Key Financial Ratios for Restaurant Companies

Because of its relationship with customers and vendors, a restaurant is a uniquely operated entity. It requires timely and repetitive monitoring of food inventory, proper staff on hand to craft the menu items and efficient management of building space. Restaurant management and investors in the industry can utilize these ratios to gain further insight regarding the operations of the business.

In the restaurant industry, prime costs encompass the expenses for food, beverages, management, hourly staff, and benefits. Traditionally, the prime costs of a full-service restaurant equate 66 to 67% of the restaurant's total sales. The prime costs of a limited-service restaurant are typically 60 to 62% of total sales. This metric is useful to internal management and external investors, as prime costs higher than these amounts may indicate unfavorable inventory prices or wage rates. The ratio is higher for a company that owns the structure in which it operates and does not have rent or mortgage payments.

Food cost to total cost measures the expense breakdown of the specific products offered. The metric is especially useful if the menu changes, or if there are plans to change the menu. The food cost that is tracked can be for a specific menu item or for a group of items. For example, a restaurant may spend 20% of its total food costs on buying hamburgers, even though 5% of sales relate to hamburgers. Alternatively, 40% of food costs may be attributable to seafood, which may not align with the business strategy of the entity. This metric is most useful in conjunction with profitability metrics to determine if specific menu items should be discontinued. From an investor's standpoint, this metric is useful in determining both the company's identity and whether the restaurant adheres to strategic initiatives.

Because restaurants utilize perishable goods and items whose quality deteriorates over time, restaurants must maintain appropriate levels of inventory. The inventory turnover ratio is calculated by dividing net sales by the average cost of inventory. In general, restaurants that handle fresh ingredients want to minimize inventory turnover to less than seven days.

A metric materially higher than industry averages may represent the purchase of insufficient inventory, a lack of utilization of quantity discounts and a risk of shortages. On the other hand, a calculation that is substantially low means that too much food is being purchased, business has slowed or food quality is potentially declining due to the lack of fresh products, which may potentially have a direct impact on long-term sales.

Restaurants determine how efficiently floor space is utilized by analyzing the sales per square foot ratio. This financial metric divides the total sales for a period by the total square footage of the location where the sales were earned. This provides insight into the layout of the structure and how well the property is being used. Additionally, this metric identifies opportunities relating to expansion and the necessity to replace large, outdated equipment.

To calculate revenue per seat, the total dollar amount of revenue earned on a given night is divided by the total number of available dining seats in the restaurant. This metric is most useful to management when it plans to reduce or expand the number of available seats within the dining area. The revenue-per-seat calculation can also be used in benefit analysis if construction costs will be incurred. For an investor, low revenue per seat is an indicator of poor pricing or slow business.

The food/beverage-expense-to-sales ratio gauges how well the company is making a profit on each good. This metric can be broken down to a specific menu item (such as salmon), a specific group of menu items (such as seafood) or as an aggregate (such as all food items). By using this metric for each menu item, management can learn the profit margin per item, understand the value of the menu item, and strategically price or offer the item accordingly. In addition, investors can forecast whether company promotions will be profitable, as well as the impact on changes to menu items.

The current ratio is calculated by dividing current assets by current liabilities. This metric measures the liquidity of an organization. A current ratio greater than one indicates that a company can pay its short-term debts using only short-term assets if a liquidation is necessary. The current ratio is applicable to the restaurant industry; it is an indication of the company’s ability to pay for items in the short term, including food, beverages and staff wages. (For more, see Liquidity Measurement Ratios: Current Ratio .)