysis in profitability ratios such as return on equity. (ROE).

The proforma income statement of Café Grill consists of expenses and revenues alongside the resulting net loss or income over a certain period from the company’s activities. The proforma income statement of the business clearly shows the management and investors whether the firm will make money or not in the future. The future income statement has got a revenue section that has inflows of cash as well as cash outflows. The next net income is calculated by subtracting total expenses from total revenue. Among the proforma expenses are; COGS (cost of goods sold). This gives a future value of Café Grill’s direct costs associated with the production and selling of goods. Other costs such as expenses in development and research of products are also included. Expected depreciation costs with respect to the company’s fixed assets are also part of the proforma income statement. The proforma non-operating expenses and revenues include primary business losses such as foreign exchange rates whereas revenues include patent income. A proforma analysis on earnings per share, EPS is also calculated from the income statement to give out the shareholders expected a profit for the targeted period. The net income section in the proforma income statement is critical as it represents the firm’s expected profitability attributable to its shareholders. It determines the production schedule. It also gives a sales projection as well as computing other expenses.

 The proforma cash flow gives out the expected amount of cash outflows and inflows of the business. The proforma cash flow statement illustrates Café Grill anticipated net cash flow over the specified period. The cash balance on the proforma cash statement shows improvement, and hence, the business will be profitable. The proforma cash flow is composed of; operational cash flows. This gives the expected cash receivership as a result of Café Grill internal business activities. The cash earnings will be net positive maintaining the company’s solvency. Investment cash flows are also included in the proforma cash flow statement of Café Grill. It estimates the amount of cash that will be received from long-life assets and other investments. Proforma financing cash flows will give the anticipated cash receivership from equity and debt, or the cash paid out as share repurchases and as dividends.

Café Grill expected rate of return is calculated from the proforma cash flow statement as well as the net present value. The two gives out a positive value; hence, the business is worth. There are no problems with Café Grill’s proforma liquidity as shown by the proforma cash budget. The company will have enough cash and hence no probability of collapsing or going bankrupt. Also, from the proforma cash budget, income generated by accrual accounting of the firm is of quality. Café Grill’s financial products risks are also anticipated to be low based on the proforma cash budget.

Both the tangible and intangible costs of the business do not exceed the gross income of the company; hence, the funding source is well implemented.

A business would be worthwhile if it has a good return on equity ratio (ROE). Return on equity ratio would measure the effectiveness of the industry in using its equity to generate income. Dividing the net profit with the equity gives this ratio by the company’s equity. A return on equity ratio of about 15-20% would make the enterprise worth as it gives the ability of the management to generate income from the available equity. (Saleem, 2011).

Operating margin will also provide a functional analysis of whether the business is worthwhile. The ratio is calculated by dividing the operating income with the company’s revenue. If the industry happens to have a small ratio, then it is less profitable and vice versa. If the operating margin of the business is zero, then the company is not earning anything from its sales. (Saleem, 2011).

Moreover, I would check on the business’s profit margin as the operating margin ratio won’t be sufficient as a standalone. The profit margin will measure the amount of profit the company earns from its sales. The ratio is calculated by dividing profit by sales. Both gross and net profit margins would be vital in evaluating the profitability of the venture. Return on assets ratio (ROA) would be crucial in measuring how the assets are being effectively utilized to generate profit. The ratio would be made by dividing the net income by the total assets. If the ratio is high, then the business is effectively utilizing its assets to generate profits. (Penman, 2007).

In conclusion, basic earning power ratio (BEP) of the business is also considered. The ratio would be calculated by dividing the business EBIT by its total number of assets. Generation of income form the assets is effective if the ratio is high. EBIT sums in all the income earned by the company in calculating the BEP ratio and hence showing how the company makes money. Comparison of tax situations with the business is done using BEP ratio (Saleem, 2011).

References

Nissim D, Penman SH. (2001). Ratio analysis and equity valuation: From research to practice. Review of accounting studies.

Penman SH. (2007). Financial statement analysis and security valuation.

Saleem Q, Rehman RU. (2011). Impacts of liquidity ratios on profitability.