Key Ratio Analysis

Profitability Ratios

In most cases, a negative return on equity could be a red flag but in the case of McDonalds from 2014-present, it’s due to the company performing stock repurchases, leaving equity in the negatives. A negative ROE would typically depict a company’s equity inefficiency in generating returns but as made evident by McDonalds’ ROA, RNOA, and other profitability ratios, the company is clearly profitable and efficient. Similarly, Domino’s negative return on equity is not indicative of the company’s equity inefficiency in generating returns as it’s clear that the company is profitable with an ROA outperforming McDonalds indicating that Dominos’ assets are more efficient in creating returns than McDonalds.

McDonalds and Dominos both have high Gross Profit Margins (GPM), averaging 60% and 35% respectively, over 10 years. While it’s considered high, the standard benchmark assumptions do not apply to either company due to the nature of their business. Both companies make money from leveraging fast food to franchisees who lease properties owned by McDonalds and Dominos causing GPM to appear quite high relative to other industries, even typical restaurants.

McDonalds and Dominos reported an average operating margin of 17% and 20%, in line with data put forward by NYU Stern reporting that the average pre-tax operating margin for restaurants is 15.80%. The values reported by both fast-food companies suggests that they outperform the industry regularly and are creating more profits from operations to pay off variable and fixed expenses. The high margin relative to the industry average is indicative of an efficient management in generating profits from operations - great sign for investors to pick up on.

Efficiency Ratios

McDonalds and Dominos have around the same A/R Turnover averaging 12.55 and 17.70 over the past decade indicating that the companies are acting on par with one another in the respect of converting credit to cash. Moreover, McDonalds and Dominos have close Days Sales Outstanding (DSO), averaging 31.31 and 20.64 respectively. Both companies have low DSO values indicating that they are collecting credit quickly and putting that money towards their business. These are both important metrics of the Cash Conversion Cycle which help gauge the efficiency of sales on credit used within the companies.

McDonalds has a much greater inventory turnover relative to Dominos but that can be attributed to the difference in sales volumes between the companies. Generally, McDonalds performs more sales in a day than Dominos but both companies have high turnovers which is consistent with both companies being in the fast-food/restaurant industry. In the fast-food/restaurant industry, it’s typical and expected to see smaller amounts of inventory relative to total assets due to the perishable nature of food. Dominos and McDonalds had an average inventory turnover of 42.23 and 150.68, respectively.

Dominos has an increasing Average Inventory Days Outstanding (AIDO) ratio indicating that the period between inventory needing to be replaced is increasing – this is not a good sign and can suggest that the company is losing demand or that the company is overproducing. McDonalds, however, has a consistent AIDO around ~ 2 Days indicating that the McDonalds’ products continue to be in high demand and they are not overproducing.

APT & DSO - looking for industry average 10y