Company Analysis about Chipotle Mexican Grill, Inc. (CMG) (Essay Sample)

Company analysis about Chipotle Mexican Grill, Inc. (CMG)
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Projections and assumptions
The sales projections detailed in the income statement are based on an analysis of the industry and growth rates plus the analysis of the competition. Non-recurring items are expected to occur regularly and in the foreseeable one year at a rate of 24%) as a result of the conclusion of pending litigation fees, write offs of bad debts and worthless assets (Helford, 2009). These are to reduce drastically in year two at 12% and will be significantly lower by year three (0.6%). For operating expense, those that vary with sales are projected to remain at a constant percentage of the total revenue (Fridson et al, 2011). Adjustments may later be made as a result of changes in supply, technology or operating environment i.e. costs increase exceeds price increase. Other operating expenses are to increase by 13.8% in 2015, 14.17% in 2016 and 12.3% in 2017 with an increase of 15% in 2014. This is as a result of anticipated reduction in prices due to globally depressed oil prices plus reduction in wage bill and operating expenses. Interest income/expenses are difficult to predict as they are dependent on the outstanding debts (Bottom of ForTop of FormLee, et al, 2009).
The management expects the interest income/expense portion of the income statement to change yearly by a 1% increase over the next three years. Depreciation expenses depend on the existing assets and planned acquisitions or disposals. The straight line method has been used to project amortization at 10% per annum. Also the income tax rate has been calculated at 39% which is the current corporate rate (Fridson et al, 2011). Forecasted values for Cash have been derived from the projected cash flow statement. Cash and cash equivalents are calculated as a percentage of total revenue (Helford, 2009). For current Assets and liabilities, items that vary with sales, e.g. accounts receivable, inventory and accounts payable have been typically been projected to remain at the same percentage of sales as in the past(Bottom of ForTop of FormLee, et al, 2009).
They have been calculated as a percentage of total revenue based on year 2014. Other operating activities have been calculated at a rate of 0.0067% as a percentage of sales/total revenue. When sales activity increases, so do revenues and expenses (Helford, 2009). The percentage approach has been used to forecast accounts receivables, inventories, and prepaid expenses and accounts payable plus accrued liabilities (Fridson et al, 2011). Liabilities have been projected at a rate of 9.5% of total liabilities using year 2014 as the base year. For net income adjustments. The new income adjustment for 2014 was comprehensive where succeeding years were calculated with the actual carrying value of the company. Capital expenditure is projected to grow by 19.5% as result of the business engaging in expansion as well as refurbishments (Bottom of ForTop of FormLee, et al, 2009). Cash flows from the investing activities are projected to increase at 10.6% with 2014 as the base year.
Capital assets are a function for existing capital amounts, planned acquisitions or disposals and amortizations expenses. The amounts for net income and depreciation expenses are derived from the income statement and the change in current assets and liabilities are calculated based on percentage of sales approach (Bottom of ForTop of FormLee, et al, 2009). The investing section of the cash flow is derived based on planned purchases or disposition of capital assets. The financing section is calculated based on planned borrowings, repayments, share issue and dividends. Chipotle Inc. Has strong internal cash flow hence a strong cash position (Fridson et al, 2011). It therefore needs less of external funds. By increasing the company’s retention ratio, external funds requirements will be done with. Safeguarding these internal cash flows is therefore paramount. Reducing payout ratio will make the company to retain more money in shareholders equity that can be used to meet funding needs (Helford, 2009).
Chipotole Mexican grill Inc. Weighted average cost of capital
This is the average after tax cost of a chipotle’s capital sources which is the standardized cost of raising money. Its formula is
WACC =  * Re +  * Rd * (1 – Tc)
Re = cost of equity, Rd = cost of debt, E = market value of the firm’s equity, D = market value of the firm’s debt, V = E + D, E/V = percentage of financing that is equity, D/V = percentage of financing that is debt and Tc = corporate tax rate (Bottom of ForTop of FormLee, et al, 2009). The company is not financed by debt hence
Rd ₓ (1-Tc) =0
WACC =  * Re,
Where Re =
= 5/720*27%
= 0.002%
WACC = 2,012,369/2,012,369*0.002%
= 0.002
FOR every $1 dollar chipotle corporation acquires from investors, it must pay them a return of at least $0.002 per dollar. The company is therefore overvalued.
References
Fridson, M. S., Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide. Hoboken, N.J: Wiley.
Helford, E. A. (2009). Techniques of financial analysis: A modern approach. New Delhi: Tata McGraw-Hill.
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Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning & forecasting: Theory and application. Singapore: World Scientific.
Appendix A
Pro forma financial statements for Chipotole Mexican grill Inc
Chipotole Mexican grill Inc
Income statements
For the years ended December 31st
(000’s)
Actual Pro forma
Period Ending:

Trend

12/31/2014

12/31/2015

12/31/2016

12/31/2017

Total Revenue


$4,108,269

$5,012,088

$6,114,747

$7,459,992

Cost of Revenue


$2,990,513

$3,618,520

$4,378,410

$5,297,876

Gross Profit


$1,117,756

$1,393,568

$1,736,337

$2,162,116

Operating Expenses

Research and Development


$0

$0

$0

$0

Sales, General and Admin.


$273,897

$336,893

$414,378

$509,685

Non-Recurring Items


$15,609

$19,355

$21,678

$22,978

Other Operating Items


$110,474

$125,719

$143,533

$161,188

Operating Income


$710,800

$904,395

$1,149,237

$1,460,285

Add'l income/expense items


($6,976)

($7,206)

($7,511)

($7,980)

Earnings Before Interest and Tax


$714,303

$911,601

$1,156,748

$1,460,285

Interest Expense


$0

$0

$0

$0

Earnings Before Tax


$714,303

$911,601

$1,156,748

$1,460,285

Income Tax


$268,929

$355,524

$556,076

$569,511

Minority Interest


$0

$0

$0

$0

Equity Earnings/Loss Unconsolidated Subsidiary


$0

$0

$0

$0

Net Income-Cont. Operations


$445,374

$556,076

$705,617

$890,774

Net Income


$445,374

$556,076

$705,617

$890,774

Net Income Applicable to Common Shareholders


$445,374

$556,076

$705,617

$890,774

Chipotole Mexican grill Inc
Cash Flow statements
For the years ended December 31st
(000’s)
Actual Pro forma
Period Ending:

Trend

12/31/2014...