Leverage Archives | Value Investing - Business and Economic Principles

Domino’s Pizza Inc. – Intrinsic Value

Domino’s Pizza is the third largest publicly traded fast-food chain in the world. With over 18,800 locations worldwide, the business model is three pronged with franchising as the primary profit center. However, it has one glaring flaw, the company is highly leveraged to the tune of more than $5 Billion. There is ZERO equity in this company. It’s average annual earnings over the last five years are around $380 Million. The interest expense alone has almost doubled from $99 Million in 2016 to $192 Million in five years.

Even with an average annual earnings of $525 Million per year, it will take 10 years to get the debt under control. Domino’s Pizza Inc. keeps recapitalizing its debt every couple of years. This recapitalization process increases the aggregated interest paid and given the current Federal Reserve’s attitude towards interest rates, this is going to be a detrimental problem for Domino’s in a few years. The weighted average borrowing rate is currently 3.8% and will remain stable for several years due to timing issues. However, there is a $1.2 Billion refinancing requirement in 2025 which will most likely result in an increase the average borrowing rate. Thus, the ability of Domino’s to continue profitability at more than $600 Million per year after 2025 is questionable.

Railroad Stock – Discovering Opportunities

Railways Pool / By David J Hoare MSA / 10/23/2019

Railroad stocks are solid and steady investments. There is limited downside risk and adequate historical data to illustrate buy and sell points for an investor. If properly applied, an investor should earn yields of 18 to 30% year on year. Learn how to develop the investment model for this particular industry.

One of the benefits of railroad stocks is the downside risk. When the stock’s share price decreases, it is unlikely it will continuously fall. The business ratios used in this industry assist in understanding how far a share price can fall. The further the price decreases, the more lucrative the investment becomes. Thus, the market – other buyer are enticed to purchase the stock due to the desirable attributes of the stock. The first section below covers this particular aspect of the share price decreasing.

On the flip side are increases in share price. How does an investor know when to sell? If you sell early, you miss out on any additional increases in share price that can add dramatically to your gain upon the sale of the stock. With railroad stock, the historical pattern has rarely wavered from a continuously increasing trend line. The key is to be patient. Yes, the longer it takes to recover and generate gains for the investor, the lower the yield for the investor. Never look at this in isolation, it’s about Bernoulli’s Law (Law of Large Numbers).

Leverage Ratios

Business Ratios / By David J Hoare MSA / 03/31/2019

Leverage refers to the ability to lift a heavier load using a fulcrum and a lever. The common image is a board on a triangular pivot point with a heavy weight (M1) on one end and a lighter weight (M2) on the other. As the lever shifts towards the lighter load it starts to lift the heavier weight. In effect, as the distance ‘b’ gets longer, it becomes easier to lift M1. This principle works with finances too. How so?

Return on Equity

Business Ratios / By David J Hoare MSA / 02/17/2018

Another performance ratio used in business is return on equity. It is similar to return on assets except return on equity uses one section of the bottom half of the balance sheet.

Operating Profit Margin – Formula and Understanding

Business Ratios / By David J Hoare MSA / 10/15/2017

Operating profit margin refers to the value earned as a percentage of net sales. The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA). This is a misleading reference as operating profit is actually defined differently by industry sector. EBITDA is used primarily in valuing businesses.

Fixed Assets To Debt Relationship

Business Ratios / By David J Hoare MSA / 12/08/2015

Every business owner, especially young entrepreneurs, must understand how long-term debt is used to finance the purchase of fixed assets. It is a basic principle especially for start-ups. There is a relationship that exists between the two. If created correctly, profitability is enhanced and cash flow is maximized.