Profitability Ratios

Return on Equity
The return on equity (ROE) ratio serves as a crucial metric for evaluating a company's efficiency in
leveraging shareholder equity to generate profits. Analysing the ROE range from the fiscal years
2019 to 2023 unveils a peak of 49.26% in 2021, contrasted sharply with a trough of 25.02% in 2023.
This indicates that in 2019, for every dollar of shareholder equity, DMP yielded 49.26 cents in
earnings available for distribution to shareholders, which declined to nearly half, at 25.02 cents per
dollar, by 2023. Typically, a higher ROE signifies more effective utilization of equity. The notable
decrease in ROE in 2023 could be attributed to X. Declining ROE (so what)

TREND
Sharp decline in ROE
Significant decrease in the company’s efficiency in using its equity to generate profit.

POSSBILE REASONS (explained in upcoming sections)

This drop could be due to a variety of factors such as increased equity, dilution of shares, efficient
use of raising more capital, decreased net earnings…

IMPLICATIONS
A decline in ROE especially when abrupt may worry investors, as it indicates a lessening ability to
generate shareholder value.

DMP experienced a significant decrease in ROE over the 2019 to 2023 period from a high of 49.26%
in 2021 to 25.02% in 2023. Meaning an investment of $1 of shareholders equity in 2021 returned
49.26 cents of earnings available for distribution to shareholders, compared with 2023 at almost half
that with 25.02 cents. This drop could be due to a variety of factors such as increased equity, dilution
of shares, and decreased net earnings. (find out)

A decline in ROE, especially when abrupt may worry investors, as it indicates a lessening ability to
generate shareholder value and long-term sustainability.

Ultimately the decline in ROE is due to a decline in the return on assets (ROA)

Elaborate explanation
In 2021, DMP had a ROE of 49.26%, meaning that for every $1 of shareholders' equity
invested in the company, they generated 49.26 cents of earnings available for distribution to
shareholders. However, by 2023, this ratio had dropped to 25.02%, almost half of what it
was in 2021. This indicates a significant decline in the company's ability to generate profits
from its shareholders' equity.

There are several factors that could have contributed to this decrease in ROE. One possible
reason is an increase in equity, leading to a dilution of shares. If DMP issued new shares to
raise capital or acquire other companies, this would have increased the shareholders' equity
in the company, thus reducing the ROE ratio. A dilution of shares can negatively impact ROE
as the earnings are now spread out over a larger number of shares.

Another factor that could have contributed to the decrease in ROE is a decrease in net
earnings. If DMP's profitability declined over the 2019 to 2013 period, this would have
directly impacted the ROE ratio. A company's net earnings are a key component of ROE, and
any decrease in profits would result in a lower ratio.

By focusing on sustaining the motion of profit inflow and controlling equity issuance, and
efficiently using shareholders' equity, the company can work towards restoring its ROE to
previous levels or even surpassing them. Shareholders and investors will be closely watching
DMP's financial performance in the coming years to see if the company can reverse this
trend and regain its profitability.

Return on Assets
Over the reporting period, DMP saw its ROA peak at 11.01% in 2019, gradually descending to a low
of 5.21% in 2023, indicating a consistent downturn throughout the period. While DMP faced a
significant drop in the 2020 financial year, its overall trajectory reflects a steady decline, a pattern
mirrored by the ASK stock price (ref). (why?)

The progressive decrease in ROA from 11.01% in 2019 to 5.21% in 2023 suggests that DMPs ability to
maintain its assets are diminishing.

The possible cause for a decrease in ROA explained by a changes in DMPs profitability and asset
efficiency. These issues could include poor utilisation of assets, a large asset base without
corresponding rise in income, or rising expenses.

The decrease in this status might indicate operational inefficiencies or difficulties in sustaining
profitability with current assets since assets are crucial for operations.

A critical analysis of Domino’s Pizza Enterprises Limited’s ROA decline can be explained
through the following key reasons:
 1. Decrease in Profit Margins: One of the primary reasons for the decline in ROA could be a
decrease in profit margins. As a company’s profitability decreases, its ROA is also likely to
decline (Horngren et al., 2019).

2. Asset Utilization Efficiency: If Domino’s Pizza Enterprises Limited has not been effectively
utilizing its assets to generate revenue, this could lead to a decrease in ROA (Garrison et al.,
2018). Dominos said it expected first-half preliminary net profit before tax between A$87
million ($57.19 million) and A$90 million, hurt by weaker-than-expected network sales in
Asia and Europe. The stock was downgraded by analysts at Citi from a "Buy" to a "Neutral"
rating. This decision was made due to growing concerns about the outlook for Japan and
France, which combined make up about 39% of the company's stores. Additionally, the
brokerage reduced its estimates for earnings per share by 8%-19% for the years 2024 to
2026. The board of governance board of DMP believe that the declining same store sales in
Asia and Europe will have a greater impact than any positive comments regarding the
improving average unit economics in ANZ and Europe.

3. Changes in Capital Structure: Fluctuations in debt levels or capital structure can influence a
company’s ROA, especially if there is an increase in interest expenses (Brigham & Ehrhardt,
2016) and Poor investment decisions or capital allocation strategies resulted in
underperforming assets and lower returns, contributing to a decline in ROA (Ross et al.,
2016). The forecast for Domino's net profit before tax for the fiscal year 2024 has been
revised downward by 23%, now projected to reach $179 million. This adjustment suggests
that the second half of the year will align closely with the initial guidance range of $87
million to $90 million for the first half. Additionally, there has been a decrease of
approximately 10% in the midcycle net profit before tax estimate for Domino's, attributed to
a revised assumption of a 300-basis point decline in the midcycle earnings before interest
and taxes (EBIT) margin for the Asia segment. This adjustment reflects the belief that
Domino's recent acquisitions in Asia, excluding Japan, will yield lower profitability than
initially anticipated. Domino’s long-term growth runway is not in jeopardy and the longer-
term rollout targets stand. Its midcycle store network forecast of some 6,300, compared with
roughly 3,800 in fiscal 2023, remains intact.

Net Profit Margin

Net Profit Margin (NPM) is a ratio is utilised as a measure of the effectiveness of the company's cost
management practices. A higher net profit margin signifies a higher level of efficiency in converting
revenue into actual profit.
A substantial decrease in NPM from 10.38% in 2019 to 5.55% in 2023, particularly in 2020
underscores the difficulty in effectively managing costs and achieving profitability.

The potential reasons for this trend (triggers) the significant decrease experienced during the COVID-
19 pandemic might be related to operational difficulties which could have escalated expenses and
diminished sales figures. Following the pandemic the ongoing decrease may indicate underlying
problems inside the organisation that impact its capacity to generate profit. Such as increasing
expenses, competitive challenges, and slower revenue growth.

The impact NPM plays a crucial role in evaluating a company’s ability to effectively control its
expenses in comparison to its income. A declining NPM indicates challenges in keeping profitability
which may raise concerns about the long-term financial stability.

Return on Equity Comparison

Return on Assets Comparison

Net Profit Margin Percentage Comparison

In the context of DMP's net profit margin percentage (NPM%), 2020 stands out as a year of
significant decline, marking the steepest downturn within the report's timeframe. This decrease can
predominantly be attributed to the adverse effects of the Covid-19 pandemic (ref). Unlike CKF and
RBB, whose NPM% remained relatively stable, DMP witnessed consistent and pronounced declines
in its NPM% throughout the reporting period, even when excluding the impacts of Covid-19 in 2020
(suggesting what?).

DMP saw its NPM% peak at 10.38% in 2019, plummeting to a mere 5.55% by 2023 (why?).

In contrast, CKF experienced a marginal uptick of 1.13% in 2022, which was its sole increase during
the period under review. RBD, on the other hand, saw two slight increases, albeit small,
contributing to a 0.34% rise over the financial years spanning from 2019 to 2021.

While the CKF and RBD displayed more stability and significant improvement in NPM. DMP more
pronounced fluctuations suggest, it may be facing unique challenges or market conditions that are
not as impactful as its competitors. As foreshadowed at the trading update, earnings for the first half
of the financial year were 22.8% higher than the previous six months but -5.3% lower than the same
period last year. The Company is well progressed on a wide-ranging company restructuring and
savings program, expected to reach ~$50 million this Financial Year, with 1/3rd of savings to be
shared with franchise partners. Today’s results show Dominos is rebuilding, and the sales initiatives
applied in Australia/New Zealand are getting traction in some of our international markets. They also
show more is required to get the same results across all 12 of their markets. An increase in network
sales by 3.78% with 2.96% like-for-like growth, along with opening of 7 new stores. For investors,
these trends could indicate potential red flags in DMP operational and financial strategies compared
to its peers.
For management, this status calls for a deeper analysis into the cost structures, assets utilisation,
and equity management to identify any underlying issues.
In the 12 months to the end of June DMP network sales +2.2% to $4 billion, with online sales
continuing their strength - +2.4% to $3.1 billion. To put that in perspective, when the franchise
pioneered online ordering in 2005, they completed 0.1% of sales online – now it’s almost 80%.

According to the CEO 395 stores, growing our network by +11.1%, including through the acquisition
of 287 stores in Malaysia, Singapore, and Cambodia. However, with same store sales -0.2%, in an
environment of rapidly escalating costs for food, packaging, energy and labour – unit economics and
the returns of our Franchisee Partners were affected, and the earnings of Domino’s Pizza Enterprises
Ltd were -23.3% lower with EBIT of $201.7 million (Annual Report, 2023).