Ratio analyses can be used for performance evaluation, analyzing trends, assessing industry benchmarks, and forecasting growth within a company (Knežević, Rakočević, & Đurić, 2011). Additionally, investors use financial ratios to make decisions about the viability of investments, the company’s potential growth, how a company manages its debt, and how effectively a company manages its liquidity (Gibson, 2011). Prior to investing in any company, investors should also evaluate the potential investment’s leverage. The company’s earnings ratios, yields on dividends, and book value per share should also be assessed.
This paper introduces a regional restaurant chain, Frisch’s Restaurants, Inc. (Frisch’s) and discusses the various ratios relevant to investors interested in Frisch’s, such as degree of financial leverage, price to earnings ratio, percentage of earnings retained, dividend yield, and book value per share. Moreover it contains a section including a vertical common-size analysis for gross profit and operating profit as a function of sales. Additionally, throughout the paper discussions will detail the findings and outline what investors might use in a decision with regard to investing in Frisch’s.
Frisch’s are operated regionally in Ohio, Kentucky, and Indiana (Frisch’s, n.d.). It “operates full service family-style restaurants under the name ‘Frisch’s Big Boy’” (Frisch’s, n.d., “Business Description” para. 1), and it offers drive-thru services as well. At the end of its 2013 fiscal year (which occurred on May 28th), the company operated 95 Frisch’s Big Boy restaurants and had licensed 25 additional restaurants to other operators (Frisch’s, 2013). Frisch’s (2013) reported having 5,800 employees at the end of fiscal year 2013, and it also was noted to have paid its 210th consecutive quarterly cash dividend at that time.
The use of a company’s debt is referred to as its financial leverage (Gibson, 2011). One measure of the use of debt can be found in a company’s degree of financial leverage ratio. This measure shows the relationship between the operating income of a company (earnings before interest and taxes) and its earnings per share (Gibson, 2011). As Exhibit 1 shows, Frisch’s degree of financial leverage was 1.20 in 2006 and 1.21 in 2007. This indicates that in 2006, for every $1 increase in operating income, there is a change of 1.21 times in earnings before interest and taxes. Similarly, in 2007, an increase of $1 in operating income would result in a 1.20 times increase in earnings before interest and taxes. Overall, Frisch’s degree of financial leverage appears consistent and reasonable.
The price to earnings ratio shows the relationship between the market price of a common share and its corresponding current earnings per share of the same stock (Gibson, 2011). Price to earnings ratios are taken to suggest expected future earnings for a company (Gibson, 2011). According to the selected data for Frisch’s (as cited in...