Company Analysis Tim Hortons
Company Analysis Tim Hortons
Tim Hortons is one of North America’s largest developers and franchisors of quick service restaurants with 4,485 system-wide restaurants as of year-end 2013 (Annual Report 2013). Tim Hortons is among the largest publicly-traded restaurant chains in North America based on market capitalization, and the largest in Canada by a wide measure. In Canada, they command an approximate 42% share of the quick service restaurant traffic. Tim Hortons Inc. has iconic brand status in Canada and strong consumer awareness in the U.S. market (Annual Report 2013). According to Ready Ratios (2014), the most important financial ratios to assess a company’s financial picture are: 1. Debt to Equity Ratio= Total Liabilities / Shareholders Equity 2. Dividend Payout Ratio = Dividend per share / Total Net Earnings 3. Return on Equity= Net Income / Shareholder’s Equity
4. Net Profit Margin= Net Profit / Net Sales
The debt-to-equity ratio is a quantification of company’s financial leverage estimated by dividing the total liabilities by stockholders’ equity (Bruns 1992). This ratio indicates the proportion of equity and debt used by the company to finance its assets. It is really important to know about what the debt-to-income ratio number indicates. This number needs to be as low as possible. The less debt relative to the income indicates that a company is financially better off because there is extra money to apply towards future goals. Referring to Appendix B, Tim Hortons debt to equity ratio is at 0.34 and has been steady for the past six years. This shows that the corporation has available money on hand to apply toward their financial goals.
Dividend Payout Ratio
The dividend payout ratio is used to examine if a company’s earnings can support the current dividend payment amount. The statistic is calculated by taking the dividend and dividing it by the company’s total net earnings (Bruns 1992). Investors usually seek a consistent and/or improving dividends payout ratio. The dividend payout ratio should not be too high. Growing companies will typically retain more profits to fund growth and pay lower or no dividends. Companies that pay higher dividends may be in mature industries where there is little room for growth and paying higher dividends is the best use of profits.
Dividends are paid in cash; therefore, high dividend payout ratio can have implications for the cash management and liquidity of the company. According to Little, dividend payout ratios over 100% means that the company is paying out more to its shareholders than earnings received (2014). This is typically not a good recipe for the company’s financial health; it can be a sign that the dividend payment will be cut in the future. According to Appendix B, Tim Hortons dividend payout is at 38.52% and has been consistent over the previous five years. This shows that the corporation has been re-investing profits to meet their future financial goals.
Return on Equity (ROE)
The return on equity is the amount of net income returned as a percentage of shareholders equity (Bruns 1992). The return on equity estimates the profitability of a corporation by revealing the amount of profit generated by a company with the money invested by the shareholders. According to Kennon, a business that has a high return on equity is more likely to be one that is capable of generating cash internally (2014). The higher a company’s return on equity compared to its industry, the better. According to Appendix B, Tim Hortons ROE is currently at 32.46%.
The subsequent five years has shown similar percentages except for year 2010. The ROE was actually 53.29%. Looking at Appendix C, the ROE comparison between Tim Hortons and Dunkin Donuts shows that Dunkin Donuts has been making steady improvements during the past 5 years and as of year ending 2013 has surpassed Tim Hortons ROE. According to Wong, Dunkin Donuts is the second largest coffee chain after Starbucks with over 7000 outlets, far ahead of Tim Hortons and the company is preparing to expand to the western U.S. (28 August 2014).
Net Profit Margin
The net profit margin is a number which indicates the efficiency of a company at its cost control (Bruns 1992). The profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit. This ratio is a good way of making comparisons between companies in the same industry, because similar companies are often subject to similar business conditions. Tim Hortons net profit margin for year 2013 was at 13.04% and for the previous 5 years has been stable (Appendix B). A comparison between Tim Hortons and Dunkin Donuts (Appendix D), shows that Tim Hortons net profit margin for 2013 was approximately 7% lower than Dunkin Donuts. While Tim Hortons has had a steady profit margin, Dunkin Donuts has increased their profit margin by 14% over the last five years.
Reviewing the ratios that were presented indicate that Tim Hortons has been a stable profitable company. Their debt to equity ratio has been consistently low, dividend payout ratio has been steady at 38%, return on equity has been consistently between 30 and 50% and the net profit margin has been constant at 13% (appendix B). A review of appendix B shows that the ratios presented have been consistent; however, on August 27 2014 Burger King announced that a deal had been reached to buy the Canadian donut chain (Isidore & Sahadi, August 2014). Many have speculated that the main reason for the merger was to reduce the business taxes paid by the corporation. Looking into the future, the Burger King acquisition may hurt the financial stability of Tim Hortons in the U.S. markets due to loyalty. I think the merger between the two corporations will take a few years to solidify. Until then I would invest due to the constant stability of the company financials and re-evaluate after a year.