The purpose of this paper is to investigate and analyze the financial statements of Texas Roadhouse Company; a locally originated yet globally recognized steak and ribs restaurant. It is a publicly traded company with over 500 restaurants outlets located in 40 states in the United States of America and four countries around the world as at 2016. Its mission statement is “Legendary Food, Legendary Service.”
The company’s balance sheet reveals three components of financial risks. These risks include; insolvency risk, liquidity risk, and capital structure risk . To get the capital structure risk, one should calculate debt to equity used by the company to finance its assets.
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52,381: 750,226
26:375
The optimal ratio should be 1:3, which would imply that the company can take full advantage of debt capital such as tax shield. In our case above Texas, Road Company cannot take full advantage of debt since it funds more of its operations using Equity funds. In the long run, the company may face financial distress if it tries to utilize debt to achieve its operations.
Liquidity ratio can be analyzed using liquidity ratios which include ; current ratio, quick ratio, and cash ratio.
Current ratio= current assets/ current liabilities.
200,259/278,527= 0.716
Texas Roadhouse Company will have a problem while paying its current obligations on time-based on this ratio.
Quick ratio = current assets less inventory divided by current liabilities.
(200,259-16,088)/ 279,527= 0.659
This ratio has a similar interpretation as that of current ratio, which is, the higher the better. In our case, the company has a small value which implies that Texas Roadhouse Company would not pay up all its liabilities if it were to be wound up.
Current ratio = cash divided by current liabilities
112,944/279,527= 0.404
This ratio also proves that Texas Roadhouse cannot finance its current liabilities using its cash; hence it would be bankrupt if it were to be dissolved .
These entire figures are static since they are based on the current balance sheet but in the long run, the balance sheet keeps on changing daily.
Insolvency risk is connected with the long-term stability of the company. Fixed asset should be financed by Equity Capital and the second condition is Fixed Assets should also be financed by fixed capital which includes Equity Capital (long-term debt) in our case, Texas Roadhouse Company fixed assets amount to $ 112,944, and Equity Capital is amounting to $ 750,226. Such figures imply that the company has financial balance and does not risk bankruptcy, in the long run, that is, it can finance its long-term assets using long-term sources of finance.
Texas Roadhouse Company has several lease transactions agreement. The lease agreements date back to 1999 to as recent as 2016. All the lease agreements are non-cancelable agreements. Land, building, and equipment initially lease for 10 to 15 years which can later be renewed upon expiry. If Texas Roadhouse Company delays the renewal of leases, then it incurs a penalty which is provided in the lease agreement. Some of the existing lease agreements have minimum rent which is deemed to increase over time. Such minimum rent amounts foster competition. Such restaurants pay their rent and other expenses on a straight-line basis over the lease agreement period. Texas Roadhouse Company does not receive leasehold improvement incentives upon opening a restaurant in a new location that is subject to a lease. It may, however, receive rent holidays, which begins on the possession date to the end when the lease commences. Rent holidays are provided in the lease agreement and also determined using straight-line basis since rent is also an expense.
Except for operating leases (primarily restaurant leases), Texas Roadhouse Company does not have any off-balance sheet assets or liabilities.
Since the company does not have any off-balance-sheet assets and liabilities, Texas Roadhouse Company’s balance sheet remains the same. It there were off-balance-sheet assets or liabilities the balance sheet could have changed significantly.
References
Texas Roadhouse Inc. (2016). 2016 Annual Report of the Texas Roadhouse Company. Retrieved from http://files.shareholder.com/downloads/TXRH/4787087358x0x936625/9235BB43-5B10-4DAB-8639-2FB36426E745/2016AR_17-8295-1_255255_client.pdf
