Message Font: Serif | Sans-Serif
No. of Recommendations: 1

Here is my current thinking. Every restaurant takes $10million to open. Each restaurant makes about $750,000 in profit a year.

I don't care how popular they are, based on those numbers this business cannot grow earnings fast enough to justify its current P/E (even though it is low by today's market's standards) without taking on lots of debt. Since D&B are planning to open 21 restaurants over the next 3 years at a cost of approx $200million and only approximately $30million can come from retained earnings, they will have a debt to equite ratio at the end of three years of about 1:1 and they will still be taking on debt faster than they are growing equity.

As long as they continue to generate only 7.5% on invested capital, they cannot grow the business faster than that without increasing leverage. But the current P/E is only justifiable with growth rates vastly exceeding 7.5%.

I guess what I'm saying is that it just costs too much to open a complex compared to trh profits they are making from them. That just means that opening more complexes makes the business a worse capital sink than it already was.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.