Account

Module:

Assignment 1:

Accounting

Domino’s Pizza UK & IRL plc –

Ratio Analysis Module Tutor:

Pat Coyle

Course:

MBA

Name:

Jeegar Merchant

Student No:

20446183

Date:

24th November 2008

1

Contents 1 Introduction 2 Domino’s Pizza UK & IRL plc – Ratio Analysis •

Profitability Ratios

•

Liquidity (Working Capital)

•

Gearing Ratio

•

Employee Ratios

•

Investor Ratios

•

Corporate Ratios

3 Limitations of Ratio Analysis 4 Conclusions 5 Appendix 6 Bibliography

2

1. Introduction Domino’s Pizza was founded by Tom Monaghan in USA, Michigan, in 1960. It was initially a single store run by Tom and his brother. There are about 80,000 Domino’s Pizza stores around the globe in more than 50 countries, employing in excess of 145,000 employees. Domino’s Pizza stores around the world deliver more than one million pizzas every day. Domino’s Pizza opened its first store in UK store in Luton in 1985. As of 29th June 2008 Domino’s Pizza had 526 stores in UK and Ireland. The company’s goal is to increase the number of stores to 1000 by 2017 (Domino’s Pizza Information pack, 2008). Domino’s Pizza UK & IRL plc was initially listed on AIM, later it moved to the main market and listed itself on the London Stock Exchange in May 2008. The wholly owned subsidiary is known as Domino’s Pizza Group (DPG), which has exclusive rights to run, operate and franchise Domino’s Pizza stores in the UK and Ireland. “A way of expressing relationships between firms accounting numbers and their trends over time that analysts use to establish values and evaluate risks” (Financial Dictionary 2008) By the means of analysis of various ratios derived from Domino’s Pizza UK & IRL plc, this report aims to determine the reliability of the company and to further investigate into the company’s weaker and stronger areas thus bringing to light the realm and in turn make comments about calculation based forecasts for the company’s future. 2. Domino’s Pizza UK & IRL plc – Ratio Analysis: Over the period of time numerous academics have poured many different methods to assess the financial stability of an organization. Financial ratio analysis is the most widely used method. This includes following categories: Profitability Ratios, Liquidity (Working Capital), Gearing Ratio, Employee Ratios, Investor Ratios, Corporate Ratios. o

Profitability Ratios: This measure the profitability of the organization.

o

Liquidity (Working Capital): This measure the company’s ability to repay all liabilities.

o

Gearing Ratio: This help measure the long term stability of the organization.

o

Employee Ratio: This measures the efficient utilisation of resources.

3

o Investor Ratio: This measures the reliability of the company for its investors. o Corporate Ratio: This measures the profit made on the amount invested. (Accounting for non-accounting students; Melissa Bushman, 2007)

Note: Please see Appendix for the details of all calculations 2.1 Profitability Ratios 2.1.1 Return On Total Assets: 2007 

18667 / (48293 – 713)

2006 

14299 / (42098 – 1496)

= 18667 / 47580 =

14299 / 40602

=

39.32

=

35.21

Interpretation:  The most important and evident figures here, increase in the ROTA,

indicating the company is utilising its assets to benefitting levels.  Looking closer in the accounts one can see the fixed assets have

increased by 23.4% and the intangible assets have significantly decreased by 52.4%, which explains the increase in the figures.  This ratio is a measure of effective resource utilization in an

organization (Luecke 2003) 2.1.2 PROFIT MARGIN 2007 

18667 / 114891 x (100)

=

16.24 %

2006 

14299 / 94965 x (100)

=

15.05 %

Interpretation:  Evidently the profit margin for the Domino’s Pizza group has gone

up 1.19% during the year.  This figure states that the DPG made £ 16.24 PBIT for every £ 100 of

sales revenues which is in coordination with the views of the Chief Financial Officer (CFO) of the company.

4

 The profit margin seems to reflect the sales increase of 17.34% and

increase in PBIT of 23.39%.  Profit margin indicates the percentage of every sterling pound of sales makes it to the bottom line. 2.1.3 Return on Capital Employed 2007  18667 / 20619 x (100) 2006  14299 / 19412 x (100)

= =

90.27 % 73.66 %

Interpretation:  Returns stand at £ 90.27 for every £ 100 of capital invested in the

business. Evidently it has risen significantly from the past year indicating good management of capital and cash available to the company.  This ration indicates the underlying risk factors for the investors; in

this case it is higher than the interest rates for non-risky investments (Geoffrey Holmes, Alan Sugden 2004).  The ratio percentage agrees with the CFO’s review of the company’s performance.

2.2 Liquidity Ratios (Working capital): 2.2.1 CURRENT RATIOS 2007 

28117 / 27575

2006 

22823 / 22638

= =

1.01 times 1.00 times

Interpretation:  The numbers above expose that DPG‘s short-term li9abilities are

fully covered 1.01 times.  The figures also show that DPG was slightly in better position in

2007 than in 2006 to repay its short term creditors from its total assets.  The increase in assets by 18.82% and in liabilities by 17.9% explains

the slight increase in the ratio.

5

 This ratio indicates the company’s ability to generate cash as need

to maintain operation and to assess the liquidity of the company (Gene Siciliano, 2003) 2.2.2 LIQUID RATIO 2007  2006 

28117 – 2340 / 27575 22823 – 1818 / 22638

=

0.93

=

0.92

Interpretation:  DPG has £ 0.93 of liquid assets for every £ 1 of its current liabilities. In a isolated case if the company needs to pay its creditors right away, DPG would have to seek a loan.  The liquidity of the company has increased by 0.01%, showing a good measure.  This increase is justified by the increase in the current assets by

18.82% and an increase in current liabilities by 17.9%.  This ratio is also know as acid test (TVU MBA notes, 2008) 2.2.3 STOCK TURNOVER 2007  2006 

70736 / 2340 57811 / 1818

=

30.23

=

31.80

Interpretation:  The greater the stock turnover ratio, the greater the efficiency of

the organization to buy and sell goods / products (J. R. Dyson, 2004)  This ratio figure shows a drop in the turnover which is not a good

indicator; however the figure has dropped by 1.57%. An increase in the stock levels by 22.3% and in the cost of sales by 18.27% would help make the figures comprehensible. The increase in the prices of the food raw materials during the year, mentioned in the executive director’s report, could help us asses the situation with more compassion. 2.2.4 DEBTORS WEEK 2007 

4001 x 52 / 114891

=

1.8 weeks

2006 

2865 x 52 / 94965

=

1.56 weeks

6

Interpretation:  This ratio suggests the amount of time taken by the debtors of DPG

to pay has increased by 0.24 weeks in comparison to 2006.  The increase in the debtors weeks is miniscule and does not affect

companies of this size and mass, however the shorter the debtors weeks the better it is for any organization.  The debtors have increased by 28.4% which could help explain this

increase. 2.3 Gearing Ratios: 2.3.1 BORROWING RATIOS 2007 

9750 / 9897 x (100)

=

98.51%

2006 

9485 / 8986 x (100)

=

105.5%

Interpretation:  The drop in the borrowing ratio from 2006 to 2007 by 6.9%

indicates that the company’s borrowing from the shareholders has decreased by this number. 

Increase in the equity by 9.2% and the increase in the borrowings by 2.72% helps explain the reason for this decreased amount.

2.3.2 INCOME GEARING 2007 

619 / 18667 x (100)

=

3.31%

2006 

507 / 14299 x (100)

=

3.54%

Interpretation:  The 0.23% decrease in the figure indicates the amount of profit

spent on the interest payables.  The percentage of income gearing is relatively minuscule implying that the major chunk of much needed business capital is derived from shareholders of this company.  The figure also states the 23% decrease in the total borrowings. 2.4 Employee Ratios: 2.4.1 PROFITT PER EMPLOYEE 7

2007 

18667 / 633

=

£ 29489.73

2006 

14299 / 593

=

£ 24112.98

Interpretation:  The profit generated by DPG for every individual employed has increased by 18.23%.  The increase in this figure despite the total number of employees growing by 6.31% indicates the well managed and profit orientation of every employee. 2.4.2 SALES PER EMPLOYEE 2007 

114891 / 633

=

£ 181502.36

2006 

94965 / 593

=

£ 160143.33

Interpretation;  The figure displays the increase in amount of revenue for each

employee by 11.76% indicating a better management and sales figures.

2.5 Investor Ratios: 2.5.1 EARNINGS PER SHARE 2007  8.48 p (Refer to page 51/16 of the Domino’s Pizza Annul Report 2006-07) 2006  6.10 p (Refer to page 51/16 of the Domino’s Pizza Annul Report 2006-07) Interpretation:  The figure shows the increase in earnings per share of 2.38 p or

28.06%.  The figures do not completely agree with the CFO’s view, but are lesser than his dictated percentage. 2.5.2 PRICE EARNINGS RATIO 2007 

171.75 / 8.48

=

2006 

186.2 / 6.1 =

30.52

20.25

8

Interpretation:  The norm is higher the price earning ratio the better the indicator of company’s profitability.  The figures above indicate a decrease in PE by 10.27 or 33.65% at

the end of 2007 in comparison to the same time frame in 2006.  This ratio is the most fundamental yardstick for valuing stocks (Jeremy J. Siegel,

2007). A quick glance at the years stock figures for DPG would reveal the prices have fluctuated but stayed in the same range and have changed at a steady pace. 2.5.3 DIVIDEND PER SHARE 2007  2006-07)

4.40 p (Refer to page 17 of the Domino’s Pizza Annul Report

2006  2006-07)

3.06 p (Refer to page 17 of the Domino’s Pizza Annul Report

Interpretation:  The figures above show that the dividend per share has increased

by 1.34 or 30.45%, but the CFO states the increment to be of 43.8% which is debatable.  There is a mention of prices for the raw materials increasing by 4%

during the, by the executive director, operating year ultimately the costs were further passed to the end consumer. A part of dividend was retained to contribute for the construction of company’s new headquarters in Milton Keynes, UK. 2.5.4 DIVIDEND YIELD 2007 

3.8 (Refer to page 65 of the Domino’s Pizza Annul Report)

2006 

3.8 (Refer to page 65 of the Domino’s Pizza Annul Report)

Interpretation:  This figure measures the present rate of return on the stock (D. L. Scott, 2003).  The figure indicates the yield has been same as 2006 making the yield on the stock not very attractive for stock exchange bulls market. 2.5.5 DIVIDEND COVER

9

2007 

8.48 / 4.4

=

1.92 times

2006 

6.1 / 3.06

=

1.99 times

Interpretation:  It is the company’s ability to continue paying current dividend levels in the future to

its shareholders (M. W. E. Glautier, B. Underdown 2001).  The figures above show that DPG could pay 1.92 times the current dividend of available profits then. However it should be noted that the dividend cover has decreased by 0.07 or 3.51% for the year 2007 compared to 2006 indicating the probability of decline in future. 2.6 Corporate Ratios: RETURN ON EQUITY 2007 

13245 / 9897 x (100)

=

133.82%

2006 

10084 / 8986 x (100)

=

112.21%

Interpretation:  ROE is used for measuring the earnings by the company for its

shareholders from all the sources available to it (Hermanson, Edwards and Maher, 2005)  The figures show that the ROE has increased by 21.61 or 16.15%

indicating that DPG has well utilised the investments of their shareholders during the financial year 2006 -2007 thus giving them a better return on their investment.

3. Limitations of Ratio Analysis (RA) Ratio Analysis is a widely used popular tool for assessing a company’s financial information; however it has its own limitations. These limitations can be listed as follows:  RA does not take into account the ‘risk’ factor of the investment.

 RA depends on the financial information and its availability provided by the company itself.

10

 RA does not paint the complete picture of the profitability of the

company unless the analyst recognises the difference in ‘quality’ of earnings.  Diversity of the companies that apply for GAAP may give rise to

anamorphic figures.  Published figures, in the report, by the company are only approximations.

 Historical costs of assets may differ than the present cost.  Liabilities may be under or over stated in the reports.  The company may distort the final figures by making favourable

changes at end of the financial year to get a ‘rosy’ financial report.  The ratios are a guiding figures but not definitive.  Economic environments are not considered while making the RA.  Accounting policies of companies may vary.  Ratio is a statistics and is unable to predict the future flows.

 Company may be found to be operating in many businesses making it difficult to identify the industry it belongs to. (J. G. Siegel, J. K. Shim 2006; A. A. Groppelli, E. Nikbakht, 2006; J. K. Shim, J. G. Siegel, 2000)

4. Conclusion: Ratio Analysis has always been a great tool for evaluating and analysing a company’s performance, despite its shortcomings. It stays as the best and fairly accurate tool to measure a company’s performance. However relatively new concepts like ‘quality’ and ‘speed’ need to be taken into consideration from time to time.

11

The RA for DPG suggests the company’s performance have been good for the financial year 2006 – 2007. The Profitability Ratios advocate that the company has performed very well in terms of using its resources for generating profits. Except for things like the stock turnover, income gearing and borrowing ratios, where DPG has slightly underperformed, the company figures show good performance on all other ratios. Employee Ratio shows that overall efficiency of the DPG has increased making it a sound vehicle for future investments. The DPG is serious about following its success paths as they are investing in quality of raw materials used and also in the society where their business operate or function. To conclude the Investor Ratios suggest the company to be an attractive investment option and which would deliver to its shareholders expectations.

Appendix: 1. Profitability Ratios: 1.1 ROTA

=

PBIT

12

-------------------------------------------------------------TOTAL ASSETS – INTANGIBLE ASSETS 2007 

18667 / (48293 – 713)

2006 

14299 / (42098 – 1496)

1.2 PROFIT MARGIN

= 18667 / 47580 =

=

14299 / 40602

=

39.32

=

35.21

PBIT --------------- X 100 SALES

2007 

18667 / 114891 x (100)

=

16.24 %

2006 

14299 / 94965 x (100)

=

15.05 %

1.3 ROCE

=

PRE-TAX PROFIT -----------------------------------------------

X

100

CAPITAL EMPLOYED

2007  18667 / 20619 x (100) 2006  14299 / 19412 x (100)

= =

90.27 % 73.66 %

2. Liquidity Ratios (Working capital): 2.1 CURRENT RATIOS

=

CURRENT ASSET

-------------------------------------CURRENT LIABILITIES 2007  2006 

28117 / 27575 22823 / 22638

= =

1.01 1.00

13

2.2 LIQUID RATIO

=

CURRENT ASSETS - STOCK

---------------------------------------------------CURRENT LIABLITIES 2007  2006 

28117 – 2340 / 27575 22823 – 1818 / 22638

2.3 STOCK TURNOVER

=

=

0.93

=

0.92

COST OF SALES

----------------------------------------STOCK 2007  2006 

70736 / 2340 57811 / 1818

2.4 DEBTORS WEEK

=

=

30.23

=

31.80

DEBTORS X No. WEEKS

------------------------------------------------SALES 2007 

4001 x 52 / 114891

=

1.8

2006 

2865 x 52 / 94965

=

1.56

3. Gearing Ratios: 3.1 BORROWING RATIOS

=

TOTAL BORROWING ---------------------------------

X 100

EQUITY 2007 

9750 / 9897 x (100)

=

98.51%

2006 

9485 / 8986 x (100)

=

105.5%

3.2 INCOME GEARING

=

INTEREST PAYABLE 14

----------------------------------

X

100

PBIT 2007 

619 / 18667 x (100)

=

3.31%

2006 

507 / 14299 x (100)

=

3.54%

4. Employee Ratios: 4.1 PROFITT PER EMPLOYEE

=

PBIT

---------------------------No. EMPLOYEES 2007 

18667 / 633

=

29.48

2006 

14299 / 593

=

24.11

4.2 SALES PER EMPLOYEE

=

SALES

---------------------------No. EMPLOYEES 2007 

114891 / 633

=

181.5

2006 

94965 / 593

=

160.14

5. Investor Ratios: 5.1 EARNINGS PER SHARE 2007  Report)

8.48 p (Refer to page 51 of the Domino’s Pizza Annul

2006  Report)

6.10 p (Refer to page 51 of the Domino’s Pizza Annul

5.2 PRICE EARNINGS RATIO

=

MARKET PRICE PER SHARE

------------------------------------------

15

EARNINGS PER SHARE 2007 

117 / 8.48 =

13.79

2006 

186.2 / 6.1 =

30.52

5.3 DIVIDEND PER SHARE

=

DIVIDEND

----------------------No. SHARES 2007  2006-07)

4.40 p (Refer to page 17 of the Domino’s Pizza Annul Report

2006  2006-07)

3.06 p (Refer to page 17 of the Domino’s Pizza Annul Report

5.4 DIVIDEND YIELD

=

DIVIDEND PER SHARE

---------------------------------------

X

100

MARKET PRICE of SHARE

2007  Report)

3.8 (Refer to page 65 of the Domino’s Pizza Annul

2006  Report)

3.8 (Refer to page 65 of the Domino’s Pizza Annul

5.5 DIVIDEND COVER

=

EARNINGS PER SHARE

--------------------------------------DIVIDEND PER SHARE 2007 

8.48 / 4.4

=

1.92 times

2006 

6.1 / 3.06

=

1.99 times

5.6 RETURN ON EQUITY

=

PROFIT ATTRIB SHARE

16

---------------------------------------BOOK VALUE EQUITY 2007 

13245 / 9897 x (100)

=

133.82%

2006 

10084 / 8986 x (100)

=

112.21%

Bibliography:

17

Bushman Melissa (2007), Association Content (10 Jan 2007) [Online] Available at [Accessed on: 20.11.08] Domino’s Pizza Information Pack (2008). Domino’s Pizza UK & IRL Plc [Online] Available at [Accessed on: 19.11.08] Dyson, J. R. (2004) Accounting for Non-Accounting Students; Pearson Education, UK Financial Dictionary (2008), The Free Financial Dictionary by Falex [Online] Available at [Accessed on: 15.11.08] Finance.google.co.uk (2008), Domino’s Pizza Uk & IRL Plc [Online] Available at [Accessed on: 19.11.08] Glautier, M. W. E., Underdown, B. (2001), Accounting Theory and Practice; Pearson Education, UK Groppelli, A, A., Nikbakht, E. (2006) Finance, Barron's Educational Series, New York Hermanson, Edwards and Maher (2005) Accounting Principles, Freeload Press Inc. Saint Pauls, USA Holmes, G., Sugden A., (2004) Interpreting Company Reports and Accounts; Pearson Education, UK Luecke, R. (2003), Finance for Managers: Your Guide and Mentor to Doing Business Effectively, Harvard Business Press, Harvard Scott, D. L. (2003) Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor, Houghton Mifflin Reference Books, USA Siciliano, G. (2003) Finance for Non-Financial Managers: A Briefcase Book; McGraw-Hill Professional, New York Siegel, J. J. (2007) Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, McGrawHill Professional, New York Siegel J. G., Shim J. K. (2006) Accounting Handbook, Barron's Educational Series, New York

18

Siegel J. G., Shim J. K. (2000) Financial Management, Barron's Educational Series, New York

19