Question

If I planning to open some fast food business ,but with organic ingredients, I should find common ratios significant to this industry. What are they and what are they telling about this industry? Be specific as to the ratios relevant to this industry and what are the industry averages for those ratios. Need references.

Answer 1

The relevant ratios and their industry average ranges are as follows

For a restaurant business , the modus operandi is typically different from the other business, These business operate on high liquidity and low debt unlike other businesses in the opeartions .

We will have a closer look into the different financial ratios typical for a restaurant operation

No	Financial Ratio	Range	Description
1	Debt ratio	0.4-0.7	The debt ratio is generally not as the the business doesn’t require intensive capital investment or use of LT debt in order to sustain their business operations
2	Debt to Equity	0.5-0.7	In similar range of debt ratio , with debt lower than amount of self capital employed in the business
3	Interest Coverage	1.96- 1.87	EBIT is generally high for covering the interest obligations
4	Current ratio	1.5-1.9	Important for the restaurant operations, the business have high current assets in the operations and have the ability to meet all ST obligations
5	Cash Ratio	0.3- 0.4	Generally cash ratio is stable as the amount of cash sales revenue is generally constant .
6	Profit Margin	4.0-5.5	Generally operates on high profit margin.
7	Inventory Turnover days	24-30	Around a month can be seen in the inventory
8	RoA and RoE	3.5-6.0	Since low amount of debt capital is employed , both RoA and RoE are in the similar range and generally higher .