Introduction and Background Information to the Company

Dave & Buster’s Entertainment, Inc. is a restaurant and entertainment company established in the United States. The company’s headquarters are in Dallas, Texas, but it has 88 sites in the United States and one in Canada. The firm was started in 1982 by James Buster and David Corriveau. Significantly, the company has engaged in corporate operations and transactions such as the public sale of shares in order to expand the firm. Edison Brothers Stores, for example, bought stock in the company in 1989 to help it expand to other cities around the country (Yahoo Finance, 2017). Some of the services and products that the enterprise offers include food and drinks, playing games, watching live sports, and event sponsorship. It serves various clients that range from adults to families. The company still aims at expanding to other national and international territories so as to improve its sustainability (US SEC, 2016). Moreover, it is a growing firm with an upward trend of making sales revenues. This report presents pro forma financial statements and a ratio analysis that aids the decision as to whether it is a worthy investment destination.

Financial Statement Review

Table 1: Dave & Buster S Entertainment, Inc. Pro-forma Income Statement for the Year Ending 31st January, 2017

Workings Amount ($000)

Food and beverage revenues 405,841 x 0.1 + 405,841 446,425

Amusement and other revenues 461,141 x 0.1 + 461,141 507,255

Total revenues 953,680

Cost of food and beverage 104,757 x 0.1 + 104,757 115,232

Cost of amusement and other 58,053 x 0.1 + 58,053 63,858

Total cost of products 179,090

Operating payroll and benefits 200,129 x 0.14 + 200,129 228,147

Other store operating expenses 250,186 x 0.11 + 250,186 277,706

General and administrative expenses 53,600 x 0.2 + 53,600 64,320

Depreciation and amortization expense 78,660 x 0.1 + 78,660 86,526

Pre-opening costs 11,561 x 0.22 + 11,561 14,104

Total operating costs 849,893

Operating income 103,787

Interest expense, net 11,464 x 0.67 7,681

Loss on debt retirement 0 0

Income before provision for income taxes 96,106

Provision for income taxes 32,131

Net income 63,975

Unrealized foreign currency translation loss (324) (324)

Total comprehensive income 63,651

From the pro forma income statement above, the company will make a total comprehensive income of $63,651 in the financial year ending 2017. The amount of profit would be an increase as compared to the financial year that ended in 2016 where the firm made $59,295. There reason for the rise is because the organization will realize an increase of 10% on sales. Nevertheless, the total operating costs will increase at the same trend of 2015 to 2016. Therefore, the firm will register a higher amount of total costs which is $849,893 as compared to $756,946 of the year that ended 2016 (US SEC, 2016). Apparently, the increase in net profit was as a result of the relatively high margin of increase in sales revenues.

Table 2: Dave & Buster S Entertainment, Inc. Pro-forma Balance Sheet for the Year Ending 31st January, 2017

Assets Workings Amount ($000)

Current assets:

Cash and cash equivalents 25,495 x 0.36 9,178

Inventories 19,529 x 1.06 20,663

Prepaid expenses 12,954 x 1.22 15,767

Deferred income taxes 30,257 x 0.98 29,651

Income taxes receivable 4,146 x 1.71 7,100

Other current assets 17,699 x 1.78 31,569

Total current assets 113,928

Property and equipment 523,891 - 86,526 + 77,802 515,167

Trade names - 79,000

Goodwill 272,694 x 1.0004 272,796

Other assets and deferred charges 18,870 x 0.95 18,012

Total assets 998,903

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current installments of long-term debt 7,500

Accounts payable 42,836 x 1.22 52,425

Accrued liabilities 103,614 x 1.6 120,360

Income taxes payable 2,697 x 1.72 4,633

Total current liabilities 184,918

Deferred income taxes 35,347 x 1.27 44,898

Deferred occupancy costs 125,259 x1.25 157,139

Other liabilities 10,194 x 1.11 11,348

Long-term debt, net 330,750 x 0.77 254,678

Commitments and contingencies 0

Stockholders’’ equity:

Common stock

Preferred stock

Paid-in capital - 280,828

Treasury stock

Accumulated other comprehensive loss (970)

Retained earnings 66,064

Total stockholders’’ equity

Total liabilities and stockholders’’ equity 998,903

The pro forma balance sheet above shows a total asset and total liabilities and stockholders’ equity at $998,903 each. The amounts are lower than the ones for the year ended 2016 that was $1,004,535. The changes followed the trend of the year 2015 to 2016 except for the assets that the firm acquired some property worth $77,802 for expansion and replacement of the old equipment. The decrease in the total amount of property was due o the depreciation of property and other assets and deferred charges (US SEC, 2016). On the other hand, the total equity and liabilities decreased due to the decline in long-term debts.

Ratio Analysis

Table 3: Dave & Buster S Entertainment, Inc.

Ratio Formula 2016 (000)

Profitability Ratios

Gross profit margin ratio Gross income ÷ net sales 704,172 ÷ 866,982 = 81%

Net profit margin ratio Net income ÷ net sales 59,619 ÷ 866,982 = 6.9%

Measures of Relative Value

Price-earning (P/E) ratio Market value price per share ÷ earnings per share 26.09

Price to Book Ratio Stock price ÷ (total assets - intangible assets and liabilities) 4.36

EPS (PAT - Preferred dividends) ÷ average number of common shares outstanding 1.46

Liquidity Ratios

Current Ratio Current Assets ÷current liabilities 110,080 ÷ 156,647 = 0.7

Quick Ratio (Current Assets -inventories) ÷current liabilities (110,080 - 19,525) ÷ 156,647 = 0.6

Financial Leverage Ratio

Debts to Asset Total liabilities ÷ total assets 658,197 ÷ 1,004,535 = 66%

Debt to equity Total debt ÷ Total equity 330,750 ÷ 346,338 = 96%

Activity Ratios

Days’ sales in receivables Gross receivables ÷ annual net sales/365 3,443 ÷ ( 866,982 ÷ 365) = 1.5 days

Return on total assets Net income ÷(beginning assets + ending total assets)/2 59,619 ÷ (950,318 + 1,004,535) /2 = 6%

Cash Flow Ratios

Operating cash flow ratio Operating cash flows ÷ current liabilities 186,983 ÷ 156,647 = 1.2

Cash flow margin ratio Operating cash flows ÷ net sales 186,983 ÷ 866,982 = 0.2

Analysis of Profitability Ratios

The company is a profitable on given the positive gross profit and net profit ratios of 81% and 6.9% respectively. It shows that the organization effectively manages its expenditures to the extent of generating significant profits. However, the management might have to find additional ways of narrowing the gap between the two ratios by increasing the net profit margin (Ehrhardt & Brigham, 2015). That would imply that the enterprise will have to cut on the unnecessary expenses.

Analysis of Measures of Relative Value

The P/E ratio for Dave & Buster S Entertainment, Inc is a positive figure, thereby, implying that the firm generates sufficient earnings from its shares. On the other hand, the positive EPS further indicates the profitability of the enterprise. Lastly, the P/B ratio shows that the book value of shares is lesser than the market value that is currently $54.43. Therefore, the company is a profitable one that attracts so many potential investors, thus, the rise in the market value of the shares (Ehrhardt & Brigham, 2015).

Analysis of Liquidity Ratios

The liquidity ratios of the firm do not appear financially impressive given that both the current and quick ratios are below 1. Therefore, it means that the company cannot use its current assets to pay its obligations to the short-term creditors. Nevertheless, one could argue that the firm utilizes a relatively high amount of short-term liabilities to help generate capital without taking long-term loans that attract interest payments. That will be a reasonable point of view if the firm does not focus on the expansion of business (Ehrhardt & Brigham, 2015). However, Dave & Buster S Entertainment, Inc. still aims at carrying out additional investments, and it would be of significance to use more long-term loans than the current liabilities.

Analysis of Financial Leverage Ratio

The debt to asset ratio and the debt to equity ratios are 66% and 96% respectively. Regarding the debt to asset ratio, the company uses more of assets to run the business than the liabilities. It presents a financially stable firm that can use its resources without relying hugely on debts. Additionally, the debt to equity ratio shows that the enterprise has more of its assets owned by the shareholders and not the debtors (Ehrhardt & Brigham, 2015). However, the difference is marginal because the ratio is 96%. In such a case, the firm ends up paying a relatively high amount of money as interest to the debt holders.

Analysis of Activity Ratios

The Days’ sales in receivables ratio of the company are 1.5 days. It means that the firm only takes an average of one and a half a day to collect its money from those who purchase on credit. The scenario is desirable because the company might not easily run into a situation where it encounters bad debts (Ehrhardt & Brigham, 2015). On the other hand, the return on total assets is at 6%. The 6% is a positive indication of a firm that generates revenues on the invested funds.

Analysis of Cash Flow Ratios

The operating cash flow and cash flow margin ratios are 1.2 and 0.2 respectively. The operating cash flow ratio is desirable because the firm managed to receive a positive cash flow from its operating activities. Moreover, it was more than the current liabilities that signifies the future outflow of funds. On the other hand, the firm managed to generate a positive cash flow margin ratio which is also desirable. For instance, some companies end up selling their products but fail to produce a positive cash flow from their operating activities (Ehrhardt & Brigham, 2015). The case of Dave & Buster S Entertainment, Inc. means that the enterprise can have cash for its day to day operations.

Return on Equity: DuPont Analysis

ROE = Profit Margin x Financial leverage x Asset Turnover Ratio

Profit Margin = net income ÷ net sales = 59,619 ÷ 866,982 = 7%

Asset Turnover, = (net sales ÷ average total assets) = 866,982 ÷ (950,318 + 1,004,535) /2 = 0.9

Financial leverage = total assets ÷ total equity = 1,004,535 ÷ 346,338 = 2.9

Therefore, ROE = 0.07 x 0.9 x 2.9 = 0.2

The DuPont Analysis above shows that the firm is capable of generating a profit margin as well as achieving a relatively high asset turnover ratio of 0.9. However, the financial leverage do not appear financially attractive to the potential investors given the total assets are almost three times the shareholders’ equity (Ehrhardt & Brigham, 2015). It implies that the firm owes most of its assets to the creditors.

Economic Value Added (EVA)

EVA = net operating profits after tax - invested capital x WACC

WACC (cost of equity = 12.5%, cost of debt = 5%, total equity = 346338, total debt = 330750, corporate tax = 39.2%).

EVA = 59,619 - (677,088 X 7.88%) = $5,452

The positive EVA of $5,452 implies that the firm had an additional value of the same amount in the last financial year. It is a desirable scenario for the investors who would wish to invest in the company.

Findings, Recommendations, and Rationale for purchasing Stock

Dave & Buster S Entertainment, Inc. is a profitable company that has both positive gross and net profit margins. However, the gap between the two margins is relatively big, 81% and 6.9% respectively. Therefore, the management needs to minimize the expenditures by cutting on the unnecessary costs so as to increase the net profit margin. The firm also operates with a higher equity than the debt capital. It is a healthy state of affairs, and the firm needs to limit the amount of long-term debts further and offer more of the shares to help minimize on the interest on capital (Apostolik, Donohue, & Global Association of Risk Professionals, 2015). Lastly, it is advisable for one to purchase stock in the company given that it has consistently generated profits and is also planning to expand, thus, making it capable of increasing the profit margins.

Financial Risk

Given that Dave & Buster S Entertainment, Inc. is an international firm, it is likely to suffer from foreign exchange risks (Apostolik, Donohue, & Global Association of Risk Professionals, 2015). For instance, if the US currency appreciates against the Canadian dollar, then the return from Canada will decrease when exchanged to the domestic currency.

References

Apostolik, R., Donohue, C., & Global Association of Risk Professionals. (2015). Foundations of financial risk: An overview of financial risk and risk-based financial regulation. Hoboken, New Jersey : John Wiley & Sons

Ehrhardt, M. C., & Brigham, E. F. (2015). Corporate finance: A focused approach. Boston, MA : Cengage Learning.

US SEC (2016). Annual report for the fiscal year ended January 31, 2016: Dave & Buster S Entertainment, Inc. US SEC.

Yahoo Finance (2017). Dave & Buster S Entertainment, Inc. (PLAY). retrieved on 27th January, 2016 https://finance.yahoo.com/quote/PLAY/options?p=PLAY