Domino's Pizza Financial Ratio Analysis And Comparison With Starbucks

Company Background

Domino’s Pizza is a multinational quick-service restaurant organization which was established in the year 1960 and is headquarter in United States. The company operates or runs through three primary segments: U.S Stores, International Franchise, and Supply Chain. Thus, segment of U.S Stores includes operations concerning all Franchised & company owned stores through the United States. Hence, its stores consist of around 6,185 franchised stores & also runs a network of around 375 U.S stores. Moreover, the segment of Supply Chain primarily contains the distribution of equipment, food, and supplies to stores from the operations center in the Canada and United States. It is also operating or running pizza restaurants in around 18,800 locations in around 90 markets (Rangongo 2019).

Starbucks Corporation is a retailer, marketer, and roaster of field coffee with business operations in around 83 markets around all over the world. The company was established in the year 1971 and is headquartered in Washington, United States. It has around 32,660 company-licensed and operated stores (Williams and Dobelman 2017). It operates its business through three segments that is Americas which contains the Canada, Latin America, and the United States; International, which includes Japan, the Middle East, Africa, Europe, China, Europe, and Asia Pacific; and Channel Development. Additionally, Starbucks also sells services and goods under different brands, including Evolution Fresh, Starbucks Reserve, Princi, Seattle’s Best Coffee, and Teavana.

Financial Ratio Analysis refers to a procedure of comparing the ratio and relationships between more than two items of the financial information from the company’s financial statements (Izzalqurny, Subroto and Ghofar 2019). Thus, it is mainly utilized as a means of making reasonable comparison around time & between different industries or companies. The following financial analysis of Domino’s and compare it with its closest competitors (Starbucks) are discussed and analysed below:

Domino’s profitability position is determined by analysing or interpreting the different types of profitability ratios for the financial years 2021 & 2020 (Kourtis, Kourtis and Curtis 2019). On the basis of financial ratio calculation, it can be observed that the overall profitability position of the company has improved marginally in the current year as compared to previous years (Robinson 2020). Hence, it is clearly evident from the calculations, there is a slight increment in the gross profit to 47.90% in 2021, implying that the firm has make a reasonable income on its net sales, because it keeps its overhead costs in control. The net profit increases considerably to 13.96% which indicates that the company was efficient in terms of generating profit from its available net revenue. Whereas, there is no significant change in the operating profit margin and pre-tax margin in 2021, suggesting that the company has managed it efficiently and has less risk involved in it. In the case of EBITDA margin, the metric decreases marginally to 22.66% from 23.54% in 2020, indicating that the group is facing from the profitability positions and with the cash flow. However, the earnings of the company are not stable and its operating expenses is high in comparison to the total revenue. Additionally, there is a huge increment in the ROA in 2021 to 15% which suggests that Domino’s has generated a large proportion of net profit from its total assets and was quite efficient. But on the other hand, return on equity is on negative because of a negative balance of total equity. Lastly, ROCE increases significantly to 27.14% in 2021, implying that larger proportion of net profit may be invested back in the company with respect to the shareholders benefits. However, when it is compared to its competitor (Starbucks), it can be noticed that the company is not at par because Starbucks has generated higher proportion of net and gross profits in the current year. But in the case of Pre-Tax Margin and EBITDA Margin, Domino’s metric is better and its return metric is also better than its competitors, though both the company’s ROE is on negative in the current year (TEXTS 2018).

Competitors Background

The overall liquidity position of Domino’s is determined by scrutinizing or analysing the different types of liquidity ratios for the FY 2021 and 2020. On analysing the company’s current and quick ratio, it can be observed that in 2021, the metric reduces to 0.91 times in from 1.27times, implying that the company does not have enough liquidity or cash to cover all of its short-term debts as the value of current assets does not exceeds the value of current liabilities in 2021 as compared to 2020. However, the company are little dependent on the company’s current assets (inventory) in order to clear short-term debts and it must be treated with cautious. Moreover, the cash ratio also decreases to 0.36 times in 2021, which implies that the company is having more amount of current liabilities than the cash & cash equivalents. Hence, it suggests that the cash which exists is insufficient in order to clear all of its debts. In the case of net working capital ratio, the metric turns in negative in the current year in comparison to previous years, implying that the company does not have the capability to cover its debts with its available current assets. Lastly, though there is a marginal increment in the company’s operating cash flow ratio, but is still less than which implies that Domino’s has produced less cash from its available operations than is required to cover its current debts. This may be a short-term problem & a requirement for more capital. Hence, when it is compared to Starbucks (competitors), the company is not at par because the overall liquidity position of its competitor is quite better and favourable because it has adequate cash to cover all its current liabilities and is also not reliant on its current assets. The net working capital ratio of its competitor is also positive whereas Dominos is having a negative value in 2021. But in the case of operating cash flow ratio, The Company Has Generated More Amount Of Cash Than Its Competitor If The Liquidity Ratio Is More Than 1 Then It Implies That The Financial Health Of Companies Is Stable.

The Domino’s operational efficiency position is decided by examining the different primary types efficiency ratios for the current year (2021) and previous year (2019). Based on the financial calculation, it can be noticed that the company’s asset turnover and fixed turnover ratio has increases marginally to 1.07 times and 6.21 times in 2021, implying that the company has tried use its fixed assets and total assets efficiently in terms of generating net income as compared to previous year. In the case inventory turnover ratio, the metric has increases considerably to 26.81 times in 2021, indicating that the group has tried to sold its goods rapidly, and there is huge demand for its products. It might occur due to a higher sales and lower input costs. Moreover, it also indicates the company has an insufficient inventory and strong sales (Lee, Lee and Moon 2016). In the case of accounts receivable ratio, there is a significant increment to 16.35 times in 2021 from 13.95 times in 2020, suggesting that the credit collection process of the company is quite effective and also has a superior quality of clients who clear all of their debts quickly. It may also imply that the company is running or operating its overall business on the basis of cash. In addition, the payable turnover ratio increases slightly to 3.04 times in 2021, indicating that Domino’s is clearing all its supplier quickly than the prior period. Higher accounts payable is considered to be more favourable than the lower metric. However, the entire payment has been made to the suppliers on credit for the purchase (Thomas and Rabiyathul Basariya 2019). The days inventory, sales, and payable outstanding also decreases in 2021 which indicates a positive and favourable efficiency position for the company. Lastly, the cash conversion cycle is on negative from the past two years. Whereas, on the other hand, when it is compared to its closest competitor, both the companies are in the same position as it is clear from the ratio calculations (Firdaus and Endri 2020). In terms of turnover ratio, the company is at par because its value is higher than its competitor and is days ratio is favourable. But on the other hand, Starbucks cash conversion cycle is in positive in 2021 as compared to 2020.

Discussion

The overall financial leverage position of Domino’s Pizza is determined by inspecting or examining the different type of solvency ratios for the financial years 2021 and 2020. On the basis of solvency ratio calculation, it can be observed that the company’s gearing ratio has increased considerably to 114.50% in 2021, implying that Domino’s is having a higher proportion of financial leverage & is more vulnerable to recessions in the economy & the business cycle (Griffin and Mahajan 2019). This is the main reason behind having higher amount of debt in comparison to the shareholder’s equity. The debt ratio also increases to 1.11 times in 2021 from 1.01 times in 2020, which indicates a high financial risk and the company financed most of its total assets through debt than the shareholder’s equity. Additionally, the debt-to-equity and equity multiplier was on negative from the past two years. It is quite obvious that the metric will be in negative because suffering from deficit as it has more amount of total liabilities than the total shareholders equity. This might be considered as a risk, implying that the group might be at bankruptcy. Moreover, the times interest earned and cash coverage ratio increases to 5.63 times and 6.52 times in 2021 as compared to 2019, implying that the company has the capability to service its liability and cover its financial obligations. Higher the metric, it becomes simpler to make an interest payment on the current debts. Moreover, when it is compared to Starbucks, it can be seen although there is a reduction in the overall financial leverage but its value is still higher than the company (Domino’s), which means the level of financial risk is high in the Starbucks. But in the case of interest coverage and cash coverage ratio, Starbucks has more ability to service its current debt than the company (Raki?evi? et al. 2016).

The overall market position of Domino’s is determined by analysing the EPS and Price/Earnings Ratio for the FY 2021 and 2020. On the basis of financial computation, the company’s earnings per share increases marginally to $0.20 in 2021 from $0.18 in 2020, implying that the company is trying to be profitable enough to cover more money or cash to its shareholders. On the other hand, the P/E ratio also increases considerably which implies that the investors are willing to cover higher share price due to a growth expectations or prospects in the future (Hong and Najmi 2020). Higher metric implies that one is paying more in order to buy the share of the net earnings of a company. Whereas, when it is compared to Starbucks, the company is not at par because its value is lower than its competitor. But in the case of P/E ratio, Domino’s value is considerably high than the Starbucks in 2021 as compared to previous year.

Conclusion

On the basis of above discussion, it can be concluded that financial ratio analysis has been utilized to analyse or examine the overall financial performance of the company and its competitor. Thus, financial ratio analysis propose entrepreneur a way to measure their company’s financial performance & compare it with the same businesses in their sector. They are mainly utilized efficiently when outcome over numerous periods is compared. The financial ratios that have been mentioned above helps in understanding the businesses’ financial statements.

In this aspect, I will discuss that I have conducted a thorough research and secondary research of analysing or examining the company and I got acquainted with all the different aspects of what are available in an annual report. For example, its business operations, corporate governance, auditors report, financial statements, notes to financial accounts etc. This helps me in undertaking great research and enhancing the data researching skills or abilities I collect information, analyse information, and then I recommend things which are in best interest of all the stakeholders involved with respect to the company. Now, with respect to carrying out this assignment itself, I have worked in a team which was a team effort. It helped me to focus on how the principles of tools work. The things which I have learned can help in the corporate life to work as a team and not just focus upon individual motives. Furthermore, when I am working in a team, there are several types of issue that pertains in a team which includes time management, issues revolving around conflicts arising between the team members and the difference in cultural background between the team members. The corporate life has been a similar feeling where I have issues regarding time management and where I have to interact with people who are from the different cultural background where politics can arise between few or more employees working in an organization.

References

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Rangongo, T., 2019. Taste’s management believes in journey to profitability. finweek, 2019(13), pp.10-10.

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