In a quote by Warren Buffet ‘’ Investment is a double edged sword’’, i am sure that all he wanted to convey that the investors should just not think about returns, they must also know the risk of investments. Hence, financial analysis is a useful tool, which helps the investor to understand as where exactly they are investing their hard earned money.
Below, using various tools of financial analysis, we will be analyzing the annual report of Chipotle Mexican Grill and would try to understand as if the stock of the company is really worth an investment or not. During our analysis, we will be observing the trends in net income and cash flow from operations, assets and liabilities , auditor’s opinion and many other factors, which will help us understand the real financial health of the company.
Auditors and their Opinion
Referring to the financial statements of the company, we found that an Independent Accounting Firm, Ernst & Young was appointed by the audit committee. The independent auditors have duly conducted their audit on the financial statements of the company which includes, Consolidated Statement of Income and Comprehensive Income, Shareholder’s equity and Cash Flows Statements for the year 2012 and 2011.
The auditors in their opinion have concluded that, financial statements of Chipotle Mexican Grill are fairly represented and the consolidated statement of financial position and the statement of operating cash flow for the year ending 2012, are in conformity with the standards of US Generally Accepted Accounting Principles(GAAP) and hence, the are providing an unqualified opinion for the financial reporting of the company.
Suspected Illegal Matters
The company is involved in litigation it is complained that the company engaged into illegal stock price inflation practice during February 1, 2012 and July 19, 2012. In the, the claimant asserted that the company, each of its co-CEO’s and CFO’s, failed to disclose the material information regarding its business and related results and prospects during the claimed class period. Furthermore, the claimant asserted that the since the company failed to disclose material information and since, even the public statements were false and misleading, this lead to artificial stock price inflation.The claimant on the basis of such illegal practices by the company seeks damages on behalf of the purported class in an unspecified amount, interest, an award of reasonable cost and attorney’s fees and injunctive relief.On this litigation, the case is still under jurisdiction, but if it will have a material impact or not, the same will depend on the decision of the court.
Secondly, the company has neither adopted any such rule nor has adopted any such changes in relation to the financial reporting, which could have a material impact on the financial statements during 2012.
Trend in Total Assets
Referring to the consolidated statement of financial position of the company, during a year from 2011 to 2012, there has been an increase of 17.07% in the amount of total assets of the company. Although, the amount of Current Assets increased only by 9.06%, the major change was recorded in the Non-Current Assets of the company. Under the section of Non-Current Assets, Long term investments increased by 49%; Property-Plant- Equipment increased by 16% and Other assets increased by 93%. No change was recorded in the amount of goodwill, which stood constant at $21939.
Trend in Total Liabilities
Following the trend in the total liabilities of Chipotle Mexican Grill , the same increased by 10.93% during a year. Both current liabilities and non-current liabilities had a significant share in this increase. While the current liabilities increased by 18.67%, under non-current liabilities, deferred rent to be payable by the company increased by 16.65% but a 24% decrease was recorded in the income tax liability of the company, which provided a net effect of an increase of 10.93% in the total liabilities.
Referring to the balance sheet of the company for the year 2012, the three most largest assets of the company are, Leashold Improvement- Property-Equipment, Long Term Investment and Short Term Investments.
While Leasehold Improvement-Property-Equipment, following an increase of 16% during an year, stood at $866703, the most significant section of the assets was the increase in the amount of both short term investment and long term investments during a year. While, long term investment increased by 49%, short term investments of the company increased by 173%. The above mentioned three most largest assets of the company, accounted for 72% of the total assets of the company.
Referring to the balance sheet of the company, the three most largest liabilities of the company, for the year 2012 are: Deferred Rent, Accrued Payroll Benefits and Accounts Payable.
While Deferred rent, following an increase of 16% during the year, stood at $167057, Accrued Payroll Benefits and Accounts Payable amounted to $71731 and $58700, respectively. The three largest liabilities of the company, accounted for 70.37% of the total liabilities.
Type of Shares
Although, the company is authorized to issue both Preferred Stock and Common Stock, but it has neither issued nor it have any outstanding Preferred Stock. In contrast, the company is authorized to issue 230000 common shares but has only issued 34912 shares. However, following the share re-purchase programme of the company for the year 2012, under which the company re-purchased 3819 common shares, the total outstanding shares as of 31.12.2012 were 31093 shares(34912-3819).
Method for preparing Income Statement
Chipotle Mexican Grill follows Multi Step Income Statement approach in the preparation of the Income Statement. The same is evident as the company, despite of deducting all the expenses at once( single step approach), has deducted relevant expenses and by classifying different expenses source, i.e Operating Expenses , Interest and Tax Expenses, to arrive at Net Income.
For Instance, during 31.12.2012, the company after reporting revenue of $2731224, segregated operating expenses and later added them up to be later deducted to calculate net income. Similar treatment was provided to Interest Expense and Taxation Expenses as a part of Multi-Step Income Statement Approach.
Extraordinary Items and Discontinued Operations
The consolidated income statement of the company do not report any information or transaction relating to an extraordinary item or discontinued operations.
Trend In Net Income
Referring to the Consolidated Income Statement of the company, the company has reported three years of accounting data relating to the income statement, i.e for the year 2010, 2011 and 2012. With the overlook of the trend in the net income of the company, it can be easily inferred, that over the years, the bottom line profits has gradually increased which during 2012 amounted to $278000. However, an in-depth financial analysis of the company through Horizontal Analysis, will help us understand as what has actually lead the net income of the company to increase over the years: