In a previous section of the paper, Domino’s financial statements were analyzed. Specific financial ratios were calculated from its statements, thereby providing an adequate picture of the company’s financial stability and key financial indicators. In response, therefore, this paper seeks to identify risks within the daily operations of the company and methods that the company has adopted to mitigate this risks. Risks that are yet to be mitigated are also going to be discussed.
Risk Identification at Domino’s
From the initial financial ratio analysis of the company, risks are not openly clear to the potential investor. The current and quick ratios for the company provide the most initial financial analyses. The current ratio remains at a healthy value above 1.0 for the past three financial years, whereas quick ratio remains under the expected value of 1.0 (Financial Morning Star, 2018). This could be the first risk that the company experiences, where there is not enough asset values to cover the liabilities that the company incurs. The company appears to have obtained other methods to pay back its liabilities should the necessity arise. This is because the current ratio remains higher than 1.0, indicating that regardless of the status of its assets, the company still maintains enough money to offset its liabilities at any point during the sample period.
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Investing in the company also presents a challenge, as there is minimal information on any other financial ratios. In the case of Domino’s the potential investor may have to look through other sources of information to determine whether the company is worth investing in, as only the current and quick ratio are available for the ratio analysis of the company (Cautious Bull, 2011). Alternatively, the company provides its excellent track record in terms of revenues and rising share price as evidence of its strong financial performance over the past five years, thereby luring investors via this mechanism (Wohl, 2018; Guru Focus, 2018).
Impact of Recent Market Changes on Domino’s
A reduction in the current ratio levels indicates that the company could be experiencing an increase in its liabilities in comparison with its assets. This is true, as the company accrues debt to finance its global expansion, as well as franchising activities which could reflect on its financial statements. Although there is an ever-increasing market for fast foods across the world, especially with regards to pizza brands, the fast rate of expansion happening at Domino’s could explain why there is an equivalent increase in liabilities. In pursuit of higher profits, the company is engaging liability-based mechanisms to facilitate its expansion campaign, especially to developing economies. Additionally, there is a shrinkage being experienced in developed markets, as the market becomes more health aware. Increased health awareness in developed countries has led to the reduction in fast food consumption, and with it – a reduction in pizza sales, thereby reducing profit margins in these areas. By introducing healthy option pizzas, Domino’s is trying to regain its market share in the developed economies while engaging efforts to expand to developing markets.
Moreover, the company has been in a highly competitive industry with other players such as Papa John’s and Pizza Hut, which has required that Domino’s invest heavily in marketing and sitting space for its outlets, especially those within malls and other social spaces. As the company invests in these facilities, there is increasing expense in setting up new franchises for Domino’s compared to the traditional method. This could eat up into the revenues, thereby providing a ratio that indicates higher liabilities than assets. However, the healthy current ratios indicate that the company remains very capable of paying off its liabilities, despite their rising monetary value over the years.
In conclusion, the company has been gaining ground in the past three years, despite an increase in the value of its liabilities. This is because Domino’s Pizza still maintains higher cash fluidity from its sales and revenues, thereby compensating increasing liabilities cost with circulating money within the firm.
References
Accounting Verse. (2017). Financial Ratio Analysis . Retrieved from Accounting Verse: http://www.accountingverse.com/managerial-accounting/fs-analysis/financial-ratios.html
Blumberg, J. (2018). Domino's stock outperformed Apple and Amazon over 7 years—now it's the world's largest pizza chain . Retrieved from CNBC News: https://www.cnbc.com/2018/03/01/no-point-1-pizza-chain-dominos-outperformed-amazon-google-and-apple-stocks.html
Cautious Bull. (2011). How Domino’s Pizza Inc Will Deliver Big Profits to Investors . Retrieved from Cautious Bull: Stock Market & Economic Analysis: https://cautiousbull.wordpress.com/2011/01/11/dominos-pizza-inc/
Financial Morning Star. (2018). Domino's Pizza Inc DPZ . Retrieved from Financial Morning Star: http://financials.morningstar.com/ratios/r.html?t=DPZ
Guru Focus. (2018). Domino's Pizza Inc (NYSE:DPZ) WACC %:4% As of Today . Retrieved from Guru Focus: https://www.gurufocus.com/term/wacc/DPZ/WACC/Domino%2527s%2BPizza%2BInc
Macro Trends. (2018). Domino's Pizza Inc (DPZ) - 14 Year Stock Price History . Retrieved from Macro Trends: http://www.macrotrends.net/stocks/charts/DPZ/prices/dominos-pizza-stock-price-history
Wohl, J. (2018). DOMINO'S UNSEATS PIZZA HUT AS BIGGEST PIZZA CHAIN . Retrieved from AdAge: http://adage.com/article/cmo-strategy/domino-s-unseats-pizza-hut-biggest-pizza-chain/312463/
