Financial Data Analysis for Public Restaurants

Eat at My Restaurant The author of this report has been asked to answer two general sets of questions. One pertains to the mechanics of net income versus operating income and other economic factors for a business and much of the rest pertains to the financial data for three different firms. Items that will be discussed will include cash flow ratios, net income, operating income, debt to income ratios and so forth. As noted above, some answers will be general in nature while others will be quite specific.

One thing that will be identified as part of this work is which of the three firms might be on thin ice given the financial statistics that are presented in relation to that firm. First off, the difference between operating income and net income is that the former is revenues minus the cost of getting that work completed, or cost of goods sold. For example, if revenue is $1,000 and the cost of delivering those goods and services is $800, then the operating income is $200.

When it comes to net income overall, this is when all expenditures are accounted for including both operating expenses and other expenses that are optional or are not directly related to the revenue obtained for that period. Figures that would be included in net income but not operating income would be research and development, dividend payments to stockholders and so forth. Those items are not necessary to pay for the business completed for that cycle.

That being said, items like that have to be paid for by some sort of money, hence the demarcation between operating income and net income overall (Investopedia, 2016). When it comes to long-term profitability, operating income would absolutely be the more important figure as there needs to be more revenue than operating expenses or the business will not survive.

In other words, if the net operating income is very small or, worse yet, negative, that would present a problem if there is a dip in revenue or a rise in expenses as that would almost certainly put the company in dire financial shape. Net income is less important as many of the items between operating expenses and net income are voluntary or at least can be planned out in advance.

Obviously, an expansion of the business, research and development and so forth would have to come from income (if any) left over after operating expenses. If there little to no money left over after operating expenses are accounted for, then the company is basically covering its basic costs (e.g. materials, wages, etc.) and this would be a sign of trouble (Investopedia, 2016). When it comes to the three brands in question, the one firm that clearly has the biggest challenge from a cash flow perspective would be Panera Bread.

Their operating cash flow to debt ratio is extremely high. The ratio did take roughly a sixteen percent dip from 2009 to 2010 but the latter figure, that being 72.23%, is still alarmingly high. Starbucks is not much better with a 2009 figure of 55.12% and a 2010 value of 63.06%. Starbucks is nearly ten percent below Panera for 2010 but they were heading in the wrong direction as of that year. By comparison, Yum Brands also had a spike upward in operating cash flow to total debt but this was only from 23.27% to 30.57%.

They had a pretty large long-term debt ratio in 2009 (23.80%) but it fell sharply to less than three in 2010. The other two firms, despite their rather high short-term debts, have no long-term debts at all. When it comes to operating cash flow per share, Starbucks is the worst of the three in that regard as well. Panera was actually quite good and had the highest amounts by far. Yum was in the middle of the pack in terms of rank but was not much higher than Starbucks.

However, this is not really a reflection of cash flow in general but more of a reflection of how many shares are outstanding as compared to the cash flow that exists per share. It would seem that Starbucks has too many shares outstanding if one were focusing only on that metric. The cash flow to dividends ratio is also a mixed bag. Panera paid no dividends in either year. Starbucks paid nearly $10 per share in the one year (2010) that they did dividends.

Yum paid dividends on both years but it was less than half of what Starbucks paid. However, Yum is clearly superior overall as they paid out dividends both years and their total dividends are pretty close to Starbucks in their one year of dividends. Panera paid none so they are clearly dead last. In the short-term, Starbucks was best in 2010 by itself but Yum was better when looking at the two years combined. All three firms have rising revenues, so that is not really an issue.

Yum and Starbucks both blow Panera out of the water when it comes to overall revenues but Yum has the margins to point to while Starbucks really does not. To answer the question concisely, Panera seems to be the most concerning when it comes to cash flow given their anemic revenue growth, their low revenue in comparison to the other two brands, their operating cash flow to debt ratio and the fact that they pay no dividends whatsoever .. they really cannot afford to.

While Starbucks is not all that much better, their revenue is growing sharply, they have no long-term debt and their operating cash flow per share is on the rise. They did not pay dividends in 2009 but they did do so in 2010, so this puts them ahead of Panera overall. The one thing that is concerning is that they debt is on the rise relative to their net cash.

In other words, they seem to be spending a lot of newer money than they are taking in and that pattern cannot be allowed to go on for long. As noted before, Panera is.