Introduction
The report is prepared with the objective of conducting the financial analysis of Domino Pizza Enterprise Ltd that is listed on Australia Stock Exchange under the ticker symbol of ‘DMP. The report carries great significance for us to attain the knowledge of financial analysis and how the financial ratios and other multiples can affect our investment decision relating to a company. To simplify the analysis and to facilitate the reader, we divided the report in multiple sections relating to ratios, intrinsic value calculation and calculation of cost of capital.
i)Liquidity Ratios:
i)Current Ratio: Current Assets/ Current Liabilities
2012:74/52= 1.42
2013: 60/51= 1.17
ii)Quick Ratio: (Cash+ Receivables)/ Current Liabilities
2012: (40+23)/52= 1.21
2013: (19+28)/51= 0.92
ii)Leverage Ratios
-Debt to Total Assets Ratio: Total Debt/ Total Assets
2012: (12+2)/175= 0.08
2013: (7+330/190= 0.21
-Interest Coverage Ratio: Operating Income/ Interest Expenses
2012:* No Interest Expense Paid
2013: * No Interest Expense Paid
iii)Efficiency Ratios
-Inventory Turnover Ratio: COGS/ Average Inventory
2012: 166/5= 33.2
2013: 188/6.5= 28.92
-Days of Receivables: 365/[Revenue/ Average Receivables]
2012: (365*21.5)/216= 36.33 Days
2013: (365*25.5)/245= 37.99 Days
-Asset Turnover Ratio: Revenue/ Total Assets
2012: 216/175=1.23
2013: 245/190= 1.28
-Fixed Asset Turnover: Revenue/ Total Fixed Assets
2012: 216/ 101= 2.13
2013:245/129= 1.89
iv)Profitability Ratios:
-Net Profit Margin: Net Income/ Revenue
2012: 27/216= 12.5%
2013: 29/245= 11.83%
-ROE: Net Income/ Total Equity
2012: 27/117=23.07%
2013: 29/103= 28.15%
-ROE(Dupont)= (Net Income/ Revenue)* (Revenue/ Total Assets)* (Total Assets/ Total Equity)
2012: (27/216)* (216/175)*(175/117)
= .125* 1.23* 1.49
= 23.01%
2013: (29/245)* (245/190)* (190/ 103)
= .118* 1.28*1.844
= 27.85%
v)Market Ratios:
-PE Ratio: Price/ EPS2012: 7.31/0.37= 19.75
2013: 10.10/0.40= 25.25
-Price-Sales Ratio: Price/ Revenue
2012: 7.31/216= 0.03
2013: 10.10/245= 0.04
WACC Calculations
i)Book Value of Debt: $116 Million
ii)Book Value of Equity: $259 Million
iii)Weights of Debt: 116/(116+259)= 30.93%
iv)Weight of Equity: 1-0.3093= 69.07%
b) Cost of Capital:
- Calculating Cost of Equity through CAPM Model:
Assume equity market risk premium= 6%
Risk-free rate= 5% (Australian government bond rate)
Beta = 0.92
RE=0.05+ 0.92(0.06)=0.1052 or 10.52%
- Cost of Debt for the firm: 1.94%
c)Weighted Average Cost of Capital(WACC)
= Cost of Debt*(1-tax rate)* Weight of Debt+ Weight of Equity* Cost of Equity
= 0.0194*(1-.30)* .3093 + .6907*.1052
= .0042+0.0726
= 7.68%
Intrinsic Value Calculation
Value of Stock: D(1+Growth Rate)/ (Cost of Equity- Growth Rate)
= .33(1+.3792)/(- 0.3792
*Recent Dividend(D)= 0.33
Growth Rate: 5 year average growth in dividend payments
=37.92%
- Calculating Cost of Equity through CAPM Model:
Assume equity market risk premium= 6%
Risk-free rate= 5% (Australian government bond rate)
Beta = 0.92
RE=0.05+ 0.92(0.06)=0.1052 or 10.52%
Analysis
Referring to the calculations above, we can witness that over the period of one year, the financial performance of Dominos Pizza Ltd has not been encouraging and had rather got worse. Beginning with the liquidity ratios, we found that both the multiples, i.e. Current Ratio and Quick Ratio indicated a declining trend signifying that the company has weak liquidity roots raising doubts over its capacity to honor its short-term debt obligations.
Carrying on with our analysis we found that during 2013, despite of fall in the profitability margins from 12.50% to 11.83%, the company increased the proportion of debt in the capital structure as indicated by Total Debt to Total Assets ratio that surged from 0.08 to 0.21. Our conclusion related to poor financial run was concreted when we decomposed the ROE multiple using Dupont Method and found that the increase in ROE multiple was sourced from increased financial leverage rather than net margins, thus indicating another negative trend for the company.
Conclusion
At the conclusion of this report and courtesy our calculations related to financial ratios, we can infer that Dominoz Pizza Ltd does not offer a lucrative investment opportunity for the investors as The company has lost on its liquidity, efficiency and profitability. In addition, despite the fall in the net margins, the company has engaged itself in more debt financing and even the shareholders of the company will not be ecstatic to witness the increase in ROE multiple coming from high financial leverage.
Note: Since we were asked to use actual 5 year dividend growth rate, we could not calculate intrinsic value as cost of equity was less than the growth rate of the company.
