Embedded Files
Use of Leverage
Denny's Corporation makes very little use of debt in their finances, and until 2020-2021 the company was not adding any more long term debt. In late fiscal year 2020 into fiscal year 2021, however, Denny's refinanced their Credit Facility and entered a new long-term loan, which can be noticed in the resulting increases in Interest Bearing Debt and EBITDA, which decreased both Debt Leverage Ratios and Interest Coverage Ratios. To analyze Denny's Debt Ratios, competitors Cheesecake Factory (CAKE), Darden Restaurants Inc (DRI), and Bloomin Brands (BLMN) were analyzed as well from the fiscal years 2017 to 2021. All ratios including share price were taken from the closing price on November 2, 2022.
Debt Leverage Ratios (from Balance Sheet)
(IBD / TA) : Interest Bearing Debt to Total Assets ratio differentiates between operating liabilities and debt capital. The percentage shown in the color of the analyzed corporation describes the amount of assets that are finance to creditors, while the remaining percentage is the amount of assets financed by owner's (shareholder's) equity. The high percentages that Denny's is calculated to have demonstrates that the corporation funds a large amount of their assets with debt. In reference to Denny's, the Balance Sheet does show that Assets are still much greater than Liabilities, but without Net PPE, Current Assets are rather low (in 2021, CA = 49.4, PPE = 224.2, TA = 392.8). Fiscal year 2018 saw a jump of over 5% in the IBD/TA ratio, most likely because Denny's invested in a new long-term loan which increased Long-Term Debt by almost $7 million. However since fiscal year 2018 the company has been decreasing their ratio, indicative of their choices to issue more stock to shareholders. Competitors CAKE and DRI had much lower ratios in 2017 and 2018, comparatively, meaning these companies were not taking out as much loans and thus had less Interest-Bearing Debt. Both competitors saw similarly large jumps in 2018, and while DRI managed to level out their ratio, CAKE has continued to increase the ratio, taking out more long-term loans to fund their operating assets.
(Net IBD / MV Equity) : Net Interest Bearing Debt to Market Value Equity measures the market value of the debt to equity ratio. This was calculated using the closing price on 11/2/2022, which equates $11.6, and a number of shares outstanding reported by Valueline to be 61.7 million. With these values, the Market Value Equity of Denny's was calculated to be $715.72. The debt to equity ratio is a direct indicator of a company's debt leverage. A low ratio would indicate that the company has more owned than borrowed capital, and that the equity of the shareholders doesn't require much additional funds to finance business operations for growth. Denny's has been in a phase of growth in the past few years though, adding many more franchises across the country, so it has had a higher ratio with more needs for funding. Over the past 5 years Denny's has maintained a relatively stable ratio, averaging 48% from 2017 to 2021. A sharp increase occurred in fiscal year 2019, which was consistent across the board with competitors as well, most likely due to selling off over 100 company units to franchisees as well as entering a new loan agreement. However after 2019, sales increased again and Denny's did not take on any more debt, so the market value equity of the company increased while IBD was being paid off and decreased.
Debt Coverage Ratios (Cash Flow)
(EBITDA / Interest): Interest Coverage ratio which describes how many times interest can be paid from existing profit, also known as the EBITDA on the company's Cash Flow statement. This can be used to analyze a company's riskiness relative to current debt/expenses. In general, a higher ratio is much better of an indicator of financial health and a company's ability to be paying back interest according to profit; a ratio is considered to be dangerous and unacceptable if it is below 1.5, which is the tipping point at which lenders most likely will not loan any more funds. Denny's does not dip below this minimum amount, but in fiscal year 2020 it does get extremely close with a ratio of 1.6; this can be attributed to COVID and the negative effect it had on profits while also increasing expenses. Before 2020 Denny's was averaging an Interest Coverage ratio of about 5.3, but post-pandemic in fiscal year 2021 the ratio amount shot up to over 30, indicating that the company was successful in paying back its interest and increasing profits, also due to the opening of many new franchise locations. Both competitors Cheesecake Factory and Bloomin Brands saw a similar decrease in 2020. Cheesecake Factory in the past 5 years has had historically higher ratios, making it an important competitor, but as of 2021 Denny's has a slightly higher ratio by about 8; Bloomin Brands also had slightly higher ratios than Denny's, but it did not recover after 2020 quite as well, ending the fiscal year 2021 with an Interest Coverage ratio of just over 8.5.
(EBITDA / Interest + Principal): Debt Service Coverage ratio describes the ability of a company to pay off both interest and principal, or their ability to pay off loans, take on new financing, and make dividend payments. The Principal part of the dividend of the ratio is taken from the current portion on Interest Bearing Debt.
Average Cost of Debt
As of the end of fiscal year 2021, Denny's Corporation has a Total Debt equal to $421.7 million. On the reported Balance Sheet from the most recent 10-k report, the debt is made up of Current Portion of LTD (0), Current Portion of Lease Liabilities ($17.664 million), Long Term Debt ($266.5 million), and Long Term Lease Liabilities ($137.5 million). Other sources of debt as written in the 10-k are Self Insurance Liabilities, including total worker's compensation and general, product, and automobile insurance. The weighted average interest rate of outstanding revolver loans was 4.44% as of December, 2021. These loans were taken out to cover new credit facilities, with a maturity date of August 26, 2026. Considering maturity of all debt, there is floating debt from a credit swap maturing in 2025, the loan for the Credit Facility maturing in 2026, and dedesignated swap loan maturing in 2033.
The Average Cost of Debt for Denny's is $531mm; calculated by averaging all debt-bearing accounts from fiscal years 2017 to 2021, including Current Portion of LT Debt, Current Portion of Leases, Long Term Debt, and Long Term Leases.
Altman Z-Score = 2.19
The Altman Z-Score is a classic calculation that predicts a company's future risk of bankruptcy. The Z-Score is measured on a scale of 0-4; from 0 to 1.8 is the "distress zone", where bankruptcy is likely to occur; from 1.8 to 3 is a "gray zone", in which the company should be very cautious; from 3 to 4 is the "safe zone", where a company is predicted to be safe from future bankruptcy. A score of 2.19 is not great; it indicates that Denny's financial risk is relatively high, as they are technically in the grey caution zone. However, when comparing the competitors, it's important to consider that this risk is possibly just something common in the market sector. Competitor Cheesecake Factory has a Z-Score of 2.13, and competitor Bloomin Brands has a Z-Score of 1.45; all of these brands in the Consumer Discretionary sector, specifically Restaurants and Bars, have high risks of bankruptcy due to their volatility and dependence on steady consumer demand. Despite this assumption though, a score of 2.19 indicates relatively high risk, and considering that Denny's has a higher level of debt, they should be careful with their finances in coming years to ensure that sales and profits can keep up with their expenses. In the past decade, Denny's Z-score has had a high of 3.16, and a low of -3.4, with an average of 0.69; consider this, and the current Z-score is quite impressive.
Page updated
Google Sites
Report abuse