Sales Growth Rates
Overall, Sonic’s accounting accurately reflects their underlying businessreality. Because of the lack of apparent accounting distortions, we decided toillustrate the affect FASB’s 2009 FAS 160 will have on the presentation of Sonic’s minority interest in net assets. Prior to September 1, 2009, Sonic hasand will continue to present their minority interest in partnership stores on thebalance sheet between liabilities and equities. However, for all statementsthereafter, Sonic will be required to present their non-controlling interests inthe equity section of the balance sheet. If FAS 160 were in effect for the yearended 2008, a reconciliation of Sonic’s equity section would appear like thetable to the right.= In 2008, there were 684 partner drive-ins. Sonic had a 65% ownership interested in these partner-drive-ins. The 35%non-controlling interest was composed of $5,220,000 interest, as shown above. As a result of this increased stockholders’equity, various accounting ratios will be impacted, such as a decrease to ROE.
Cash flow analysis
Sonic has positive cash flow from operations (CFO) to either distribute to debt and equity holders or reinvest in thebusiness. There is a gap in 2008 between CFO and Net Income of $33,543,000. However, it is only 4% of total assets soit does not raise a red flag. The difference is mostly attributable to the deprecation add back when calculating CFO. For2008, Sonic has Free Cash Flow (FCF) to common equity of $16,384,000 and FCF to all investors of $929,000. Both of these numbers are significantly lower than Sonic’s competitors. For example, Jack in the Box (mkt. cap 1.4B) has FCFto investors of $4,082,000 which is more than 4 times as large as Sonic (mkt. cap 584M). This suggests that Sonic isusing its FCF’s to grow the business. Also, capital expenditures in 2008 were $106,905,000 while Deprecation for 2008was $60,319,000 which also suggests Sonic is growing its capital base. This is in line with Management’s Discussionand Analysis where they state their plans to open new franchise stores.
The average of Operating Accruals/Net Operating Assets between 2006-2008 for Sonic was 12%, which raises a red flagin the eVal software. Compared to Sonic’s competitors, Burger King has 9.2% and Jack in the Box has 11.5%.However, when looking closer at the Sonic financial statements, the majority of the accruals comes from non-currentoperating accruals, specifically, expensing the depreciation of capital expenditures. Sonic’s earnings quality is thereforegood since a small percentage of the accruals are associated with receivables and other current asset accounts.
Growth Rates, Profitability and Margins
Sonic has a 4 year average sales growth rate of 10.73%.Comparatively, the average sales growth rate of Burger King,CKE Restaurants, and JACK in the Box’s 4 year average growthrates is 3.7%. This implies that Sonic’s sales have been growingat a faster pace than the industry average sales growth rates in thepast 4 years.