Domino Pizza consolidated report analysis
Memorandum
To: Shareholders Domino’s Pizza Enterprises Limited
From:______________________________________
Subject: The report on financial position of Domino’s Pizza Enterprises Limited
Date: May 16 2012
Introduction
In this report, we will be looking at the company’s financial performance in terms of the returns on investments or the profitability in the last five financial years. Moreover, the average returns on investments will be leveraged with the industry averages so as to ascertain the financial performance of the company compared with the other firms in the industry. The company’s financial performance will be analyzed using the financial ratios as a tool to determine the firm’s bottom line.
The firm’s profitability and efficiency
According to the firm’s profitability ratios, the firm’s overall returns or profitability have been increasing in the last five years. As indicated, the performance of the firm in terms of profits has been improving over the last five years. In fact, the company returns have been steadily growing. The steady growth is being observed in the returns on assets, equity and capital employed. In fact, the returns on capital employed have recorded tremendous growth in the last two years (Domino’s Pizza Enterprises.
The firm’s profitability ratios show how we have been using the company’s limited resources so as to generate revenues which in effect will add value to you as shareholders (Guerard & Schwartz 2007, p.167). Drawing from the financial report, the company’s five years of active business engagement have resulted in tremendous growth in profits and shareholders’ dividends (Domino’s Pizza Enterprises 2011, p.23). To the shareholders, this is a clear indication that the returns in their investments are guaranteed (Lasher 2010, p.89).
The profitability ratios indicate both the overall performance of the company and its efficiency in the use of resources. In fact, the margin ratios indicate the profit quantity the company generates on sales at various levels (Gibson 2010, p.225). The ratios that indicate the company returns such as the return on assets, return on equity and return on capital employed measure the firm’s overall efficiency in generating returns (Kimmel et al 2011, p.700). From the report, the ratios indicated the increasing efficiency in the use of the firm’s resources to generate income.
Compared with the average industry profitability ratios, the firm’s profitability ratios are below the average. This shows that the company’s returns are below most of its competitors within the industry (Brigham & Houston 2012, p.124). Furthermore, the indication is that the company did not perform well in the last five years as compared with its competitors. Even though the company has been making profits in the last five years, it could not reach the level of others within the industry.
The turnover ratio that measures the firm’s efficiency indicates the decreasing trend in the last five years. Since the firm’s efficiency is an important determining factor in the firm’s profitability, the decreasing efficiency has been attributed to the slow growth in the firm’s profitability (Haber 2004, p.146). However, the effect has not prevented the firm from making a profit. Furthermore, the firm has not been able to recover its interests. Comparing these efficiency ratios with those of the industry, the company has not been performing well. The ratios are far much below those of the industry indicating that the firm has not been efficient enough in its management as compared with its competitors.
Generally, the trends in the profitability ratios show steady growth in the company profitability for the last five years. There was an increase in the profit ratios by more than 1%. Similar trends are also depicted with other profitability ratios such as returns on assets, return on equity and the return on capital employed. However, the efficiency ratios have been declining though with a smaller percentage. Despite the fact that there has been a decline in the growth of efficiency ratios, the firm is still viable for investments. The growth in profits and returns on investment indicates that the firm has a future prospective (Madura 2006, p.581).
Liquidity ratios
The liquidity-ratios measure the company’s ability to meet its short-term debt obligations (Lee et al, 2009). The liquidity of the firm also shows the ability to meet its operative activities which are essential for growth and development. The ratios that have been used to measure the firm’s liquidity include the current ratio and the quick ratio. The company’s capability of meeting its short-term obligation is measured by balancing the company’s most liquid assets to the immediate liabilities (Stickney et al. 2009, p.159). The highly liquid assets are those assets that can readily be converted to cash.
Generally, greater liquid-asset coverage to current obligations ratio is better for the firm. The greater ratio indicates that the company can easily pay for the due debt within the shortest time period and can still meet the ongoing operations (Covello & Hazelgren 2006, p.214). On the contrary, a lower coverage ratio shows that the company is incapable of meeting its short-term needs and at the same has complications in managing its operations (Albrecht et al 2010, p.681).
The liquidity ratios of the firm show a decreasing trend in the last four years. This is not encouraging. It shows that the firm has been having difficulties in meeting its short-term debts (Needles & Powers 2008, p.79). However, the decrease in the firm’s liquidity has not affected the firm. The firm is still capable of paying its creditors such as the suppliers. Compared with the industry liquidity, the firm is better placed. The ratios indicate that the firm’s liquidity is higher than that of the industry. Therefore, the firm is still capable of meeting its short-term obligations as compared with other firms in the industry.
Conclusion and recommendation
The trends in the profitability ratios indicate that the firm has been improving its returns on investments. Nevertheless, other ratios such as liquidity and efficiency ratios declining trends indicate the firm’s poor performance in these areas. Therefore, it is essential for the firm to have long-term strategies on how to generate revenues in order to survive. Long-term profits are not only essential for the firm’s survivability but also for the benefit of the shareholders who in most cases get the shares in form of dividends. Moreover, the firm’s management should also find ways in which they could increase their efficiency in the management of the firm’s resources.
References
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Domino’s Pizza Enterprises, Annual report 2011, Web.
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