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Financial analysis of two companies

Updated on February 7, 2012

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Comparing two companies

This is an analysis of Darden Restaurants and Brinker International... this should not be used for investing purposes of any sort, but rather for learning about basic corporate finance ratios. The author is simply giving his perspective based on his own research and will not be held responsible for anyone who uses the following information for anything more than a learning tool.

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 2007 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, 2007, 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, 2007, 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 5.5% between 2006 and 2007 while Brinker International, Inc. increased its property, building and equipment by 4.7%. These changes indicate Darden may be scaling back the growth of its business in an effort to maintain stability and efficiency, or most likely as a future effort to decrease their large amount of current liabilities ($1.07 billion, which is over twice as high as its current assets, or 37.3% of their total assets and 19.3% of total sales in 2007). On the other hand, Brinker International, Inc. appears to be more focused on the growth of its business which is shown by the increase in long-term debt financing of 13.2% between 2006 and 2007.


Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Current Ratio





The different liquidity ratios allow us to compare these two companies ability to pay current debts, and thus their short-term capability to survive as a business. Based on the above results, we can see that Brinker International, Inc. has the advantage in liquidity moving forward, although Darden Restaurants did make significant strides to improve this aspect in their business (as shown by the 14% increase between 2006 and 2007). In contrast to Darden Restaurants, Brinker International, Inc. scaled back their liquidity ratio over the two years, perhaps because management realized it was not getting the full use of their short-term cash, and have decided to start investing in more productive assets (new locations, equipment, etc.).


Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Return on Sales





Return on Assets





Return on Equity





Earnings Per Share





The profitability ratios above show indicate that Brinker International, Inc. management has been better at using their available resources to produce income in 2007. In 2006, however, you can see that Darden Restaurants had a better return on their assets. The significant change in Darden Restaurants profitability could be the result of various activities but is most likely a direct effect of the loss incurred to discontinued operations in 2007.

Cash Flow

Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Cash Flow to Net Income





The fairly large change in cash flow to net income between 2006 and 2007 reflects the large change in reported net income for Darden Restaurants, and should prompt further investigation into what attributed to the significant change. The significant change in Darden Restaurants net income, which further affected profitability and return on equity, could be the result of various activities but is most likely a direct effect of the loss incurred to discontinued operations in 2007 (as noted in the income statement and specifically acknowledged in the 10-K notes).


Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Asset Turnover





Receivable Turnover





Inventory Turnover





The efficiency ratios indicate that both companies have made some improvements in order to become more proficient at using their resources to generate sales between 2006 and 2007. Based on the information above we can see that Darden Restaurants turns over its assets and receivables more effectively, while Brinker International, Inc. does a better job managing their inventory.


Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Debt Ratio





Times Interest Earned





The information above shows that Brinker International, Inc. has been extremely aggressive using borrowed funds to finance the purchase of company assets. Darden Restaurants has been comparatively more reserved regarding leveraged investments.

Dupont Framework:

Darden Restaurants (2007)

Brinker International, Inc. (2007)

Darden Restaurants (2006)

Brinker International, Inc. (2006)

Return on Equity





The DuPont Framework presents a systematic approach to identifying the general factors that contribute return on equity by individually looking at profitability, efficiency, and leverage, and then combining the results (return on sales x asset turnover x asset-to-equity ratio). The information above shows that Brinker International, Inc. has improved its overall return on equity, while Darden Restaurants has moved in the opposite direction. Brinker International, Inc has done this specifically by moderate improvements in return on sales, asset turnover, and asset-to-equity ratio, while Darden Restaurants had a dramatic reduction in their return on sales, and only a small improvement regarding the asset turnover, and asset-to-equity ratio.

As a prospective investor, looking at the preceding information, I would prefer to invest my hard-earned money in Brinker International, Inc. because of their apparent focus on growth along with their short-term stability. Compared to Darden Restaurants, Brinker International, Inc. has been more profitable, more efficient with their current equity, and also remain the better option in terms of liquidity. They have also been more aggressive in leveraging the company assets, which potentially would yield investors better returns on their money. All this information indicates that Brinker International, Inc. is in a better position to move forward with their business plan. On the flipside, Darden Restaurants has done a better job efficiently managing their assets and receivables, but their profitability and return on equity have decreased over the 2007 fiscal year. These decreases were primarily due to the loss on discontinued operations, specifically the closing of 54 Smokey Bones restaurants, which makes me skeptical of things to come in the future for Darden Restaurants (also, according to their 10-K they are still in the process of trying to sell the remaining 73 Smokey Bones restaurants). The overall picture shows that Darden Restaurants is in a consolidation phase, where they will likely need to take some time to reassess their business goals, as well as develop and implement specific strategies necessary to accomplish these objectives. Brinker International, Inc., on the other hand, have put themselves in a strong position to further develop their growing business, and would thus appear to be the better investment alternative at this time.


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