We put a lot of weight toward the quality of a company. This is accomplished through a number of different measures within Liquidity, Balance Sheet Strength and Management. We have over 3,500 companies in our database and Popeyes Louisiana Kitchen (NASDAQ:PLKI) has one of the highest quality score in any sector.
PLKI participates in the restaurant industry. The company develops, operates and franchises quick service restaurants under the Popeyes brand. This Georgia-based company currently has over 2,100 restaurants.
Working Capital to Current Assets measures the amount of working capital a company should have. Working capital comprises a company's short-term assets less short-term liabilities. This difference, if a positive amount, gives the company flexibility with changing environmental demands. A company could have too much working capital that may be better utilized paying down debt or making longer-term investments. PLKI's working capital ratio stands at 0.071 and qualifies at the top tier of our scoring methodology. They have neither too much, nor too little working capital.
Cash to Current Assets measures the amount of cash a company will need to perform its operations. Too much cash poses problems that reflect poorly on management. A great example of this is with Apple (NASDAQ:AAPL) as it recently had nearly $200 billion in cash reserves. It received a lot of criticism for not putting this capital to use and increase the value of the company. In response, it gave up a lot of this cash with dividend payments and share buybacks. PLKI on the other hand is in a slightly different type of business (restaurants) and could be considered a "high-volume" cash business. Typically, cash businesses find themselves generating a lot of cash and it is able to leverage this by reducing capital turnaround much faster than account payable turnaround. In other words, when PLKI buys chicken from a vendor, it usually won't have to pay that vendor until 30 or 60 days latter. Meanwhile, its restaurants can sell all this chicken for a profit before ever having to have had to technically pay for it. This creates a cash float and puts PLKI in a great cash position. Its current cash ratio is 0.78 from its franchise and store owned businesses.
Working Capital Required gives us an understanding of how much working capital a company may need. This is not a standard ratio and is unique to our methodology. It is calculated as follows: (WC / sales1) / (sales1 / sales2) where WC is working capita, sales1 is the current revenue, and sales2 is the previous quarter's revenue. This ratio provides an idea of the amount of working capital that is needed to produce revenue using the delta of quarterly revenue. PLKI's working capital amount is positioned to expand revenue growth determined by the ratio 0.076.
Net Income to Revenue is an important consideration when reviewing the liquidity of any business. It helps in aiding the overall ability of a company to regenerate capital. Granted, it is not the only measure that can do this, and accountants have the ability to hide non-cash items in the figure. Those issues aside, PLKI is great at producing income from its franchises and company owned locations. The company's core business is its franchise division giving them an advantage over many of their competitors. PLKI is able to generate more than 2x the revenue from franchise fees compared to its store owned locations. The franchise royalties received are also low cost due to setting up and running a restaurant. PLKI's net income margin is 18.2%, in line with McDonald's (MCD) at 19.8% which also franchises restaurants. Regardless of PLKI's direct competitors, any restaurant business cranking out near 20% net income is worth looking at.
Balance Sheet Strength
Liabilities to Assets is a clean conventional ratio that measures the amount of debt a company has compared to its assets. This figure will give us an understanding of the company's ability to raise more debt should it be needed for expansion. PLKI stands at a 70% near the threshold of a overleveraged company. Generally at about 75% we find that companies are unable to raise more debt at reasonable values.
The changing balance sheet Delta measures the change in assets and liabilities from one quarter to the next. A positive change in assets and a negative change in liabilities lends itself to an increasing equity position which is favorable toward shareholders. We have found that PLKI is increasing its assets position as well as its liability position, however, the increase in assets is greater than the increase in liabilities still giving an increase in equity for shareholders.
The statement of cash flows reconciles a company's balance sheet and income statement. It is in this statement that we can determine how cash is being managed in a business. The first item we look at is the net income quality. It is possible for managers, CFOs and accountants to skew the net income figure using accounting and accruing tricks. To reconcile the net income figure we look at the net income compared to the total cash flow from operating activities. In general, if the net income figure is less than the total operating activities figure than net income is thought of being of low quality. However, in PLKI's case we find that the net income figure is less than the operating activities total cash flow implying that the net income figure is of high quality.
Next, we review the company's investing activities. We generally believe a company's growth depends on its investing activities. Companies that do invest will see growth over companies that do not invest. Granted the net effect of investing activities must be positive, and that the investments need to be good investments. Reviewing the statement of cash flows we can determine that PLKI is investing a relatively proper amount compared to its financial standing.
Finally, our last review of management involves around its financing activities. Taking out debt and doing other activities that do not promote the growth of wealth for its shareholders is unfavorable in our eyes. Granted, these activities have to be considered on a case by case basis and many investors believe that any return of wealth through the use of dividends and buybacks are negative attributes of a company's management. However, we generally view share buybacks and dividend payments as beneficial in investors' eyes and as long as the company is in the proper position can create value and wealth for an investor. PLKI is found to return shareholder wealth through a solid share buyback plan.
Taking the whole financial picture of PLKI we find that the company has incredible quality, however, is not currently priced in the market at a reasonable level. There may be other better opportunities that have strong quality attributes at a better relative price. This is the type of company you pay attention to in a market crash, when it goes on sale at a deep discount.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.