Accounting and Financial Management - Dominos Pizza - Case Study Example

Accounting and Financial Management Group Project Group Members 1. 2. 3. 4. 5. Lecturer’s Name Submission Date Marking Criteria Appendix A Group: _____________________________ __________________________________ _____________________________ __________________________________ Criteria Maximum Marks Awarded Marks Other Comments Presentation of the report 2 Referencing 3 Quality of writing 2 Application of analysis models 5 Interpretation/Recommendation based on analysis of the results 10 Logical arguments 6 Critical evaluation of the limitations of financial statement analysis 2 Total Marks 30 TABLE OF CONTENTS Executive Summary 4 Introduction 5 Trend Analysis; Interpretation and recommendation 7 Horizontal Analysis; Interpretation and recommendation 9 Vertical Analysis; Interpretation and recommendation 11 Ratio Analysis (Profitability, Efficiency, Liquidity, market performance); Interpretation and recommendation 15 Limitations of the analysis 16 Conclusion 17 References 18 Appendices 19 Executive Summary Domino’s pizza financial growth has been rapid over the years. This has resulted from the hard work of the firm’s employees as well the expansion of the firm into new markets in recent years. The financial statements of the firm show that there has been significant improvement in the performance of the company in the food industry. This paper aims at outlining the analysis of the financial reports of the company over a span of the past three years beginning 2013 through to 2011. This is to highlight the areas that have improved over the years in addition to making recommendations for areas that need to be worked on. The report is vital as it shows the financial performance of the company and this can be used in attracting investors as well as shareholders in a bid to further improve the financial base of the company. The report contains a summary of what Domino’s Pizza is about, interpretations and recommendations for its financial statements including trend and vertical analyses of its income and balance sheets as well as the ratio analysis of its financial statements for the three years (2013-2011). The paper has three sections. The first contains the introduction which outlines what Domino’s Pizza is about as well as a brief history of the company. The second is the body of the report that outlines the company’s strategy and its S.W.O.T analysis. It also entails the analysis, interpretations and recommendations for the company’s financial statements. The third section contains a summary of the report, the references and the appendices to the report. Introduction Most companies make it their target to maximize on profits whereas the aim ought to be benefitting the environment or the community. A sustainable business indulges in practices that not only aim for profit maximization but also for environmental and social policies (Mittal, 2006, pg.24). Companies often give reports on their financial performances at the end of each 12months using the identifiable and measurable income and expense items attributable to that period. There are several mechanisms that may be used to outline the financial performance of a company. These include income statements, balance sheets and cash flow statements. Income statements present the profit or loss accrued by a firm over the period for which the accounting is made. Balance sheets give a summary of the position of a firm in terms of finances at the end of the accounting period (Ogilvie, 2006, pg. 58). Changes in equity are often outlined in a statement that shows the changes over the accounting period. The profit or loss is added to equity in the statement of changes in equity which, at the end of the reporting period, is included on the balance sheet. A cash flow statement on the other hand gives a report on the amount of money that is received by the firm as well as that which is utilized for expenses. It shows how prepared a firm is in meeting its financial obligations on time. It enables decision makers to evaluate the ability of a firm to generate cash flows, meet financial obligations, finance changes in nature of activities and obtain cash from external sources. It shows the changes in cash, an asset, from one balance sheet to the next (Mittal, 2006, pg. 56). It shows the main cash generating activities which are tied to the other financial statements. These include operating activities which outline the daily tasks such as receipts and payments that reflect the expenses and revenue in the income statement as well as the current assets and liabilities in the balance sheet; investing activities which relate to the acquisition and disposal of non-current assets and investments reflected as non-current assets in the balance sheet; and financing activities that relate to changing the size and composition of the financial structure of a company which are reflected as non-current liabilities and equity in the balance sheet (Harris and Mongiello, 2012, pg. 12). This report is aimed at giving an analysis of the financial statements of Domino’s Pizza over a period of three years beginning 2013 through to 2011. This will include a trend analysis of its income statement, a horizontal analysis of its balance sheets, a vertical analysis of both the income statement and the balance sheet and a ratio analysis outlining its liquidity, efficiency, profitability and market performance. This is imperative as it helps in evaluating the decisions made in the past by the firm and help in determining the choice of future decisions. The past events can be used to make predictions about the future. Domino’s Pizza is a fast growing company in the food industry that is seeking to attract investors and other stakeholders to the business. It has recently expanded its market into Australia, New Zealand and Europe. It has grown from a physical shop that sells pizza to an online platform that enables people from various markets to access its products and services. The year 2013 alone has seen to its growth in an immense way. This is replicated in its financial performance that has been buoyed by digital advancements and product innovation as well as quality customer service of value for money. According to the group’s CEO on the financial performance for the year 2013, there has been EBITDA growth of 17.5% in the Australian and New Zealand market due to a combination of improved margins, economies of scale and the continued sell down of corporate stores (Annual Report, 2013, pg. 49). These changes have seen to the enormous growth of the firm over the years enabling it to be ranked among the first to provide an online platform for its customers to make orders. Trend analysis of Income Statement of Domino’s Pizza Enterprises Trend Analysis for Income Statement for the period 2013-2011 Base Year 2011 Jun-13 Jun-12 Jun-11 Revenue (dollars in thousands except per share data) Domestic Company-owned stores 95% 90.3 100% Domestic franchise 106.50% 95.8 100% Domestic Supply chain 100.20% 91.3 100% International 107.20% 95.80% 100% Total Revenues 100.70% 92.10% 100% Cost of Sales Domestic Company-owned stores 90.50% 86.10% 100% Domestic supply chains 99.20% 90.90% 100% International 102% 92.40% 100% Cost of sales 97.40% 89.90% 100% Operating margin 108.90% 97.60% 100% General and Administrative 100.70% 91.40% 100% Income from operations 115.30% 102.40% 100% Interest expense, net 90.30% 115.30% 100% Income before provision for income taxes 128.80% 95.20% 100% Provision for income taxes 129.40% 99.60% 100% Net Income 128.60% 92.80% 100% The trend analysis of the firm shows that there has been tremendous growth of the firm. The year 2011 being the base year shows tremendous growth in the revenue base. A decrease of 8% is noted for the year 2012; however, a corresponding 0.7% increase is noted as compared to the base year in 2013. Despite a drop in the total revenue in 2012, 2013 saw an increase in the general performance of the company. The improvement is mainly attributed to by an increase in the domestic franchise and international as well as domestic supply chain revenues (Annual Report, 2013, pg. 50). Domino’s Pizza expanded its client base in the year 2013 into Australian, New Zealand and European markets. This acted as a platform for improvement in terms of revenues since the firm accrued profits from increased sales. As compared to 2011, there was a 6.5% rise in revenue from domestic franchise, 0.2% increase in domestic supply chain revenue and 7.2% rise in international sales. This resulted in a 0.7% rise in the total revenue probably brought down by the drop in revenue experienced in the domestic company owned stores. The cost of sales saw a drop as compared to 2011(Annual Report, 2011, pg. 48). There was a drop in the year 2011 in the cost of sales and this is attributed to by the collective drop in the sales of the domestic company owned stores, domestic supply chains as well as international sales. The year 2013 saw an increase in the cost of the international sales. This can be attributed to the company’s venture into other markets such as Australia, New Zealand and Europe as well as the cost of harboring an online domain in a bid to provide an online platform for consumers to make their orders besides accessing information on the company. As compared to 2012 that saw a drop in income from the operating margins as well as general and administrative functions relative to 2011, the year 2013 has seen a rise comparatively. An 8.9% and 0.7% rise in operating margin and general and administrative income respectively has been noted for the year 2013. This has culminated in a 15.3% increase in income from operations in relation to the base year as compared to 2012 where the rise income from operations was 2.4% (Annual Report, 2012, pg.54). There has been an increase in the net income in 2013 as compared to 2012. This is attributed to by international and domestic same store sales growth, the store count growth internationally in addition to improved operating margins. This can also be attributed to a reduction in the net expenses as compared to that incurred in 2012. 2012 saw an increase in net expenses of 115.30% as compared to that of 2013 of 90.30%. The company’s income without provision of income taxes saw a rise in 2013 as compared to 2012 in relation to the base year (Annual Report, 2012, pg. 50). Recommendations The trend analysis of the income statement for Domino’s Pizza shows that enterprise has enjoyed an upward trend in terms of revenue since 2011 and has also made strides in its ventures by getting into new markets and come up with innovative ways of reaching its target market. This makes it a good company to invest in given its likelihood to prosper in the future. The company ought to work on improving the growth of company owned stores to make its revenue base stronger. Horizontal Analysis of Balance statement for Domino’s Pizza Enterprises Consolidated Balance Sheets Base Year 2011 2013 2012 2011 Assets Current Assets Cash and Cash equivalents 81.20% 109% 100% Restricted Cash and Cash equivalents 64.50% 64.80% 100% Accounts receivable 107.80% 108% 100% Inventories 91.20% 101.20% 100% Advertising fund asset, restricted 132.40% 104.50% 100% Other Assets 107.40% 95.30% 100% Total Current Assets 92.60% 93.70% 100% Property, plant and Equipment 95.80% 99% 100% Other Assets 126.80% 131.30% 100% Total Assets 97.60% 99.50% 100% Liabilities and Stockholder's Deficit Current Liabilities Current portion of long term debt 267.00% 269.20% 100% Accounts payable 91.60% 111.00% 100% Dividends Payable 813.20% 100% Advertising Fund Liabilities 132.40% 104.50% 100% Other accrued Liabilities 89.20% 97.80% 100% Total Current Liabilities 94.70% 95% 100% Long term liabilities Long term debt, less current portion 105.10% 105.90% 100% Other accrued liabilities 103.80% 111.80% 100% Total Long term liabilities 105.10% 106.10% 100% Total Stockholder's deficit 109.80% 110.40% 100% Total Liabilities and stockholder's deficit 97.60% 99.50% 100% Domino’s Pizza balance sheet shows that the assets and the liabilities equate each other over the years with a decreasing trend over the years. The assets have decreased in 2013 as compared to 2012 in relation to the base year. The total current assets have been declining from the base year. This is attributed to the development of new products in new markets which in turn incur costs in marketing. This could also be attributed to the introduction of Domino’s Pizza products into new markets in Australia, New Zealand and Europe (Annual Report, 2013, pg.49. This could be explained by the company utilizing its assets to launch its products in the new market, a big risk but one that is likely to accrue large profits as evidenced by the rise in revenue in the income statement. In addition, the launching of an online platform where the company clients can access its products and services may have resulted in the utilization of some of its assets. The total current liabilities have reduced over the years in relation to the base year. There has however been an enormous increase in the amount of long term debt in 2012 and 2013. The firm’s current liabilities have been declining with the years in relation to the base year with the long term debts increasing over the years. This shows that the firm takes on short term plans that it can accomplish and incorporates its long term plan into its strategic plan to ensure it achieves its mission and vision in addition to providing quality service to its clients (Annual report, 2011, pg. 47). The assets of the company are equal to its liabilities thus implying that the firm is capable of running its risks. Recommendations As it stands, Domino’s Pizza is a transparent firm given the state of its assets and liabilities and how they have changed over the years. This makes it a firm worth investing in. The tabulation also shows that the firm needs to work to ensure its assets are higher than its liabilities. This will put it in a better position with investors most of who look out for the ability of a company to venture into unknown territories based on its asset value. Vertical Analysis of Balance Statement Consolidated Balance Sheets- Vertical Analysis 2013 2012 2011 Assets Current Assets Percent Percent Percent Cash and Cash equivalents 8.70% 11.40% 11% Restricted Cash and Cash equivalents 12.70% 12.60% 19.30% Accounts receivable 20% 19.70% 18.10% Inventories 6% 6.50% 6.40% Advertising fund assets, restricted 10.20% 7.90% 7.60% Other Assets 6.80% 5.90% 6.20% Total Current Assets 64.50% 64% 68% Property, plant and Equipment 18.90% 19.10% 19.20% Other Assets 16.60% 16.80% 12.80% Total Assets 100% 100% 100% Liabilities and Stockholder's Deficit Current Liabilities Current portion of long term debt 0.80% 0.80% 0.03% Accounts payable 2.00% 2.50% 2.40% Dividends Payable 0.40% 0.05% 0.80% Advertising Fund Liabilities 1.50% 1.20% 1.30% Other accrued Liabilities 2.60% 2.80% 3.10% Total Current Liabilities 7.30% 7.30% 6.80% Long term liabilities Long term debt, less current portion 48.80% 48.80% 50% Other accrued liabilities 1.40% 1.50% 1.50% Total Long term liabilities 50% 50.30% 51.50% Total Stockholder's deficit 42.50% 42% 41.70% Total Liabilities and stockholder's deficit 100% 100% 100% The balance statement of the company shows that a large percentage of the current assets contribute to the total assets. This is replicated in all the three years represented. The long term debts also represent a big percentage of the total liabilities and stockholder’s deficit. Little changes are noted in the percentages of total assets and liabilities over the years showing that the performance of the company has been consistent over the years. Most significant changes are noted in cash and cash equivalents in the year 2013 thus showing that much of the company’s assets have been used up in new acquisitions. There is also significant change in the long term debt of the year 2013 and 2012 in relation to 2011. This can be attributed to the risks the company has made by expanding into new markets and introducing a new online platform for interacting with its clients which saw an increase in advertising fund assets for the year 2013(Annual Report, 2013, pg. 55). Recommendations The firm shows consistency in its performance as portrayed by the vertical analysis of the balance statement. This makes Domino’s Pizza a company worth investing in. It is imperative that the firm considers ways of ensuring the trend of consistency is maintained. Vertical Analysis of Income Statement Income Statement For the period between 2011-2013 2011 2012 2013 Revenue % of total revenue % of total revenue % 0f total revenue Domestic Company-owned stores 20.40% 19.90% 19.20% Domestic franchise 11.30% 11.80% 12% Domestic Supply chain 56.20% 55.70% 56% International 12.10% 12.70% 13% Total Revenues 100% 100.00% 100.00% Cost of Sales Domestic Company-owned stores 16.20% 15.10% 14.50% Domestic supply chains 50.40% 49.70% 49.60% International 5% 5% 5% Cost of sales 71.50% 69.90% 69.20% Operating margin 28.50% 30.10% 30.80% General and Administrative 12.80% 12.70% 12.80% Income from operations 15.70% 17.40% 18.00% Interest expense, net 5.50% 6.90% 5.00% Income before provision for income taxes 10.20% 10.50% 0 Provision for income taxes 3.80% 4.10% 4.90% Net Income 6.40% 6.40% 8.10% The income statement of Domino’s Pizza shows the same consistency in the company’s performance. The revenue generated by the company over the years has been consistent with the domestic supply chain taking the bigger percentage of the total revenues with 2013 showing an almost equal percentage in terms of growth to that of 2011. The cost of sales was highest in the year 2011 compared to other years. The net income was however highest in the year 2013 at 8.1%. The consistency in performance can be attributed to a solid foundation in business that Domino’s Pizza has laid in a bid to enhance its growth in the food industry (Annual Report, 2012, pg. 53). Recommendations The company has to ensure the consistency of its financial performance is maintained to attract more investors. Ratio Analysis of Domino’s Pizza Financial Statements Ratio Analysis 2011 2012 2013 Liquidity Ratios Current Ratio 1.7 1.3 1.3 Interest Coverage Ratio 1.8 1.5 2.6 Quick Ratio 1.5 1.2 1.2 Profitability Ratios Net Profit Margin 0.06 0.06 0.08 Operating Profit Margin 0.3 0.3 0.3 Return on Equity 0.5 0.4 0.7 Return on Total Assets 0.1 0.1 0.1 Return on Capital Employed 0.2 0.2 0.3 Efficiency Ratios Inventory Turnover 26.9 24.5 29.7 Assets Turnover 1.7 1.6 1.8 Market Value Ratios Price-Earning Ratio 28 18.7 39.5 Market-to-Book Ratio 8581.1 8354.4 15714.9 The liquidity of Domino’s Pizza has been well maintained for the three year period. The significant difference is noted in the interested coverage ratio showing fluctuations in the three year period. This could be attributed to the changing interest rates over the years. Generally, the firm’s liquidity shows that it is capable of paying its debts (Annual Report, 2011, pg. 56). This could be the reason for its long term debts since financiers trust it enough to fund its ventures. The company’s profitability as shown on the chart shows that the firm utilizes its assets well and also controls its expenses in a bid to generate more returns. The turnover of the company, which has worked to maintain the profitability of the firm, is a testament to this fact. This has also been consistent over the three year period making Domino’s Pizza an appropriate company to invest in due to assured constant returns. The efficiency of the firm, as outlined by the inventory and asset turnovers, is well attested to. This goes on to show that Domino’s Pizza is quite adept at transforming non-monetary materials into cash. This is evidenced by the introduction of an online platform by the firm to enable its clients to access products and services online and make orders (Annual Report, 2012, pg. 52). The market value of the company is high and with a high investor ratio given its high market to book ratio. It also has a low cost of issuing stock given its relatively high price to earnings ratio. Limitations of financial analysis There are several limitations to the use of financial analysis in evaluating the performance of an organization. There are managers that advocate for a ‘triple bottom approach’ that entails environmental and social performance evaluation. In addition, the tabulations are often done by humans who are prone to err and may thus introduce bias to reflect the good performance of a company. The computation of information that spans over a long time period makes it difficult for adequate comparisons to be made (Arora, 2006, pg. 36). Conclusion Financial statements are an adequate way of analyzing the financial performance of a company especially when there are investors to be attracted or shareholders to be enticed to take on more shares. There are various ways in which this can be done including income, balance and cash flow statements. These are often related to each other by one aspect or another. There are various ways of putting this information in a way that will enable easy evaluation. This includes the use of trend, vertical and ratio analysis. They help in assessing the performance of affirm over a time period as well as against other companies. Financial analysis methods come with their limitations among which are inaccurate data entry, inadequate comparison and their sole evaluation of financial performance. References Arora, M. (2006). Accounting and Financial Management. New Delhi, India: Krishna Prakashan Media, pg 34-39. Annual Report 2011, Global Momentum Domino’s Pizza 2011 Annual Report. Retrieved from http://www.annualreports.com/Company/3022, pg 48-52. Annual Report 2012, Domino’s Pizza 2012 Annual Report. Global Footprint; 10,000 and Growing. Retrieved from http://www.annualreports.com/Company/3022, pg 47-54 Annual Report 2013, Domino’s Pizza 2013 Annual Report. Retrieved from http://www.annualreports.com/Company/3022, pg 45-52 Harris, P and Mongiello, M. (2012). Accounting and Financial Management, London, UK: Routledge, pg 10-14. Mittal, R.K. (2006). Management Accounting and Financial Management. New Jersey, NJ: FK Publications, pg 24, 56. Ogilvie, J.(2006). Management accounting-financial strategy. New York, NY: Elsevier Ltd, pg 56-64. APPENDICES FORMULAE FOR CALCULATING THE RATIOS LIQUIDITY Current Ratio= Current Assets/ Current Liability Interest Coverage Ratio= Earnings before Interest and Tax/ Interest Quick Ratio= (Current Assets- Inventory)/ Current Liability PROFITABILITY Net Profit Margin= Net Profit after taxation/ Turnover Operating Profit Margin= Operating Profit/ Turnover Return on Equity= Net Profit after taxation/ Equity Return on Total Assets= Net Profit after taxation/ Total Assets Return on Capital Employment= Net Profit after taxation/ (Total assets- current liabilities) EFFICIENCY Inventory turnover= Turnover/ Inventory Asset turnover= Turnover/ Total Asset MARKET VALUE RATIO Price Earnings Ratio= Current stock Price/ Earnings Per Share (EPS) Market to Book Ratio=Market Value of Equity/ Book Value of Equity Read More