Dominos’ Pizza Group PLC

Introduction

The company under review is Domino’s Pizza Group PLC. The financial years analyzed in this report are 2015 and 2014. The last financial year ended on 27^th December 2015 with the reports released in March 2016. The auditors for the company are Ernst & Young LLP. Domino’s Pizza main business is the supply of Pizza. The company has a set of products that operates as one brand delivered by franchisee partners carefully chosen by the company (Domino’s Pizza, 2017). The business operates through a positive relationship with all their partners who include the supply chain and franchises. The chairman of Domino’s Pizza is Stephen Hemsley, and the chief executive officer (CEO) is David Wild. The other executive directors are Collin Halpern who is the vice chairman, Steve Barber, Kevin Higgins, Ebbe Jacobsen, and Hellen Keays. As at 27^th December 2015, the company had 168,201,532 shares which traded at £111.25. Therefore the market capitalization of Domino’s as at 27^th December 2015 was £18,712,420,435.

Financial Details and Ratios

See Appendix

Financial Analysis

Profitability Ratio

The profitability ratios calculated are the gross profit margin and the net profit margin. Domino’s pizza had a growth in the gross profit margin for the financial year ended 2015. In 2014, the ratio was 37.6% which increased to 39.0% in 2015. The increase in the GP margin is an indication of the efficiency in managing their cost of production. Similarly, the net profit margin increased in 2015. The firm had a net profit margin of 14.8% in 2014, which increased to 15.7% in 2015.

The increase in profitability ratios shows how well Domino’s Pizza was able to achieve its profitability from their activities. The overall performance at Domino’s is favorable. It shows that the business was able to control its costs. The increase in the gross and net profit margins is attributable to the decrease in the cost of production. The financial year 2015 witnessed a decrease in commodity prices, fuel costs especially after the collapse in oil globally. There was also a decline in wheat prices as well as a low cheese price. The company further invested in a digital application that helped boost their sales. The mobile app gained popularity among the customers and therefore contributed to the increase in the profit margins in 2015 as compared to 2014. The increase in profitability due technology concurs with the assertions of Mithas et al., (2012, p.15) who concludes that information technology has a positive impact on the profitability of firms.

The return on capital employed (ROCE) for the year 2015 was 0.64 which shows a decreased from 0.72 in 2014. The ratio shows that in 2015 the company was able to generate £0.64for every dollar of the employed capital. The ratio is favorable because it shows that more profits are generated by each capital employed. It indicates that the company efficiently uses its capital employed to generate profits.

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Activity Ratios

The efficiency ratios calculated are the accounts receivable or debtor’s turnover and the inventory or stocks turnover.  Domino’s accounts receivables turnover changed from 8.3 in 2014 to 11.02 in 2015. The rise in the ratio in 2015, shows that the business was able to expand their collection of the debtor’s accounts in the year.  It indicates that the corporation is constantly improving its recoveries from creditors each time. In 2015, the ratio of 11.02 may be due to the concern shortening its credit policy and observing to it strictly. The increase in the debtor’s turnover may also be attributable to the high quality of customer services in all the stores. The high customer service leads to customer satisfaction and therefore, a timely payment to the company.

The inventory turnover experienced a slight decrease in 2015 when compared to 2014. In 2014, the firm’s inventory turnover was 39.7 while in 2015, it decreased to 35.01. According to Gaur et al., (2005, p.181), inventory turnover show the number of times a firm can sell its average stock in a period. Therefore, Domino’s decreased its efficiency in converting its stocks into actual sells in the financial period 2015 as compared to 2014. The decrease may be attributable to excess stocking inventory in the firm due to an overestimation of customer demand in the year.

The asset turnover ratio for Domino’s dropped in 2015 to 1.71 as compared to 1.74 in 2014. Despite the slight drop in the asset turnover, the company efficiently uses its assets to generate revenue. The company generated 1.71 in revenue for every amount invested in assets an indication that the firm uses its assets efficiently.

Liquidity Ratio

From the analysis, the liquidity ratio of Domino’s is not favorable. Though there is an increase in the current ratio in 2015, it is still below the industry acceptable. The firm had a current ratio of 0.95 in 2014, which slightly increased in 2015 to 1.26. The increase in 2015 is because of an increase in the level of stocks held in the business from 4826 in 2014 to 6208 in 2015 (Domino’s Pizza, 2017. The decrease in the short term liabilities also contributed to the increase of the current ratio. The low liquidity ratio is a signal that Domino’s has a grave problem since their ratio drops below the acceptable industry level of 2:1. According to Costea and Hostiuc (2009, p.252), the analysis of the current ratio shows a firm’s ability to repay their current debts from proceeds of the current assets. The establishment has 1.26 current assets for every current liability in their custody. The executives of Domino’s should find means of increasing their current assets and reducing the current liabilities so that they mitigate the risk of failing to pay their obligations when they fall due.

Similarly, the quick ratio increased in 2015 when compared to 2014. In 2014, the company had a quick ratio of 0.89, which increased to 1.17 in 2015. The ratio in 2015 is above the industry accepted of 1:1, which shows that the enterprise does not depend on the stocks in the business to repay its debts. The management at Domino’s should endeavor to sustain their quick ratio at above one which is an indication of a sound management of their working capital. Just as Juan García‐Teruel and Martínez‐Solano (2007, p.166) asserts, the management of Domino’s should have a trade-off between the risks and profitability in deciding the optimal levels of currents assets and current liabilities to be held in the business.

Financial Structure

The ratios calculated in the financial structure are the debt ratio and the debt to equity ratio. From the breakdown, there was a slight decrease in the debt ratio of Domino’s in 2015 as compared to2014. In 2015, the firm had a debt ratio of 0.47 which is a decrease from 0.56 in 2014. A lower ratio indicates a favorable performance by the company. It shows that the firm is more stable with a high potential longevity because it has an overall lower debt. A debt ratio that is lower than 0.5 is favorable for companies. Therefore, Dominos has two times as more assets than its liabilities which is less risky for the business and concurs with Michalski (2008, P.13) who claims that the debt ratio indicates the level of risks that creditors may face by doing business with Dominos.

Contrary to the debt ratio the debt-equity ratio of Domino’s shows that the creditors and investors have an equal stake in the assets of the company. In 2015, the debt equity ratio was 0.90 which is a slight decrease compared to 2014 which was 1.26. The ratio shows that Domino’s relies equally on creditors and investors to finance their assets. The ratio of 0.9 is risky for the business because it indicates that the investment made by investors in the firm is almost equal to that made by creditors.

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Investment Ratio

The ratios calculated for investment are the price-earnings ratio (P/E) and the dividend yield ratio. The P/E ratio for 2015 decreased a little when compared to2014. In 2015, the P/E was 3.12, and in 2014 it was 3.15. The slight drop will not affect the positive future performance of the company. It, therefore, proves that investors are willing to invest in the company and that the prospects of Domino’s are increased growth and higher performance.

The dividend yield at Domino’s pizza was constant in the two years under analysis. The dividend yield stood at 0.19 for the two years. It shows that for every dollar invested,  the expected return an investor should get is 0.19 in dividends.

Cash flow ratios

The cash flow ratios analyzed are the cash flow margins and the cash return on assets. The company had a small increase in the cash flow margins in 2015 as compared to 2014. The cash flow margins were 0.24 in 2014 which increased to 0.25 in 2015. The slight increase is because of the increase in the net sales for the company from 288,691,000 in 2014 to 316,788,000 in 2015.  Another factor that increased the margin is the increase in the cash from operating activities experienced in 2015.

The cash return on assets also increased in 2015 when compared to 2014.in 2015, the cash return on assets was 0.43 which is an increase from 0.41 in 2014. The increase is attributable to the increase in the cash from operating activities in 2015 and the increase in the total assets of the company in the year.

Overall performance

Domino’s Pizza financial performance for 2015 was a significant improvement from 2014. Despite the volatile business environment, the company was able to increase its income and profitability in the year. The e-commerce platform propelled the revenue of the firm to greater heights. The company had a strategic joint venture in Germany that is expected to increase revenue and profitability in 2016 financial year. Notwithstanding the economic challenges that faced companies around the world, Domino’s increased their operating income in the year up from £ 62,331,000 in 2014 to £73,181,000 in 2015(Domino’s Pizza, 2017). In conclusion, the financial performance at Domino’s Pizza is sound.  Investors are more probable to invest their money in the firm because its performance is favorable. Though its ratios are good, the company should foster ways of making sure that they do not depend so much on debts so as to maintain their liquidity position and avoid a further drop in the ratios.

Possible Improvement on Financial Reporting

The effective functioning of a company is underpinned on timely and meaningful information. A company’s management uses the financial and non-financial information to direct and manage the activities of the firm, while external users use them to make both financial and investment decisions while exercising the regulatory oversight for the company. However, not always will the information made available to users be of importance. It, therefore, calls for an improvement in such areas so that the information is more meaningful to users. There are some areas that need improvement in the financial reports of Domino’s Pizza so that they can be more meaningful to the users.

One of the areas that the firm should improve is on the key performance indicators as shown on the financial reports on page 16 and 17. The company should indicate the total revenue received before breaking down into individual segments. A user of the report will quickly get to see the overall performance for the year of the company in comparison with other years. It will also reduce the bulkiness of the report since it is clearly showing its overall performance which is the interest of most investors.

Another aspect that needs improvement is in the notes on financial reporting in page 78 that addresses the basis of preparation of the financial statements. The company used the notes to echo some of the requirements of the Accounting Standards concerning financial reporting. However, it does not indicate to the user the relationship between the requirements and the organization. It goes to show that the company is including the disclosures in the financial statement as conformity to the IFRS requirements only. The company should instead make a statement on the bases it uses and gives a reason as to why they think that is the best base to use. It also further showed the extent of its adoption to the new and revised standards. The company should include how its operations improved after the adoption of the revised standards.

The third aspect that the company can improve is the use of charts and graphs to show the compensation of executives of Domino’s Pizza. The use of graphs and charts will concisely and clearly give more information than when the firm uses text. The more recent release of standards of FASB requires a graphical representation of disclosures ((Ernst & Young, 2014, p.8). For the company to make the financial reports more useful to all users, the disclosure of the compensation of executives should be in a tabular form in addition to the explanations given on page 41 of the financial reports 2015.

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Appendix