Valuation ratios in the restaurant industry

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Valuation ratios in the restaurant industry

Value Line Research Department Restaurant companies are essentially retailers of prepared foods, and their operating performance is influenced by many of the same factors that affect traditional retail stores.

For the most part, restaurants have business models that are relatively easy to understand, and the array on the Value Line page is the same as that of a standard industrial company. Nonetheless, there are a number of unique factors to consider when making investment decisions regarding this large and segmented industry.

Valuation ratios in the restaurant industry

Competition between restaurants is intense, since dining options abound. And, while there are certainly dominant players in this industry especially among fast-food purveyorsno one company has the market cornered. Indeed, virtually every restaurant location must compete not only against other publicly traded chains, but also a wide array of small, local establishments.

Competitors include everything from delis and pizzerias to fine-dining restaurants. And, of course, it is relatively easy to forgo prepared foods, altogether, in favor of home cooking, which is usually a less expensive option.

Thus, restaurant meals are discretionary purchases, and the industry tends to be highly cyclical. Sales Top-line growth is typically generated in two ways, opening locations and boosting same-store sales.

Opening new doors is a straightforward strategy, and usually the main driver of revenue when a company is in its early stages. As a chain grows in size, however, it becomes increasingly difficult to capture benefits.

Comparable-store sales, or "comps", is a valuable metric to examine when analyzing restaurants. Comps are particularly important once a company reaches maturity, since they become the primary driver of growth. Product innovations and menu-price increases are two of the most common ways to increase same-store sales.

Remodeling existing locations is another way to boost guest traffic. Furthermore, promotions and limited-time offers are widely used to attract diners. Investors should also pay attention to trends in the dollar value of the average guest check, as this can shed additional light on what exactly is driving sales.

Most companies in this industry have operating margins in the mid- to upper teens, and net profit margins in the mid- to high-single digits. Food costs are obviously an important line item and, at times, can fluctuate wildly.

Prices for staples, such as corn, chicken, beef and dairy, can move greatly, depending on factors like crop yields, feed costs and other external demand factors.

Focus on Your Financial Strength

Labor is another major cost for service-oriented restaurants. Typically, workers earn modest salaries, often at or just slightly above government-mandated minimum wages. Employees that fall into this category are usually fast-food workers, dishwashers and bus boys.

Casual Dining Restaurants can be loosely broken down into two broad categories: The same general factors discussed above dictate the performance of each group, but sit-down restaurants tend to be more expensive, making them even more sensitive to consumer budgets and the health of the economy.

Fast-food restaurants, being less dependent on macroeconomic conditions, are better defensive investment plays. In a recessionary environment, their convenience and value make them attractive options for diners seeking inexpensive meals or for those trading down from casual-dining establishments.

Convenience is a major part of the fast-food business model, so a vast network of stores is essential to success. In addition to expansive hamburger chains, there are a number of large players that focus on niches, such as sandwiches and pizza. Foreign markets offer vast growth potential for companies willing to take on the challenge of finding a successful formula that appeals to a wide array of customs and tastes.

A well-known brand name provides a huge leg up when expanding overseas, which is one reason why fast-food makers dominate the international arena.Valuation Ratios in the Restaurant Industry Case Solution,Valuation Ratios in the Restaurant Industry Case Analysis, Valuation Ratios in the Restaurant Industry Case Study Solution, The factors underlying the differences in estimates of multiple (price-earnings and price to book) in four companies in the restaurant industry.

Determinants of Valuation Ratios: The Restaurant Industry in The restaurant industry has always represented a prime example of a competitive industry. Restaurant Industry in India - Trends and Opportunities.

3 Restaurant valuation is a specialised art and appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the Restaurant Industry in India - Trends and Opportunities.


Identify top companies for sales and analysis purposes Food and drinks sales of the restaurant industry in the United States Employment in the quick service restaurant franchise industry. The Business Analysis & Valuation: Using Financial Statements, Text & Cases text book has won the American Accounting Association’s Wildman Award for its impact on management practice, as well as the Notable Contribution to the Accounting Literature Award for its impact on academic research. In BVR’s Guide to Restaurant Valuation, expert Ed Moran, along with a small army of other franchise and restaurant professionals, walks you through the complicated, yet fascinating, process of determining a restaurant's value - while sharing some of his favorite eating establishments along the way.

This sample valuation report was generated using PDQ Value Industry Conditions and Outlook 6 B. Analyzed the historic financial statements by calculating financial ratios and common-size financial statements for each historic year in order to identify trends.

Valuation Ratios in the Restaurant Industry 1. Drivers of price-to-book equity and price-to-earnings multiples include: a. Company’s profit margins, that is, the entity’s ability to generate abnormal earnings%(14).

Valuation ratios in the restaurant industry

Teaching Note to (). Harvard Business School. Harvard Business Review.

Industry Overview: Restaurant