# Ratio analysis of Domino’s Pizza

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# 1.        Ratio calculation of Domino’s Pizza

 Type of Ratio 2009 * Return on capital employed EBIT/ 20263 100 = 17.06056192 (Total asset-current liability) 118771 Assets turnover Revenue/ 239015 1 = 1.601333244 Total asset 149260 Gross profit margin Gross profit/ 20263 100 = 8.477710604 Revenue 239015 Net profit margin Net Profit/ 15353 100 = 6.423446227 Revenue 239015 Current ratio Current asset/ 47255 1 = 1.549903244 Current liability 30489 Stock turnover Inventory/ 3598 100 = 1.644784962 (Revenue-Profit before tax) 218752 Debtors turnover Revenue/ 239015 1 = 10.28109945 Trade & other receivable 23248 Gearing ratio Non-current liability/ 23866 100 = 25.14725252 Equity 94905 Interest cover EBIT/ 20263 1 = 13.0560567 Interest expense 1552 Dividend cover Basic earnings per share/ 22.6 1 = 1.004444444 Diluted per share 22.5 Earnings per share = 22.6

Figure 1 Ratio calculation of year 2009

 Type of Ratio 2008 * Return on capital employed EBIT/ 17018 100 = 15.28045901 (Total asset-current liability) 111371 Assets turnover Revenue/ 229587 = 1.615024234 Total asset 142157 Gross profit margin Gross profit/ 17018 100 = 7.4124406 Revenue 229587 Net profit margin Net Profit/ 11834 100 = 5.154473032 Revenue 229587 Current ratio Current asset/ 49904 1 = 1.620996557 Current liability 30786 Stock turnover Inventory/ 3525 100 = 1.658285074 (Revenue-Profit before tax) 212569 Debtors turnover Revenue/ 229587 1 = 9.284495309 Trade & other receivable 24728 Gearing ratio Non-current liability/ 32117 100 = 40.52413758 Equity 79254 Interest cover EBIT/ 17018 1 = 8.158197507 Interest expense 2086 Dividend cover Basic earnings per share/ 18.4 1 = 1.005464481 Diluted per share 18.3 Earnings per share = 18.4

Figure 1 Ratio calculation of year 2008

# 2.        Historical trends of some important ratios in graphs

Chart 1 Asset turnover ratios

Chart 2 Gross profit margin ratios

Chart 3 Net profit margin ratios

Chart 4 Current ratios

Chart 5 Debtors turnover ratios

Chart 6 Gearing ratios

# 3.        Report on Domino’s Pizza’s financial performance and position

## 3.1    Profitability

Profitability ratios are indicators that measure a company or an organization in term of the capability to generate profits during a certain period of time (Lopes 2010). For profit companies and organizations are set to bring profits to investors, this is a fundamental consensus in the global business environments. The profitability of a company could normally be reflected by several ratios. As in this case the gross profit margin of Domino’s Pizza from 2008’s 7.4% to 8.48% in 2009, this increase indicates that the company make a little more profit under the same quantity of sale. And the net profit margin also increased from 5.15% to 6.42%, we can see from the formula of the calculation of net profit margin that compared to gross profit margin the net profit margin focuses on the efficiency of making profit in the real cases. What’s more the ratios of return on capital employed, interest cover, dividend cover and earnings per share also in different perspectives measuring the profitability of the company.

## 3.2    Liquidity

The liquidity ratios calculate the company’s ability to pay off the short term liabilities with its current cashes and other cash equivalents that could be transferred into cash in short term (Ken 2009). There are several indicators to demonstrate the liquidity of a company, but we will talk about the current ratio only in this case.

The divided current assets by current liabilities are the current ratios. According to the calculation results from the annual reports, the current ratio of Domino’s Pizza in 2009 is 1.55 compared to 1.62 in 2008. These two digits are both excess 1 which means the company is capable of meeting the short term obligations. And the mile drop of current ratio in 2009 does not necessarily means that the company has less ability to pay the debt, but in contrast as soon as this ratio is still more than 1 then such drops could means positive thing because the company is using more borrowing money to created profit for the investors.

## 3.3    Long term solvency

Dislike the current ratio, the long the solvency is dealing with the long term debts. The gearing ratio that we are about to analyze is a financial leverage that shows the comparison between the owners’ fund and the creditors’ funds as the source of capital (Unknown 2010).

The gearing fell dramatically from 40.5% to 21.4% from 2008 to 2009. This one on one hand suggested that the company is clearing off a large sum of debs with the creditors, but one the other hand the drop may also indicate that the company’s preference of equity funding other than debt funding.

## 3.4    Efficiency

Efficiency ratios include asset turnover, stock turnover, debtor turnover and creditor turnover, such ratios are very important in calculating the efficiency of the company in many ways. For example, the debtor turnover analyzes the percentage between sale revenue and credit sale to show how efficient is the selling.  The other types of efficiency ratios perform similar tasks but focus on different areas (Reed 2010). Such ratios are useful when investors are comparing the efficiency of the company and its competitors in the industry because a leading performance in the efficiency ratios usually means better profitability of the company. As for the company, the debtor turnover rate had increased a bit from 2008 to 2009 but the asset turnover decreased while the other two indicators did not change obviously during the same period of time.

## 3.5    Overall evaluation of Domino’s Pizza using the financial ratios

From the discussion we have above, we can see that in 2008 to 2009, Domino’s Pizza’s overal financial permance is stable but still develped in a good way. Its profitability is improving toghether with its efficiency. And its solvency is the major part that the company had perform very well, we can see from the dramatical drop in the gearing ratio. What’s more the liquidity is performing in a normal situation.

# 4.        Limitations of ratio analysis

There are three two limitations of using ratio analysis in assessing the company’s performance.

Firstly, concentrating on the change of the financial ratios would not be enough to understand the financial performance of the company. For example, companies usually increase their revenues by increasing their investment. Then in some cases we cannot see a change in such cases gross profit ratios may not change obviously but the growth of the company needs to be observed.

Secondly, quantitative analysis like the ratios analysis cannot replace the qualitative analysis. For example, if the company choose to change their strategies to adapt to a change that the management expects happening in the near future, the financial ratios in the short term may suffered but the future may probably be very bright. So quantitative analysis and qualitative analysis are both needed in the actual cases.

# Reference

Ken, G. 2009, Amivest Liquidity Ratio, Accessed May8th 2010 [online]:http://www.financialwebring.org/gummystuff/liquidity-ratio.htm

Lopes R. 2010, Profitability Ratios. Accessed May8th 2010 [online]: http://cnx.org/content/m15556/latest/

Reed, J. 2010, What Is an Efficiency Ratio? Accessed May8th 2010 [online]: http://www.wisegeek.com/what-is-an-efficiency-ratio.htm

Unknown 2010, Gearing Ratio and Interest Cover Ratio, Accessed May8th 2010 [online]:http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/ipay-th.htm