Which Pizza Chain is the Ideal Choice for Investors? Part 2
Yasir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Previously, I discussed the profitability and liquidity ratios for the two companies. I will now discuss invesment ratios. The previous mentioned ratios give the public a general idea of how well the company is performing. It tells the basic rates and ratios of the basic business operations meaning that it tells us the overall information regarding the profits, revenues, expenses, cost of sales, assets, liquidity and capital employed. However, these ratios are only calculated for the sole purpose of giving out the valuable information to the future potential investors of the company. It gives the investors a deeper performance of the company. The results show how well the company is able to make its shareholders happy by evaluating the different ways in which the shareholders get their return. An investor will look at all these ratios before taking a further step in investing into the company. These ratios also give information about the market price of the shares and how well it operated in the stock exchange market.
One of these ratios is the gearing ratio and it basically measures the gearing or the leverage of the company. It shows the number of assets that are generated from borrowing. It shows the proportion of the assets that are liabilities. Different investors use different ways in evaluating the gearing ratios. Some investors prefer a lower gearing ratio. This is because the company has fewer liabilities and the business will need to pay a relatively lower interest on the borrowings. Interest is not an optional payment and has to be paid in any given case unlike dividends which are given to the shareholders. A lower interest payment would mean less deduction from the year’s profit meaning that there are going to be higher earnings for the shareholders. This is one of the attractions for the potential investors. However, gearing also measures the risk and measures how strong the business is. If the business has been giving good dividends and has a good history, then a higher gearing would not be a problem to some of the investors as it shows how strong the business is by paying constant interest and generating higher returns for its shareholders.
Domino’s (NYSE: DPZ): 1,485,362/ 460,837 x 100= 322%
Papa John’s (NASDAQ: PZZA): 117713/ 415,941 x 100=28.3%
The results show that domino’s has a very high gearing ratio and therefore has a lot of long-term debt. Papa john’s has a very low gearing of only 28.3% which means that there aren’t any major long-term liabilities of the company and it is relatively safe for investors. Not all investors will go for Papa John’s. Some of these will look for the return in Domino’s and if the company is strong enough, Domino’s will be a first preference.
Interest cover is another popular investment ratio and it measures how well a business can cover its interest. The higher the rate, the higher will be the profit that will be available to shareholders. It is measured as operating profit before interest/ total interest charge for the year.
227,702/ 96,810 = 2.35 times
65,486/ 7,536= 8.68 times
The ratios show that Papa John’s is able to cover its interest expense over 8 times with its current operating profit while Domino’s is only able to cover it 2.35 times. Therefore, there are likely to be higher returns every year for Papa John’s as the profit available before interest is enough to cover the interest plus any additional financial costs.
Earnings per share ratio is the most common ratio which is used by investors. This is actually calculated by the company on its own as there are requirements which demand the ratio to be calculated and shown in public. It is mandatory to calculate this ratio in the London stock exchange and in the New York stock exchange. It basically calculates the per share earnings in the financial period. However, it is only useful to the ordinary shareholders as they don’t have a fixed rate of return. It is calculated as
Total profit available for distribution/ total number of issued ordinary shares.
Domino’s Pizza: earnings per share for Domino’s Inc. is $1.50 as given in the annual report for the current year
Papa John’s Pizza: earnings per share for Papa John’s is $1.97 as given in the annual report for the current year
The results show that the shareholders are getting a higher return on their shares and there is a difference of $0.47 per share. This is one of the major attractions of Papa John’s and several shareholders are likely to invest in the company as it is generating almost the double value of the number of shares issued.
A price earnings ratio or a P/E ratio determines the ratio of the price of the share with respect to the earnings generated per share. It is useful when comparing businesses in the same industry. A high P/E ratio means that there are higher chances of greater future returns for the shareholders. A low ratio means that there is less potential growth in the future on earnings. It is calculated as market price of share/earnings per share.
Domino’s: 32.37/1.5= 21.58
Papa John’s: 36.5/1.97=18.5
This shows that domino’s has a greater future potential in giving out returns to the shareholders. However, the difference is not massive and both the companies have a decent P/E ratio.
The dividend yield ratio is another popular ratio amongst investors. It is basically a payout ratio and it measures the ability of the business to maintain its dividend payments. It shows the proportion of dividends from the entire earnings per year. It is calculated as dividends/ net income.
Domino’s: the company’s dividend yield is 0% as the company has not been able to generate any dividends over the past couple of years. This is because of a negative retained earnings or retained deficit. The business needs to remove the retained loss in order to start paying a dividend.
Papa John’s: the dividend for Papa John’s is 0% as well. The company does have a decent value of retained earnings; however, not all companies can pay the dividend every year. The company might be looking for a lump sum amount to reinvest in the company in order for future growth or to fund other projects. When the company doesn’t have any important reasons to keep its earnings, then the dividends are paid to the shareholders.
All good companies and corporations have bad times and good times. Not every company can satisfy its shareholders every year. Looking at the results, Papa John’s will be the better company to invest in. One of the reasons is that the interest cover and the earnings per share ratios are higher than domino’s. Another positive point is the liquidity of the company which is pretty decent. The gross profit margin is also in favor for Papa John’s. However, both the companies have not been able to pay dividends for a couple of years. This might be a plus point for Papa John’s as this might mean investing in future projects and growth which is likely to increase future dividends and earning. Also, the riskiness of the company is less than domino’s as the gearing rate is comparatively lower. Domino’s will be a poor investment option as the company has not been able to benefit the shareholders. This is because of the massive retained losses of the company. Also, the gearing is high which means that a very high amount of interest is charged from the earnings every year. In order to improve the company, the current CEO and managers of the company need to design and put forward a capital reconstruction scheme in order to eliminate all the losses. After the losses, the business might be able to pay out the dividends.
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.