This report provides an overview of Dominos Pizza and analyzes its financial performance using ratio analysis. It discusses the company's capital structure, profitability, activity/efficiency, and liquidity ratios. Recommendations for improvement are also provided.
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Dominos Financial Analysis1 Table of Contents Introduction......................................................................................................................................2 Overview..........................................................................................................................................2 Ratio analysis Literature Review.....................................................................................................3 Benefits........................................................................................................................................3 Limitations...................................................................................................................................4 Ratio Analysis in detail....................................................................................................................5 Gearing / Capital Structure ratios.................................................................................................5 Investors’ ratios............................................................................................................................6 Profitability ratios........................................................................................................................6 Activity / Efficiency ratios...........................................................................................................7 Liquidity ratios.............................................................................................................................8 Recommendations and Conclusions................................................................................................9 References......................................................................................................................................10
Dominos Financial Analysis2 Introduction Financial performance is the ultimate aspect of determining the whether the company is performing above the standard set by the industry or below the standard set by the industry. This indicates the level at which the company is and wants to reach in the future. The below report talks about the overview of the Dominos and the study of the ratios has been undertaken to give the essence of the financial strength and the weakness of the company. Overview Dominos Pizza is an American based food chain which was found in the year 1960. The headquarters of the corporation are Dominos Farms Office Park in Ann Arbor, Michigan.In terms of the sales the chain became one of the most popular pizza seller companies in the world. The company was founded by James Monaghan and Tom Monaghan. Dominos belong to the food industry providing the fast food to all kinds of the people. In term so the location the company is operating at 13811 locations presently and with the team of 14100 of the company owned office. The company opened its first international outlet in Winnipeg, Manitoba, Canada. Also in the same year Dominos opened its 100thstore in Vancouver. By 2014 the company was spread among 6000 international locations (Morning Star, 2018). In terms of the nature of the business Dominos does not label itself as the fast food chain and intends to deliver the fresh quality food at the fast pace. The business is operating as the agencies and franchises. Earlier Dominos was not having the facility of the restaurant to eat and only provide the pizzas of the finest quality ingredients. Not only the company is ambitious in majority of the franchisees owning more than 100 stores, the business continues to grow
Dominos Financial Analysis3 eventually. The world class training program and the consistent food quality is what makes the dominos an exception fast food chain, having the award winning food service team (Morning Star, 2018). Ratio analysis Literature Review Accursing to (Isard, et al 2017) Ratio Analysis is a quantitative analysis of information presented in the financial statement.Ratio analysis is used to evaluate different aspects of the company such as the liquidity position of the company, the efficiency, the solvency and the profitability of the business. In view of (Loughran and McDonald, 2016) the ratio analysis is needed only to measure the financial performance of the company from all the aspects.Measuring of the profitability is an important and the critical aspect and also helps the firm get to know the weak areas against the benchmark set by the company. The overall financial strength of the company can be determined by the usage of the ratio analysis technique. The fiscal position of the company can be determined through the ratio analysis technique Benefits Ratios analysis assists in validating or disapproving the business decisions such as investing, financing and operating decisions of the organization. The financial statements are cumulated into the figure that can be compared with the previous year, thus giving the helping hand to evaluate the financial position of the firm. According to (Weygandt, Kimmel, and Kieso, 2015)The accounting statements simplify the financial data into the simpler ratios on the basis of the following categories such as liquidity, efficiency, solvency and the profitability of the business.
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Dominos Financial Analysis4 The problems can be identified with the help of the ratio analysis and lets the management put attention towards the ley potential areas which require help. There are so many problems that are missed or lost in the complex accounting statements and the ratios will eventually help the management to pin point the problems and get the relevant solutions for them In opinion of (Nimtrakoon, 2015) with the help of the ratios the company can conduct the intra as well inter firm’s comparison operating under the same industry. This technique will help the organization in understanding the financial position of the company in the better manner and can improve the performance if there are any variances that are found and have the replacement or the alternatives for the same. With the pros come the cons of the Ratio analysis technique which are as follows Limitations In case of the ratios the firms can manipulate the data by changing the figure of the ratios to project the financial position of the company sound and by doing this the investors can be misled easily. Therefore the technique ends up in the process of the window dressing. If there are any price changes or any inflation in the price of the company the ratios typically ignore this factor and it can be observed when the numerous ratios are calculated on the basis of the historical costs and the changes are not given much importance in price level between the periods. Accounting ratios basically ignore the qualitative features of the organization as said by (Kaplan and Atkinson, 2015). The only thing the company takes into the consideration only the monetary value of the firm
Dominos Financial Analysis5 There is a different approach in calculating the ratios when calculated by different firms at the same time. For example in case of the current assets many firms take current liabilities into the consideration with some having an exclusion of the bank overdraft. Ratio Analysis in detail Gearing / Capital Structure ratios These are those ratios which are formed up of the capital structure and determine the proportion of the finance of debt against the equity. One such ratio is the times interest coverage ratio which determines the amount of expense of the interest the company can bear with the existing earnings. Gearing ratio Times Interest Coverage RatioEBIT3.984.064.134.24 Interest Expense From the above table it can be analyzed that the Domino’s pizza has improve the times interest coverage ratio as compared to the last four years. In 2014 the ratio was 3.98 times where as it increased to 4.24 in the year 2017. The increase in the ratio indicates the company is able to pay the interest obligations on time (Jenter and Lewellen, 2015).
Dominos Financial Analysis6 Investors’ ratios Investor’s ratios are calculated to measure the ability the business can return to the owners in terms of the money. The Earnings per share ratio is the part of the investor ratio and determines the penny earned by the shareholders on investing per dollar (Nimtrakoon, 2015). Investors Ratio Earningsper shareNet Profit0.130.120.150.17 Weighted average Outstanding Shares The earnings per share ratio of the Domino’s company earlier declined from 0.13 to 0.12 in the year 2015 and thereafter the company improved its performance by increasing the volume of the sales but at the same time decreasing the heavy cost of goods sold. The number of outstanding shares also increased in comparison to the previous year (Öztürk and Karabulut, 2017). Profitability ratios Profitability ratios are the financial ratios that help in determining the financial position of the company in terms of how much profit is earned with respect to the sales and the production costs incurred. The gross profit the net profit and the return on equity form the club under the profitability ratios (Laitinen, 2017) . Profitability Ratios Gross Profit RatioGross Profit * 10030%31%3131%
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Dominos Financial Analysis7 % Sales Return on EquityNet Income26%24% 30 %33% Shareholders’ Equity Net Profit ratioNet Profit * 1008%9%9%10% Sales From the profitability point of view the company is performing outstanding as all the three ratios are increasing in comparison to the cumulative effect of the four years and also at the faster pace. This means the company is maintain its cost and focusing more on the profitability to expand its business in near future and to provide the future value to the shareholders of the company. The gross profit rose by 1% in general but the net profit has increased by 2 percentage points. The return on equity has been drastic from 26% to 33% thereby instilling the confidence among the shareholders to invest (Laitinen, 2017). Activity / Efficiency ratios These ratios determine the ability of the company to convert the assets into the generation of the income for future purposes. TheInventories turnover period ratio,Trade receivables collection period ratioandTrade payables payment period ratio are categorise for this category (Gitman, Juchau and Flanagan, 2015).
Dominos Financial Analysis8 Activity/Efficiency ratios Inventory * 3656.966.095.905.24 Sales Payables * 365 15.9 317.6216.5314.01 Sales Receivables * 365 21.6 021.7322.1422.78 Liquidity ratios The liquidity ratios of the company represent the liquid position of the firm and how well the current obligations can be paid with the help of the existing current assets can be easily converted into the cash. 201 4 201520162017 Liquidity ratio Current ratioCurrent assets1.611.611.231.46 Current Liabilities Quick RatioQuick Assets0.560.710.480.53
Dominos Financial Analysis9 Current Liabilities The current ratio of the Dominos Company is low as compared to the ideal ratio of 2:1. However it can be seen that earlier the ratio was 1.61 and it fell down to 1.23 in the year 2016 due to decrease in the current assets and simultaneous increase in the current liabilities. This happened due to the poor cash conversion cycle. Since the receivable cycle is taking time to generate the cash of 22 days the company shall reduce the same to improve both the ratios. The company shall also focus on improving the quick ratio as it determines the cash position of the business (Ehiedu, 2014). Recommendations and Conclusions From the above analysis it can be concluded that though the company performing well still there are some areas that needs improvement and which are the current ratio, quick ratio, and activity and efficiency ratios. The overall financial position of the company is dependent on these ratios and the cash conversion cycle of the company. To improve these ratios Dominos must get rid of the useless assets and the food menu which is not working. It shall switch from short term to the long term loans to avoid the current obligations. In a way the cycle shall be long so that the company gets the time to pay back to the creditors and majorly it shall focus on controlling the overhead expenses. All these strategies may work in the positive direction of the Domino’s Pizza and it shall continue to serve it customers with better models and efficiency.
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Dominos Financial Analysis10 References Ehiedu, V.C., (2014) The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach.Research Journal of Finance and Accounting,5(5), pp.81-90. Gitman, L.J., Juchau, R. and Flanagan, J. (2015).Principles of managerial finance. Australia: Pearson Higher Education AU. Isard, W., Azis, I.J., Drennan, M.P., Miller, R.E., Saltzman, S. and Thorbecke, E., 2017.Methods of interregional and regional analysis. Routledge. Jenter, D. and Lewellen, K. (2015).CEO preferences and acquisitions.TheJournal of Finance, 70(6), 2813-2852. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Laitinen, E.K., (2017) Profitability Ratios in the Early Stages of a Startup.The Journal of Entrepreneurial Finance,19(2), pp.1-28. Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey.Journal of Accounting Research,54(4), pp.1187-1230. MorningStar,(2018)Domino'sPizzaInc[Online]Availablefrom https://www.morningstar.com/stocks/xnys/dpz/quote.html[Accessed on 22nd December 2018] Nimtrakoon, S., (2015) The relationship between intellectual capital, firms’ market value and financialperformance:EmpiricalevidencefromtheASEAN.JournalofIntellectual Capital,16(3), pp.587-618.
Dominos Financial Analysis11 Öztürk, H. and Karabulut, T.A., (2017) The Relationship between Earnings-to-Price, Current Ratio, Profit Margin and Return: An Empirical Analysis on Istanbul Stock Exchange.Accounting and Finance Research,7(1), p.109. Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015.Financial & managerial accounting. John Wiley & Sons.