Data Analytics of Restaurant Industry

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Date: 25 April 2021

Financial Analysis of the Restaurant Industry

The analysis of the data regarding trends analysis and financial ratio analysis on the financial data gathered from the 10-K Annual filings dated from 2010 to 2015 have shown interesting aspects of the company’s financial positions. There are 52 firms included in the financial ratio and data analysis. The companies which have been in the limelight concerning their strong financial indicators include McDonalds Corporation

Discussion:

1-Which Three Firms Has the Greatest Earnings

The Return on Assets is calculated for the firms for the years 2010-2015. It is calculated as;

ROA= (Net Income)/ (Total Assets)

The Return on Assets of the company regarding the earnings of the company concerning its available resources of the 52 companies’ show that the highest return on Asset is reported for Denny’s Corp in 2014. However, Denny’s Corp Return on Assets has been negative in all four years 2010, 2011, 2012, 2013, and the highest negative in 2015. More stable and higher Return on Assets is found to be reported by Dominos Pizza Inc. Starbucks Corporation being the third and Chipotle Mexican Grill is the fourth highest return on Assets reporting company. A more stable Return on Assets is reported by McDonalds Corporation as well. It is to be noted that have used the average of the total assets for five years for the computation of the Return on Assets. The details of the Return on Assets on the 52 companies can be seen in the exhibit in Chart 2.

2-Earning Trends

As per the earnings trend analysis of the firms, the company McDonald’s Earnings can be witnessed as the highest compared to the other companies. Starbucks Corporation is the second highest earning company in the industry. The third highest net incomes are reported for the company Yum Brands while Sodexo is the fourth highest earning company. The data can be seen in the Chart 1 in the Appendix.

The earnings of the Darden Restaurants, Inc are also higher as compared to other industry participants of the restaurant industry. Chipotle Mexican Grill is just behind the Darden Restaurant regarding the annual earnings. Restaurants, Brands Int Inc is also considered in the highest earning category in the restaurant industry.

It is evident that the earnings of McDonalds Incorporation are way higher than that of the others. The three companies, McDonald’s, Starbucks Corporation and Yum Brands have a far higher net income as compared to the other industry competitors of the restaurant industry.

McDonalds, Starbucks and Yum Brands have the most stable earnings as compared to the other industry participants.

3-Effective Use of Financing Leverage

The analysis of the financial leverage of a firm yields’ information on the use of its financial sources for its sourcing of the assets. The financial leverage of the company is calculated by using the debt-to-equity ratio and the return on equity of the firm. The interest coverage is also computed to evaluate the financial capability of the company.

The computations are done through these formulas;

Debt to Equity= (Total Liabilities)/ (Total Equity)

Return on Equity= (Net Income)/Equity

Interest Coverage= (Net Income)/ (Interest Expense)

The chart 3 in the exhibit shows the Debt to Equity of all 52 companies in during the year 2016. The highest debt to equity is recorded for the company Jack in the Box Inc. Sonic Corporation has the second highest debt to equity ratio, whereas; Ignite Restaurant Inc has the third highest Debt to Equity Ratio. McDonald’s has a 4.43 Debt to Equity Ratio, whereas Yum Brands have higher at 7 times. The Domino’s Debt to Equity Ratio is negative showing the lower debt dependency.

The ROE of the firms is highest for the Nathans Famous Inc, and of second rank it is highest for Sonic Corporation. Third highest Return on equity is reported for Yum Brands Inc and fourth for Meritage Hospitality Group. Starbucks also has the return in the higher ranks regarding shareholders. The details can be seen in the Chart 4.

Another ratio has been computed as well for evaluating the financing capability of the companies. The highest interest coverage is reported for Restaurant Brands, Inc, secondly for the Yum Brands and in third place is the McDonalds Corporation. Domino’s, Mitchell’s & Butler Inc, and Sodexo have better interest coverage ratios as well. The details can be seen in the chart 5 in the exhibit.

4-Which Three Firms Seem Riskiest

The Current Cash Debt Coverage Ratio is computed by the formula;

Current Cash Debt Coverage Ratio=(Operating Cash Flow)/(Current Liabilities)

The current cash debt coverage ratio is used to evaluate and analyze the riskiness and the ability of the firm to pay short-term liabilities. The highest ratio is reported to the Danny’s Corporation. Sir Royalty, Keg Royalties, and Pizza Royalties have been the ones with dominating cash coverage ratio. McDonald’s has a stable coverage ratio of around 2 in the last five years. Yum brands coverage ratio is lower than 1. Chipotle Mexican, CEC Entertainment, and the one mentioned above have the coverage more than 1 showing the potential of the companies. The details can be found in Chart 6.

5-Recommendations for Investing

As per the analysis of the 52 firms in the restaurant industry following conclusion is deduced;

ROA	Domino’s Starbucks, Chipotle Mexican, McDonald’s
Earnings	McDonald’s, Starbucks, Domino’s, Yum Brands
Debt-to-Equity	McDonald’s, Yum Brands
ROE	Nathans, sonic, Starbucks
Interest Coverage	Yum Brands, Dominos, McDonald’s
Current Cash Debt Coverage Ratio	McDonald’s, Chipotle

This conclusion shows the best investment decision by the analysis can be McDonald’s or Yum Brands. Thus, it is recommended that the investment should be made in any of these companies.

Regards