debt to equity ratios by industry

Dine Equity Performance

Dine Equity performance:

Introduction:

The International House of Pancakes opened in 1958 in the state of California. Offering family friendly dinning services; However IHOP corporation franchiser of restaurants was first established in 1976 in the state of Delaware. In November 2007 IHOP merged with Applebee’s and in June 2008 formed Dine Equity Inc. for a total of 3,400 franchised and owned Applebee’s and IHOP restaurants as of December 2008.

According to their 2008 annual report there are currently 2,004 Applebee’s one of the largest casual dining restaurants in terms of number of restaurants and market shares. There are currently 1,396 IHOP restaurants in competition with restaurants like Denny’s offering children menus and discounts for senior citizens serving low to moderate prices.

Dine Equity Mission and core value is to become the number one franchiser in the restaurant industry while providing and exceptional customer service by committing to reducing overheads and optimizing on Applebee’s and IHOP business.

According to their last annual report their 1st quarter stock showed the highest closing price for 2008 and the 4th quarter stock showed the lowest closing price of 2008 compared to 2007 fiscal year highest closing price shown in the 3rd quarter and lowest closing price for 2007 shown in the 1st quarter. Also according to their 2008 annual report there are 5,300 registered holders as of February 17, 2009.

Company Performance:

In analyzing this company we will use 4 measurements of performance including profitability, Liquidity, Financial leverage and activity ratios.

1. Profitability:

In analyzing this company’s profitability we will look at the company’s return on assets (ROA), return on equity (ROE), Gross profit margin, price earning ratio (PE), divided yield and divided payout ratio.

a. Gross profit margin:

The gross profit margin is a ratio that indicates the profitability of a company, it is calculated by dividing gross profit by total sales, it is stated as follows:

Gross profit margin = sales – cost of sales/ sales

Using the 2008 report we determine the gross profit margin for the year, 2008, 2007 and 2006, the following table summarizes the results:

gross profit margin

2008

2007

2006

sales

1613628

484559

349560

cost of sales

1179811

303891

208465

gross profit

433817

180668

141095

gross profit margin

0.268845731

0.37285

0.403636

The gross profit margin has declined from a high of 0.403636 in 2006 to 0.26885 in 2008, this indicates that the profitability of the company is declining over the years, this shows that in the next period the gross profit margin may decline.

b. Return on assets:

Return on assets indicates the amount of profit generated for each dollar of assets. It is calculated by dividing net income by total assets:

Return on assets = net income / total assets

The following table summarizes the results:

return on assets

2008

2007

2006

total income

-154459

-480

44553

assets

3361217

3831162

768870

return on assets

-0.045953296

-0.00013

0.057946

From the above table it is evident that the return on assets has been declining over the years, the value is negative for the year 2007 and 2008 meaning that the firm’s profitability has declined and therefore expected to decline in the future.

c. Return on equity:

The return on equity ratio indicates the rate of return on shareholders equity. It is calculated by dividing net income by the value of share holder’s equity.

Return on equity= net income / equity

The table below summarizes the results:

return on equity

2008

2007

2006

total income

-154459

-480

44553

equity

42767

209373

289213

return on equity

-3.611639816

-0.00229

0.154049

From the above table it is evident that the return on equity has been declining over the years, the value is negative for the year 2007 and 2008 meaning that the returns on shareholders equity has declined and is expected to decline in future.

d. Price earning ratio:

This is another ratio that indicates the profitability of a company, it is a ratio that indicates the price paid by shareholders relative to profits, and it is calculated by dividing the price per share by earning per share.

Price earning ratio= price per share/ earnings per share

The table below summarizes the results:

price earning ratio

2008

2007

2006

price per share

34.74

104.76

146.9

earnings per share

-10.09

-0.13

2.46

price earning ratio

-3.443012884

-805.846

59.71545

It is evident that the price earning ratio was relatively high in 2006 given that investors were paying 56.71 dollars for a dollar earned, however in 2007 and 2008 it is evident that this ratio value is negative meaning that investors are experiencing losses, the share price has also declined over the years meaning that there has been a decline in investors confidence.

e. Divided yield:

The divided yield ratio indicates how the company pays out its dividends in a year relative to the price of its shares, it is calculated as follows:

Divided yield = divided per share/ share price

The following table summarizes the results:

Divided yield

2008

2007

2006

divided per share

1

1

1

share price

34.74

104.76

146.9

Divided yield

0.028785262

0.009546

0.006807

From the above table it is evident that the divided yield ratio is relatively low for the three years. However there has been a slight increase in the ratio as the price of shares decline.

f. Divided payout ratio:

The divided payout ratio indicates how the company pays out its dividends in a year relative to earning, it is calculated as follows:

Divided payout ratio= dividend per share/ net income

The table below summarizes the results:

dividend payout ratio

2008

2007

2006

dividends

1

1

1

net income

-154459

-480

44553

dividend payout ratio

-6.47421E-06

-0.00208

2.24E-05

From the above table is evident that the dividend payout ratio has been relatively small over the past three years and has been declining, this indicates that

2. Liquidity ratios:

These are ratios that help in the determination of a firm’s ability to pay its short term debts, these ratios are used by those who extend financial credit to the firm to determine the creditworthiness of a firm, these ratios include

a. Current ratio

Creditors prefer a high current ratio while share holders prefer a lower current ratio. This ratio indicates the company’s position to repay it short term debts and is determined as follows

Current ratio = current assets/ current liabilities

current ratio

2008

2007

2006

current assets

399129

433678

78393

current liabilities

282714

381340

64105

current ratio

1.411776566

1.137248

1.222884

The current ratio has increased and this means that the company is able to repay its short term debts.

b. Quick ratio:

The quick ratio is used when there is a large value of inventory that may not be liquidated easily.

Current ratio = current assets-inventory/ current liabilities

2008

2007

2006

quick ratio

current assets

399129

433678

78393

inventory

22820

73627

396

current liabilities

282714

381340

64105

1.33105895

0.944173

1.216707

3. Financial leverage ratios:

These ratios determine the extent which a firm is using its long term debts,

a. Debt ratio:

The debt ratio indicates the amount of assets that are financed by debts, it is calculated by dividing the total debts by total assets, and the table below summarizes the results:

Debt ratio = total debts/ total assets

debt ratio

2008

2007

2006

total debts

3318450

3434739

479657

total assets

3361217

3831162

768870

debt ratio

0.987276335

0.896527

0.623847

From the above table the debt ratio has increased meaning that the company is utilizing its long term debts to acquire assets.

b. Debt to equity ratio:

This ratio indicates the level of debts and equity used in financing the company’s operations, the ratio is calculated by dividing the total debts by equity, results are summarized below

debt equity ratio

2008

2007

2006

total debt

3318450

3434739

479657

total equity

42767

209373

289213

77.59370543

16.40488

1.65849

From the above table it is evident that the debt equity ratio has increased meaning that there has been an increase in debt financing relative to equity financing.

4. Activity ratios:

a. Asset turnover:

These ratios include the asset turnover ratio which indicates how a company is using its assets to generate sales, the ratio increased in 2008 to 0.48 from a low of 0.1264 in 2007.

Asset turnover =- total sales/ total assets

The table below summarizes the results:

Asset turnover

2008

2007

2006

sales

1613628

484559

349560

assets

3361217

3831162

768870

Asset turnover

0.480072545

0.126478

0.454641

Forecast of the company:

The company’s profitability has declined in the past three years, sales have increased but the profits have declined, it is expected that the level of profitability of the company will decline in future, the decline in profitability has been as a result of increased expenses including an increase in restaurant expenses from 117,448 in 2007 to 978,197 in 2008, other expenses that increased include interest expenses from 28,658 in 2007 to 203,141 in 2008, also administration expenses have also increased and this has resulted into a decline in profits, it is expected that in future the level of profits will decline.

Share holder equity is also expected to decline as dividends and return on equity decline, this means that in future we expect less equity financing and an increase in debt financing, the increase in debt financing will mean that the company will pay higher interest expenses resulting into a further reduction in profits.

Summary:

From the above analysis it is evident that the company has been performing poorly in the last three years, there has been an increase in expenses that have resulted to losses, this has reduced investor confidence whereby equity financing has declined and share prices have also declined. This decline in equity financing has resulted into increased debt financing and the company is now experiencing an increase in interest expenses which have in turn reduced profits.

The company should try and reduce its interest expenses by reducing its debt financing, this can be achieved through boosting investor confidence, with the current decline in share prices it is evident that in future the share prices will increase as the company starts to gain profits and therefore this would be a good investment option, over time the company will repay its debts and this will increase its profitability given that the sales levels have increased over the past three years and therefore expected to increase in future.

References:

Dine Equity Inc. (2009) Dine Equity financial report 2008, retrieved on 17th November, from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTA4OXxDaGlsZElEPS0xfFR5cGU9Mw==&t=1

Stickney, C. and Schipper, K. (2006) Financial Accounting: An Introduction to Concepts, Methods and Uses, New Jersey: Prentice hall press.

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