Donimos Financial Statement Accounting Analysis

Domino’s Financial Statement Analysis
Name
Institution
Date
Strategy analysis
Business model
Domino’s focuses on delivering high quality and fresh foods especially pizzas to customers quickly and safely and relying on superior service delivery (Dominos, 2017). The company has entered into franchise agreements with restaurants to expand the business operations in the domestic and international markets. The company experienced growth, even after the 2008/2009 financial crisis highlights the importance of the deliveries to improve profitability. Additionally, the company has cost-efficient stores that have made it easier to maintain high profitability levels.
Company/ Industry Overview
Domino’s Pizza is a piazza delivery company serving customers in the US and the international market, and the company has a third segment the Supply Chain segment. The company has increasingly relied on digital growth to remain competitive and reach out to more consumers (Banjo, 2016). Similar to other players in the food and retail market, energy and food prices affect the industry’s operations regularly. The rise of prices in raw materials is a concern even as energy costs have been low in the last three to four years. Restaurant spending also affects the industry and as the price of ingredients fluctuate this affects the businesses, and they may be forced to change prices more than is necessary
The major market players have franchise that run independent businesses using the main company’s brand name. Growth in the international market will cushion the industry from market slow down, but there is still concern that changing consumer preferences will impact negatively on the company’s operations in the US (Canadean Company Reports, 2016). Increased global food consumption is an opportunity for the food and restaurant market players to expand in markets of operations.
Another risk to the business is fewer people choosing to visit restaurants, and while some eat outside the establishments they are less likely to be loyal customers. The challenge then is how to reach to customers who meet outside orders. There are various outlets for takeouts and companies with delivery options are more likely to be competitive. Consumers choose different restaurant outlets sometimes without being aware of the nutritional content of the foods even as there is increased public interest on consuming nutritious diets (Brindal, Wilson, Mohr, & Wittert, 2014). Generally, the food and restaurant industry is competitive, and players need to be innovative to attract more customers.
Accounting Analysis
The management at Domino’s evaluates the estimates of assets, liabilities, revenues as well as expenses while disclosing contingent assets and liabilities. The company reports on an ongoing basis and estimates on revenue recognition are based on historical experiences and assumption made based on the circumstances. The company earns revenue through the domestic owned company and the franchise, the manufacturing, the supply chain segment and the international business (SEC, 2017). However, the sales from franchise stores are not included in the Company revenues, but when the company-owned stores report retail stores the retail revenues are recorded when items are delivered to the customers or carried out to the (SEC, 2017).
Another critical accounting practice is evaluating the long-lived and intangible assets ,and when the assets are acquired for the franchise operations the company uses fair values of assets and liabilities, while depreciation and amortization focuses on the physical inspection, history and other information available (SEC, 2017). The company’s policies do not distort the valuation of long-term and intangible assets and potential impairment is calculated when the carrying amounts is considered when the carrying amounts are not recoverable. The company has not made changes in the way assets are recorded by the franchises and company-owned stores are recorded. Even when there are changes in recoverability of assets because of differences in areas of operations, the impairment charge is fairly valued.
In the year ended December 2015 the company recognized deferred tax evaluation allowance of $ 300,000 and capital gain as this was related to sale of the company’s stores to the franchisees (SEC, 2017). When calculating the deferred tax assets depends on the circumstances including the ability to generate taxable income, but since the foreign subsidiaries tax basis does not exceed the main company investment then the deferred income taxes are not recorded (SEC, 2017).
Financial analysis
The company’s revenue increased in the year December 28 2014 and in January 3 2016 from $1, 993.80 to $ 2216.50 million while the revenue for the year ended December 2012 was 1678.40 million. Similarly, the cost of sales increased by 134.30 million from 2015 to 2016, but since the sales revenue were higher there was a positive net income increase of $ 30.20 million. The net income has increased consistently in the past five years from $ 112.4 in December 30, 2012 to $ 217.7 in January1, 2017 (SEC, 2017)


DominosYum BrandsChipotleRevenue USD Mil2,4736,3663,904Gross Margin %3141.912.8Operating Income USD Mil4541,62535Operating Margin %18.425.50.9Net Income USD Mil2151,61923Net Income USD Mil2151,61923
Income statement analysis
In terms of profitability Yum Brand has performed better compared to Dominos and then higher revenue resulted in higher gross margin and operating margin. When compared to Chipotle the company performed better and was able to manage costs that Domino’s reported better net income despite having lower revenue.
The Gross margin has improved over the past five years, but it this growth has been modest in that period in the year ended 2012 the gross margin was 29.9% and increased to 331.0 % in December 2016. This has mostly been associated with operating income improving from $ 282 million in 2012 to $454 million in 2016 as did the net income in the same period increasing from 112 million to $215 million (SEC, 2017). However, the cost of sales and expenses also increased substantially in the same period and this has resulted in the modest increase in the gross margin levels. The operating costs in the food and restaurant industry is high when compared to the gross sales highlighting the need to reduce these costs (Nessel, 2012)
The earnings per share was reflected the company’s better performance from 1.91 in 2012 to 4.30 in 2016 (Nasdaq, 2017). While the common shares available reduced from 59 million in 2012 to 50 million in 2016 the EPS would still have improved substantially if the available stock remained at the same level (SEC, 2017).
Balance sheet analysis
Liquidity current ratio = total current assets/ total current liabilities= 495.873 M / 403.698 M = 1.23. The company’s quick ratio was 1.13 in the same period and the two ratios indicated that the company’s liquidity position is healthy as it is able to meet the short-term needs as they fall due (Marketwatch.com, 2017).
Liquidity ratio
Dec-111-DecDec-13Dec-14Dec-15Dec-161.661.331.381.611.61.23
The cash and cash equivalents in the past for years increased from $54.8 million to $14.4 million, to 30.9 million and 133.34 million in January 3, 2016, but then fell to 42.8 million in January 2017. Similarly, the total assets have increased and the company reported $ 799.8 million in 2016 compared to $ 596.3 million in 2015 a $ 203.5 million. The dividend per share has been the highest in the past five years as the basic common stock was $4.41 I January 2017 compared to 3.58 in the previous years (SEC, 2017).


Value and du Pont analysis
The du Pont analysis breaks the Return on Equity into three parts as the Profit Margin, Asset turnover and Equity Multiplier
In the year 2016 this was
Profit margin =Net income / sales revenue= 214,678 / 2,472,628 = 8.68%
Asset Turnover= Revenue/ Average Total assets= 2,472,628 / (716,295+ 799,845)/ 2=3.26
Equity Multiplier= Average Total assets/ Average Equity= (716,295+ 799,845)/ 2/ (48.1 000+49.900) =7.74
ROE=8.68%* 3.26*7.74=219.01%
The equity multiplier has a large effect on the ROE compared to the profit margin and the asset turnover. The ratio analysis will be utilized in forecasting sales and financial performance for the company. Sales in the market tend to be seasonal and he industry is labor intensive highlighting the need to consider how labor and source of ingredients affects their operations (Anonymous, 2016).
References
Anonymous. (2016). Restaurants - quarterly update 11/28/2016. (2016). (). Fort Mill, South Carolina: Mergent. Retrieved from https://search.proquest.com/
Banjo, S. (2016). Domino’s-earnings deserving of Silicon Valley valuation. Retrieved from
 HYPERLINK "/gadfly/articles/2016-10-18/domino-s-earnings-deserving-of-silicon-valley-valuation" /gadfly/articles/2016-10-18/domino-s-earnings-deserving-of-silicon-valley-valuation
Brindal, E., Wilson, C., Mohr, P., & Wittert, G. (2014). Nutritional consequences of a fast food eating occasion are associated with choice of quick-service restaurant chain. Nutrition & Dietetics, 71(3), 184-192. doi:10.1111/1747-00...