Chipotle Mexican Grill, Inc. is a company that includes several subsidiaries which conduct restaurant businesses in the United States of America, Canada and England. In total, the Company involves 1,230 restaurants across the globe. Also, it has one shop-house in the Asian market included. These restaurants being dispersed across six regions are operated and managed within a common location. These dining establishments avail exotic food to consumers. They are well-known for such meals as burritos, tacos and salads.
It should be noted that these restaurants are operated in three different ways including end cap outlets, in-line and free-standing outlets.
In the course of determining a short-term liquidity of the firm, the following ratio as working capital ratio is considered. It is used to establish the ability of the firm to meet its short term obligations. These financial duties are concerned with the day-to-day operations of the firm. The following formula for calculating this ratio is provided below.
Working Capital= Current Assets-Current Liabilities
Workings1, 2010= 406.22-123.05= 283.17,
2011= 501.19-157.45= 343.74
This ratio tends to increase from 2010 to 2011. This is a clear assumption that the firm is healthy and meeting its financial obligations on time. The higher ratio of 343.74 in 2011 indicated that the firm’s operational activities were efficient since accounts receivables had been paid on time. Thus, they were optimized on the manner of cycle of aforementioned activities.
The current ratio is a short-term liquidity ratio. It is calculated using the below formula:
Current Ratio= Current Assets/ Current Liabilities,
Workings2, 2010= 406.22/ 123.05= 3.3, 3.3:1
2011= 501.19/157.45= 3.18, 3.18:1
The current ratio of this firm is being on the safe side, since investors prefer the ratio being greater than 2. Thus, for every $ 1 of debt, the Company has $ 3 of cash assets. This healthy ratio indicates that the firm has some financial resources, which it can use to expand its business activities as well as to invest in other short-term forms of securities.
The acid-test ratio is a ratio used to determine a short term financial ability of this firm through the elimination of inventory. Inventory is eliminated from the ratio, since it is prone to such perils as damage and a theft. The formula used for calculating the ratio is given as the following one.
Acid-Test Ratio= (Current Assets-Inventory-Prepayments)/ Current Liabilities
Workings3, 2010= (406.22-7.1-16.02)/123.05= 3.11
2011= (501.19-8.91-21.4)/157.45= 2.99
This acid-test ratio depicts a healthy Company since they replicate a faster rate for which inventory is sold to customers. It also means that in 2010 the Company had $ 3.11 of cash for every $ 1 debt while in 2011. It had $ 2.99 of cash for every $ 1 debt.
Cash-Forecasting and Pro Forma Analysis
A cash-flow forecasting assists managers to identify the possible cash shortfalls by way of establishing the movement of cash within the firm. In a broader aspect, the forecasting enlightens the management of the firm on whether the current income is able to offset the total costs of conducting resultant business activities. In that sense, it is safe to assume that a sole purpose of cash-flow forecasting is to determine on whether the business is making some immense profits for which it can use to off-set debts.
The Adjusted Net Income Methodology
In 2010: $ Million
Add: Total Receivables 44.8
Prepaid Expenses 28.3 73.1
Subtract: Accounts Payables 55.96
Accrued Expenses 94.01 (149.97)
Total Cash Flow 102.11
Net Income 214.95
Add: Total Receivables 40.76
Prepaid Expenses 24.67 65.43
Subtract: Accounts Payables 65.09
Accrues Expenses 94.01 (159.1)
Total Net Cash Flow 121.28
The resultant increase in the amount of net cash flow from the value of $ 102.11 million in 2010 to $ 121.28 million; in 2011, it was a clear indication that the firm had a stable liquidity position. Thus, it is assumedly clear that the Company has a surplus amount of money that it can use to make large investment decisions.
A larger base of net cash flows is a positive indication that the firm can assume even stable policies needed for the growth and expansion activities, in the whole.
Capital Structure and Solvency
A capital structure refers to the financial resources which are available to the entity as well as to the determination of their respective attributes. On the other hand, solvency refers to the long-run capacity of the entity to make its financial obligations good.
For Solvency, we have the following ratios:
Financial leverage ratio = Total assets/common equity capital
2010, 1648.41/0.35= 4709.74
2011, 1706.21/0.35= 4874.89
The financial leverage ratio tended to increase significantly from the ratio of 4709.74:1 in 2010 to 4874.89: 1 in 2011. This increase is assumed to indicate that the Company is aligning more to debt forms of financing as compared to the equity forms of financing. This is a positive attribute since investors prefer to invest in the Company which utilizes more of debt financing as compared to the equity form of financing. This is because of the fact that debt financing is tied to both the financial leverage as well as the interest as some items in deductible tax items. The financial leverage expounds on the fixed interest which are paid after obtaining debt finances. These interests are considered to be less than the rewards obtained from a debt finance option. On the other hand, the interest items as a tax deductible item fosters the reduction in the amount of taxable income, the Company should pay since interests are ascertained as the expenses to the firm as opposed to dividends.
The main goal of conducting a capital structure analysis is to determine the exact degree of financing resources owned by the company as well as allowing an easier comparison of the company’s performance in respect to external forms of competition. In an effort to determine the capital structures of the firm, the following ratios are used.
Total debt to equity capital = total debt/shareholders’ equity
For 2010, 3.46/ 1261.23=0.003
2011, 3.46/1307.62= 0.003
These ratios tend to remain constant for the long periods of time. The lower value of these ratios provides a clear indication that the Company is maintaining a steady magnitude of debt financing in respect to the total capital structures. Furthermore, it is clear to assume that the Company has focused more on equity financing as compared to debt financing.
Return on Invested Capital
These are investment ratios which are used to determine the expected rates of return on the invested capital. They include the following ones:
Operating cash flow per share ratio = (net cash flows from operating activities-preference dividends)/ weighted average number of ordinary shares
In 2010, (289.19-0)/0.35= $ 826.23million
In 2011, (411.1-0)/0.35= $ 1174.57 million
This ratio increased significantly from 826.23 in 2010 to 1174.57 in 2011. This is the indication that the Company has more cash at hand which it can use to meet its current financial obligations. This liquidity position of firm guarantees potential investors of a high rate of return. Thus, the aforementioned assets are placed in a fair position upon which they can create an income value.
A dividend per share= (profit after tax- preference dividends)/weighted the average number of ordinary shares)
In 2010, (178.98-0)/0.35= $ 511.37
In 2011, (214.95-0)/0.35= $ 614.14
The aforesaid ratio tended to increase significantly from $ 511.37 in 2010 to $ 614.14 in 2011. This is a clear indication that the firm’s shares are valuable in the stock market, since it is assumed that they are sought after in a high demand by investors. As a result, the value of the Company is depicted as having attained a healthy status.
Earnings per share= profit for shareholders/ number of ordinary shareholders
In 2010 = 287.83/31.69 = $ 9.08
In 2011= 350.56/31.56 = $ 11.11
The EPS is a ratio used by investors to determine the profitability of the firms’ share over a given period of time. In this case, the Company’s share profitability has increased significantly being a reflection of the positive performance of firm.
A price/Earnings ratio = current market price/earnings per share:
In 2010, 243/9.08= 26.76
In 2011, 243/11.11= 21.87
The P/E ratio of the firm tended to decrease significantly from 26.76 in 2010 to 21.87 in 2011. This is a positive indication since a low P/E ratio assists in helping to raise the current market price of shares in the stock exchange market. Thus, the rate of return of investments is guaranteed at a higher rate.
Asset Turnover (Utilization)
This ratio is used to determine the efficiency of the entity in deploying the available resources. The formula for calculating the ratio is given as sales/total assets:
In 2010, 1835.92/ 1648.41= 1.11
In 2011, 2269.55/ 1706.21= 1.33
The ratio tended to increase from the 1.11 in 2010 to 1.33 in 2011. This is the indication that the Company is using its resources efficiently to create the income value.
Profitability and Equity Analysis
Return on Equity= Net Profit/Average Ordinary Equity
In 2010, 178.98/ 1261.23= 0.14
In 2011, 214.95/1307.62 = 0.17
Net Profit Margin = net profit/net sales
In 2010, 178.98/1835.92= 0.097
In 2011, 214.95/2269.55= 0.097
The return on equity is a ratio used to determine the manner in which the shareholders’ equity creates the value to the firm. Whenever the ratio is perceived as having increased, it is assumed that the firm is utilizing the available resources efficiently.
Usefulness of the Financial Statements
With the provision of financial statements of the Company, the analysis of its performance has been made easier in terms of the financial performance. Specifically, the financial statements have assisted in determining the financial setting. The financial statements have helped in providing a favorable financial environment safe for conducting business activities. For instance, I have used a balance sheet to determine the performance issues. It has provided the significant information pertaining to the assets of the Company. Subsequently, the financial income statements have assisted in my analysis of operating results of the Company in terms of the reports related to sales, expenses and profits of the firm, in general.
Furthermore, the financial statements of the Company have helped in determining the Company’s cash exchange in the course of business operations. In this case, the detailed information pertaining to the capability of the firm to pay for accrued expenses as well as the asset resource purchase has been determined effectively. In addition to this, the financial statements have helped in establishing the amount of the shareholder’s equity present in the firm. It should be noted that the balance sheet indicates the changes of the firm in respect to the shifts affected in retained earnings as well as liabilities and the Company’s net-worth.
Review of Accounting Principles in Respect to the Performance Analysis
The consolidated financial statements related to Chipotle Mexican Grill Inc. are inclusive of the subsidiary companies it owns. The accounting consolidation principle has enabled a disclosure of minority interests which helped in determining the provisions of both the income as well as consolidated balance sheets.
The Cash and Cash Equivalents Accounting Principle
The Company has embraced this accounting principle to include the determination of such items as cash and bank balances, which should be portrayed at their immediate face values. The inventories of the Company have been valued at their respective lower costs of exact market values. Also, the Company has determined its cost of inventories through the FIFO methodology as the provisions for inventories are posted on the obsolescence basis.
Forecast of the Income Statement, Balance Sheet and Cash-Flow Statement
Workings, 1 net revenue (2269.55-1835.92)* 6 = 2601.78 + 2269.55= 4871.33
Total Revenue 4871.33
Less cost of goods sold 3604.54
Gross profit 1266.79
Less: selling expenses 338.95
Unusual expenses 5.8
Operating Income 810.98
Income Tax –total 150.33
Income after Tax: 660.55
Minority Interest: (0)
Income after Tax and Interest 660.55
Total current Assets (656.68-620.44)* 6 = 217.44 + 656.68 874.12
Non-current Assets: property/equipment (835.65-804.66)*6 + 835.65 1021.59
Long term investments (169.18-159.01)*6 + 159.01 220.03
Other long term assets 32.92
Total Assets 2170.6
Liabilities and Shareholder’s Equity
Accounts Payable: (65.09-55.96)*6 + 65.09 119.87
Accrued Expenses 94.01
Capital leases 0.14
Total Current Liabilities 214.02
Common stock 0.35
Additional Paid in capital
(805.37-789.27)*6+ 805.37 901.97
Retained earnings (888.11-815.81)*6+ 888.11 1326.77
Treasury Stock (386.99-344.02)*6+ 386.99 -644.81
Other equity 4.68
Total Equity 1802.25
Liabilities 214.02 2016.27
Depreciation (74.94-68.92)*6 + 74.94 111.06
Deferred Taxes (11.32-10.06)*6+ 11.32 18.88
Non-Cash items (11.76-13.42)* 6 +11.76 21.72
Changes in Working Capital (43.17-33.35)*6 + 43.17 102.09
Cash from Operating Activities 914.3
Capital Expenditures 🙁 151.15-113.22)*6 + 151.15 – 378.73
Other Investing Cash flow Items, Total – 164.67
Cash from Investing Activities: – 543.4
Financing cash flow items 145.56
Issuance of Stock -62.00
Issuance of debt -0.24
Cash from Financing Activities 83.32
Foreign Exchange effects – 1.26
Net Change in Cash: 452.96
Conclusion and Recommendations
To sum up, I think that the Company is healthy. There is a positive ground to advocate for investing into the Company’s stock market. The following are some recommendations which I have put forth to cement on the position stipulated above:
I) There is the likelihood of the Company to continue paying dividends since the amount posted as retained earnings does not seem to increase.
II) There is a possibility that the Company will continue to create substantial profits. This is because of the steady increase in the amount of the sales’ revenue in respect to the cost of goods sold.
III) The values of calculated ratios assume a positive ground for the Company to meet both short and long-term investment decisions. This positive attribute adds-up to the assumption that the Company has future survival chances.