Rojas versus Phoenix Case Study - Alexis Lake Frank & Suzanne Watson are an early 50s couple who have spent the last 20 years operating a restaurant and raising a family in southern New Jersey. The restaurant had done well and they managed to make a good living. Having rebuilt after hurricane Sandy and with the kids grown and out of the house, they took the opportunity to sell their business and relocate back to the Finger Lakes region of upstate NY. With nearly a million dollars in cash they spent several months looking for a place to live and a new business opportunity. By the summer they had narrowed their list to two opportunities in the small hamlet of Hammondsport New York. The community had recently received national publicity being named the co-coolest small town in America. The Watsons felt the small quaint shops surrounding the village square, the plethora of new wineries and boundless recreational opportunities offered by Keuka Lake made this an ideal location. The first option was a Mexican restaurant named Rojas. It was located right in town about 150 yards from the waters edge. It specialized in Mexican and Spanish cuisine and has been operating successfully for 13 years. Prior to that, the building had been a favorite ice cream parlor for the locals and tourist alike. The current owners live in Syracuse and have outsourced the daily management to Sodexo. The second option is the Phoenix restaurant. It is located 4 miles outside of town along the lake road and has water views with a large deck that can accommodate additional seating in nice weather. The restaurant has been in continuous service for 35 years and the owners are looking to sell and retire. Frank and Suzanne have visited and eaten at both locations. Their accountant, Gregg Martin, has secured the latest completed financial statements and has indicated that both restaurant owners are asking $2 million dollars for 100% ownership of the stock in the
business. He reminds you that the acquisition of the stock means you are acquiring all of the firm’s assets and their liabilities. As friends of the Watson’s oldest offspring, you have been asked to provide an impartial opinion of their 2 choices. Assignment: Answer the following questions. 1) Which restaurant opportunity has the better financial condition? Explain... Balance sheet, Profitability, Cash flow Calculate financial ratios to determine which one has the better financial condition. Based on the ratios below, it appears that Phoenix is in better financial condition. Current ratio = Total Current Assets / Total Current Liabilities Rojas $504,800 / $266,000 = 1.897 = 1.9 Phoenix $454,000 / $198,000 = 2.292 = 2.3 The Current Ratio is the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash relative to liabilities. Anything over 2 meant indicate the business is not investing enough in assets. Return on Assets = Net Income / Total Assets Rojas $148,900 / $2,992,300 = .0497 = .05 Phoenix $185,700 / $1,494,000 = .1242 = .12 This is a measure to determine how well a company is using its assets. The higher the return the better the company is using its assets. Quick ratio = Current Assets - Inventory / Current Liabilities Rojas $504,800 - $104,000 / $266,000 = 400,800 / 266,000 = 1.506 = 1.5 Phoenix $454,000 - $201,000 / $198,000 = 253,000 / 198,000 = 1.277 = 1.3 The Quick Ratio is a test or Acid Test is used to measure a business’ ability to pay off short-term obligations without relying on the sale of inventory. The higher the ratio the better the liquidity of the company. Debt-Equity Ratio = Total Liabilities / Total Stockholders Equity Rojas $1,592,000 / $1,400,300 = 1.1368 = 1.14 Phoenix $259,000 / $1, 234, 200 = .2105 = .21
This is a measure how dependent a company is on debt financing as compared to owner’s equity. Essentially how much is owed versus owned. The lower the amount the less the company is borrowing and is in a stronger equity position. Gross Margin = Gross Profit / Sales Rojas $1,780,000 / $2,600,000 = .6846 = .68 Phoenix $1,504,000 / $2,360,000 = .6372 = .64 This is an indication of the total margin available to cover operating expenses and yield a profit. Total Margin = Net Income / Sales Rojas $148,900 / $2,600,300 = .0572 = .06 Phoenix $185,700 / $2,360,000 = .0786 = .08 A higher ratio means thats costs are under control and making profit. Return on Equity = Net Income / Owners Equity Rojas $148,900 / $1,400,300 = .1063 = .11 Phoenix $185,700 / $1,234,200 = .1504 = .15 This reflects the return on funds invested by shareholders. It indicates long term growth and survivability of the company. Essentially , the higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. Debt Ratio = Total Liabilities / Total Assets Rojas $1,592,000 / $2,992,300 = .5320 = .53 Phoenix $259,800 / $1,494,000 = .1738 = .17 The higher the debt ratio the more the company has borrowed and the riskier the investment. 2) For a price of $2 million dollars, which option provides the greater value and why? While a balance sheet, state of cash slows and the income statement are good indications of financial health of the organization this is different than value or market value for $2 million. 3) What other information might you find useful in making this decision? It would be helpful to know what other businesses are selling for in this area. I would expect that being located on / near Keuka Lake that the real estate prices will be higher, but that would be helpful to factor into the final decision. I would also take a look at other restaurants in the area and do a competitive SWOT analysis of both restaurants. It would also be helpful to know the property taxes. Typically these are very high around Keuka
Lake. Lastly, I would want to tour each restaurant, view and compare their equipment, condition of the buildings, the willingness of the staff to stay after the ownership change. 4) Which restaurant option would you recommend? Based on the calculations from the financial ratios, in particular the ROE and debt to equity, I would recommend Phoenix. It is also more stable with a more steady profit each year compared to Rojas.