Which Pizza Chain is the Ideal Choice for Investors? Part 1
Yasir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Domino’s Pizza (NYSE: DPZ) is one of the biggest pizza delivery companies in the United Stated of America. The pizza chain is popular worldwide and has over nine thousand franchises all over the world. The company is headquartered in Michigan but has received popularity worldwide and it became a public limited company in late 2004. It has branches in all the major cities of the world including London, New York and Kuala Lumpur. The corporation was founded in 1960s and is now the second largest Pizza chain in the U.S. Originally, the company was known as Dominick’s until it was purchased by Tom Monaghan who was the sole owner of Domino’s. He saw some rapid growth in the company and after 38 years of success, Tom Monaghan sold over a 90 percent share to Bain Capital Inc. The company stayed as a private limited company; however, after 6 more years, the shares were issued in the New York Stock Exchange under the symbol of DPZ. Since then, the company has been a hot attraction for investors.
Papa John’s Pizza (NASDAQ: PZZA) is another famous pizza delivery corporation in the U.S and is one of the largest pizza chains in the world. It is headquartered in Louisville, Kentucky. Papa John’s has also been growing internationally with over 500 franchises in more than 30 countries. Thin crust pizza has been the company’s specialty since its start. The company is a public limited company with thirty percent of its shares with John Schnatter, the founder of the company.
Fast food companies have been a major attraction for investors during the years as they see greater potential returns. Restaurants such as McDonald's have received a lot of positive reviews in terms of performance and now the investors are looking to invest in other food companies like Papa John’s and Domino’s.
Ratio analysis and decision making
Calculating ratios and comparing these ratios with similar companies is vital when finding out the performance of a company. There are several categories of accounting ratios and each ratio needs to be calculated to get accurate results in decision making.
Profitability ratios
These ratios tell us the profitability of a business and the rate at which the business is making its profits. A higher rate would obviously mean better profitability.
Gross profit margin: This shows the business’s control over its production costs or whether or not if the business is able to maintain a constant margin each year. The percentage rate is calculated as:
Gross profit/revenue
Domino’s gross profit margin for the year:
438,589 / 1,570,894 = 27.9 %
Papa John’s gross profit margin for the year:
633,237 / 1, 126,397 = 56.21%
Papa John’s is better off with a higher gross profit margin in its sales revenue. This means that the company is well off and is able to cover its costs in a more efficient way.
Operating profit margin: This basically tells us about how the business covers its additional overhead costs. When the gross profit margin is held constant, it tells us the rate at which the business is able to manage its net income margin with respect to revenue. The rate is calculated as: operating profit/revenue
Domino’s operating profit margin:
227,702 / 1,570,894 = 14.4 %
Papa John’s operating profit margin:
86,744 / 1,126,397 = 7.7%
This shows that domino’s is getting a decent operating profit rate of 14.4% as compared to the 7.7 % of papa johns. This shows that domino’s is more efficient in managing its overhead costs while the gross profit margin is held constant. The company is well off with a good operating margin before interest and taxes.
Return on capital employed: this is one of the most used ratios. This basically tells us the return that the business is able to generate by its transactions throughout the financial year with the use of the existing resources (or assets). The higher the rate, the higher the return on the assets. This is calculated as net income before tax, interest and dividend / total assets x 100.
Domino’s ROCE rate is: 227,702 / 460,837 = 48.4%
Papa John’s ROCE rate is: 86,744 / 415,941 = 20.8%
The result shows that Domino’s has been more efficient in generating a great return on its existing assets. This means that the assets have been utilized efficiently and are almost giving the company a half return on the value of the assets. However, Papa John’s ROCE is not that efficient compared to the rival company.
Liquidity ratios
Liquidity ratios are one of the most used ratios as they show the liquidity of a business. This basically means the position of the business in terms of short-term cash requirements. A higher liquidity ratio is preferable as is it means that the business has a greater number of assets to pay off its short term liabilities.
Current ratio: this is a very simple ratio which calculates the short term assets that the business has in order to pay off its long term liabilities. Generally, a ratio of less than 1 means that the business doesn’t have enough current assets to pay of the current liabilities and this usually causes problems for the business. It is calculated as current assets/ current liabilities.
Domino’s: 305,038 / 186,126 = 1.63
Papa John’s: 112,372 / 90,687 = 1.23
Both the companies have a greater number of current assets to pay off their current liabilities within the financial year, however, Papa John’s is still well off. A lot of people think that a higher ratio means that the business has a lot of cash after paying the liabilities and hence, they are better off. However, this is not the case as the business which has a ratio which is slightly higher than 1 is better as the business doesn’t have any useless current assets. A very high ratio means that the business can put the remaining cash into good use and the remaining current assets are idle. Therefore, a ratio between 1 and 1.5 is preferred by companies.
Quick ratio: This is actually a better way of finding out the liquidity of a business. The thing is that current ratio takes into account stock as well. Stock or inventory cannot be turned into cash quickly and is the least liquid current asset. This ratio removes the stock from the equation and then calculates the ratio and this is a better way to determine if a business is able to pay off its current liabilities. It is calculated as current assets – stock/ current liabilities.
Domino’s: 305038- 26,998 / 186126 = 1.49
Papa John’s: 112372 - 17,402 / 90687 = 1.04
The result shows that Papa John’s is still the better company in terms of liquidity. However, the ratio is less than 1.5 for Domino’s and it is still decent in terms of liquidity.
For Investment ratios and conclusion, please read the 2nd part of the series:
yasirrfc has no positions in the stocks mentioned above. The Motley Fool owns shares of Papa John’s International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
