Introduction
The International House of Pancakes is a large company in the hospitality sector where its major operations are carried out through franchises. It is owned by the Dine Equity company which also owns other subsidiaries in the hospitality sector. Financial ratios are used by internal and external users to judge the financial health of the company.
Liquidity Ratios
Current Ratio (2010) = Current Assets = 325,720 = 1.68
Current Liabilities 193,353
(2009) = Current Assets = 337, 144 = 1.3
Current Liabilities 257, 967
Acid Test Ratio (2010)= (Current Assets- Inventory) = 325,720- 11,977 = 1.623
Current Liabilities
193,353
(2009) = (Current Assets- Inventory) = 337,144- 12,236 = 1.259
Current Liabilities
257,967
Accounts Receivable Turnover
(2010) = Sales = 642,216 = 8.9
Receivables 72,080
Average Collection Period = Total days in a period * Accounts Receivables
Credit Sales
(2010) = 365* 72080 = 41 days
642,216
Inventory Turnover = Sales
Inventory
(2010) = 642,216= 54
11,977
Solvency
Debt Ratio (2010) = Total Liabilities = 2,685, 720= 0.87
Total Assets 2,994,529
(2009) = Total Liabilities = 2,843,914= 0.92
Total Assets 3,100,868
Debt to Worth Ratio (2010) = Total Liabilities = 2,685,720= 22
Total Equity 121,759
(2009) = Total Liabilities = 2,843,914= 40.68
Total Equity 69,904
Times Interest Earned (2010) = EBIT =
72,345+131,434* = 1.3
Interest Expense 131,434
(2009) = EBIT =
107,447+139,611 * = 1.8
Interest Expense 139,611
(*Income before taxes plus interest expense figures from the income statements (Dine Equity, 2010).
Profitability Ratios
Return on Operating Assets (2010) = Net Income =
48,043 = 1.62%
Operating Assets* 2,958,916
(*Total assets less the assets held for resale)
Return on Assets (2010) = Net Income =
48,043 = 1.6%
Total Assets 2,994,529
Return on Equity (2010) = Net Income =
48,043 = 0.40
Stockholder’s Equity 121,759
(2009) = Net Income =
75,460 = 1.07
Stockholder’s Equity 69,904
Book Value Per Share(Dec) = Stockholder’s Equity
Average Outstanding Shares
(2010) = 121,759= 7
17,168
(2009) = 69,904- = 4.14
16,904
(In the financial ratio analysis on the liquidity, solvency and profitability of the company, refer to the specific figures in the appendix.
Importance of Financial Ratios to the Internal Users or Management
The current ratio is the relationship between the current assets and the current liabilities. It measures the ability of the company to use its short-term assets to finance the payment of its short-term obligations. It analyses the liquidity of the firm. The company has been improved its liquidity ratio in 2010 compared to 2009. The acid test ratio is similar to the current ratio only that the inventory and the prepaid expenses are excluded from the current assets. It takes the assets which are considered to be more liquid. In both 2010 and 2009, the ratio has been below the recommended ratio in the industry which is 2:1. A company should ensure the company is operating at the recommended ratio in order to avoid liquidity problems (Nazir & Afza, 2009). The creditors are highly interested in the liquidity ratios to protect their interests. There should be sufficient liquidity to meet the interest and the principal payments on the loans.
The accounts receivable ratio shows the effectiveness of the company in extending credit facilities to its customers and the efficiency of its debt collection procedures. The higher it is, the more efficient the company is. The average collection period shows the period it takes for a company to receive payments from its debtors. In order to improve the liquidity of the company, the average collection period should preferably be 30 days or less. The company in 2010 had a period of 41 days which is quite high.
The inventory turnover shows the number of times the company replaces the inventory over the trading period. The company has higher levels of inventory turnover at 54 which is a good sign as it shows the company has strong sales.
The debt ratio shows the percentage of assets the company has acquired in comparison to its debts. The lower the percentage the better as it shows the company has a lower leverage. The company in 2010 was less leveraged than in 2009 showing that the company improved its debt management. Debt to worth ratio is used by a company and investors to ascertain what percentage of the company’s growth has been financed by debt. The higher it is, the more a company is leveraged which is risky for the company. In 2010, the ratio was 22 meaning that that the company reduced its leverage compared to equiy since in 2009 the ratio stood at 40.
Times interest ratio measures the ability of the company to cover its debt obligations. In 2010, the ratio went down. The company made less profit in 2010 compared to 2009. It should strive to make higher profits in the year 2011 to improve its ratio. The return on assets ratio shows the progress the company is making in ensuring that its investments in its assets is being utilized to generate profit. The percentages are low and in 2010, the ratio went even lower.
The return on operating assets shows the efficiency of the company in using its operating assets to generate income. The lower profits in 2010 made the ratio be quite low. This return on equity ratio is crucial to the investors as it shows the return on the capital or the investments that the shareholders have put into the company. In 2009, the investors got a good return however in 2010 due to the lower profits the investors must have been disappointed. The book share per value shows the value of the shares and is similar to the earnings per share.
The company management use ratios to judge the performance to know the areas that they should improve in terms of liquidity, profitability and leverage. The potential shareholders scrutinise the financial statements to know which company they should invest in. They are only interested in healthy companies. The IHOP Company has several problems in terms of profit, liquidity and debt management therefore the management should lay strategies to increase its profit and reduce debt.
Appendix
DineEquity, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended September 31,
2010 2009
Segment Revenues
Franchise revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 280,562 $ 278,922
Company restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642,216 668,149
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,329 99,182
Financing revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,188
12,504
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,033,295 1,058,757
Segment Expenses
Franchise expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,368 77,411
Company restaurant expenses . . . . . . . . . . . . . . . . . . . . . . . . . 551,837 573,343
Rental expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,165 73,081
Financing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,234 360
Total segment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701,604 724,195
Gross segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .331,691
334,562
General and administrative expenses . . . . . . . . . . . . . . . . . . . . 116,531
117,015
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131,434
139,611
Impairment and closure charges . . . . . . . . . . . . . . . . . . . . . . . . . 3,085
6,472
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . 9,230
9,056
Loss (gain) on extinguishment of debt and temporary equity . . (4,540)
(38,803)
(Gain) loss on disposition of assets . . . . . . . . . . . . . . . . . . . . . . . 923 (7,253)
Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,783 1,017
(Loss) income before income taxes . . . . . . . . . . . . . . . . . . . . . . 72,345
107,447
Benefit (provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . (23402) (31,987)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,083 75,460
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,083 75,460
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,168 16,904
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,519 17,717
Source: Dine Equity,2010.
DineEquity, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
September December 31
2010
2009
Assets
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,230 $ 82,314
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,790
72,690
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72,080 104,690
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,977 12,236
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 7,702
Prepaid gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,609 19,878
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,024 13,425
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,091 15,444
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35,613 8,765
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .325,720 337,144
Non-current restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .44,696 48,173
Restricted assets related to captive insurance subsidiary . . . . . . 3,779 4,344
Long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .246,650 259,775
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 711,991 771,372
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697,470 697,470
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,685
849,552
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,538 133,038
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,994,529 $3,100,868
Liabilities and Stockholders’ Equity
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . .$ 25,200 $ 25,200
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,408 31,729
Accrued employee compensation and benefits . . . . . . . . . . . . . .32,022 37,397
Gift card liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,723 105,465
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,000 58,176
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,353 257,967
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . 1,557,053 1,637,198
Financing obligations, less current maturities . . . . . . . . . . . . . .302,980 309,415
Capital lease obligations, less current maturities . . . . . . . . . . . 146,253
152,758
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,287
369,127
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,794
117,449
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,685,720
2,843,914
Commitments and contingencies
Preferred stock. 187,050187,050
Stockholders’ equity
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .121,759 69,904
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . $2,994,529 $3,100,868
Source: Dine Equity,2010
References
Dine Equity (2010). 2010 Annual Reports. Retrieved from:
http://investors.dineequity.com/phoenix.zhtml?c=104384&p=irol-reportsAnnual
Nazir, M. & Afza, T. (2009). Impact of Aggressive Working Capital
Management Policy on Firms’ Profitability. The IUP Journal of Applied Finance, 15(8), 19-30.