COMPARATIVE INVESTMENT ANALYSIS

Comparative Investment Analysis

Comparative Investment Analysis

Introduction

This is a comparative investment appraisal report to compare and analyze the financial position of two companies of the same industry in order to evaluate final decision for investment purpose. The analysis is done for Darden Restaurants and Brinker International, Inc. operating in restaurant industry. The financial position of both the companies and key financial ratios are studied and commented to make the decision convenient. The financial information is based on year 2010.

Discussion and Analysis

Darden Restaurants and Brinker International, Inc. are competitors in the restaurant industry. Aside from the obvious similarities inherent to the foodservice business (providing high-quality food, service, and atmosphere to their various customers), these two companies are very different when viewed through a financial perspective. In order to evaluate these two companies, I have prepared common-sized financial statements and computed key ratios that will be used to show and further analyze these fundamental differences.

Regarding their respective 2010 income statements, Darden Restaurants had the higher gross profit margin (23.5% compared to the 16.4% reported by Brinker International, Inc.) as well as book value of shareholders equity. Darden Restaurants' higher gross margin reflects the greater efficiency with which it is able to turn investors' money into income for the company. This efficiency is also shown in the higher operating income margin for Darden Restaurants (10.3% compared to the 7.9% by Brinker International, Inc.). The higher operating income margin also signifies that Darden has comparatively lower fixed costs, thereby giving its' management more flexibility in determining prices. This pricing flexibility provides an added measure of safety for the company during tough economic times for Darden Restaurants. The operating expense percentage went on to show that the management at Darden restaurants also did a better job in terms of managing their expenses in creating sales (89.8% compared to 92.1%). Brinker International, Inc. had the vastly higher net profit margin of the two companies (5.3% compared to 3.6% from Darden Restaurants). The lower profitability margin shown by Darden Restaurants during this year was likely almost entirely due to its' substantial losses from discontinued operations.

The consolidated balance sheets for both Darden Restaurants and Brinker International show the majority of both companies' assets to be in long-term investments, more specifically; property, buildings, and equipment. On May 27, 2010, Darden Restaurants reported land, buildings, and equipment accounting for $2.18 billion, or 75.8%, of its' $2.88 billion in total assets, while on June 27, 2010, Brinker International, Inc. had net property and equipment of $1.77 billion, or 76.4%, of its $2.31 billion in total assets. This heavy allocation reflects the nature of the restaurant industry needing land and equipment in order to provide a casual dining environment along with the necessary equipment to prepare food for their customers. This asset mix, however, can also adjust over time depending on the current position of the company and the strategic choices they make in regards to the future. Darden Restaurants decreased its property, buildings and equipment by ...