The Solid Rise of Fiesta Restaurant Group Inc (NASDAQ:FRGI)

For the past year, Fiesta Restaurant Group Inc (NASDAQ:FRGI) has had wild swings in its performance and finances. When looking at the company’s financial statement, the company’s volatility somewhat makes sense. The company’s values in each category have been more or less inconsistent, which may yield uncertainty for investors and shareholders.

This article will go more into depth about each of these financial categories.

Tax Burden

The label of the tax burden can be a bit confusing. The formula is intended to multiple the returns on equity into a round number, the tax burden is usually thought of as the question, “What is the amount of money the company keeps after taxes?” For investors, the tax rates that hit around 38 percent may make investors a bit more uncomfortable. Fiesta Restaurant Group forecasts that taxes during 2014 will stay higher than 2013, due to the expiration of the tax credit for work opportunity.

Interest Burden

A similar system applies to the company’s interest burden. This metric is a measure of the amount of money that Fiesta Restaurant Group is holding on to. The company paid out the majority of their operating income in interest in the last few years. However, in 2013 the number actually improved significantly. Over the course of the year, the company completely improved their debt situation. They realized that there is a significant cost on closing out the position, which was written off as an interest expense. Thus, even though the value seems to be worse for 2013, the company actually improved itself over the course of the year.

Operating Margin

Fiesta Restaurant Group’s operating margins have been growing. For the past few quarters, the restaurant industry underwent a brutal period with intense battles for market share and rising costs for ingredients, which reduced margins for most companies. Fiesta Restaurant Group did exceptionally well in that struggle, and ended up increasing their sales and margins.

Turnover of Assets

Asset turnover is the division of the company’s sales by the company’s assets. This metric allows investors and shareholders to measure how well or poorly the company is making use of its base of assets to generate sales. Additionally, the company has learned how to utilize their assets better in order to generate sales. This is positive news for investors and shareholders, because it shows that the company is not holding onto bloated asset values on their financial sheets.

Leverage Ratio

According to the table, the leverage ratio and return on equity are ridiculous. The first financial statements of the company indicate the struggling situation that the company is in. The equity value is negative, and that negative value brings down the results, by causing the values for the leverage ratio as well as the return on equity to be negative on the sheet.

Additionally, the fact that the equity value is negative, it manipulates the calculations of the values of the next year as well. By the end of last year 2013, the company seems to have transformed. While the leverage ratio was still very high, the company’s financial statements were now on the same level as that of other companies. During that year, the company also saw that its stock price skyrocket.

Return on Equity

In 2013, Fiesta Restaurant Group’s return on equity took a hit compared to the last few quarters. This drop was partially expected, since 2013 was the year of restructuring the debt. The company closed out unattractive debt situations, and incurred a loss as a result. The loss throughout the year dragged income down past sustainable levels. For the sake of comparison, the net income in 2013 was $9,257,000, and the loss was $16,411,000 to close out that debt position.

Conclusion

Not counting taxes, Fiesta Restaurant Group Inc has shown near constant improvement. In the eyes of an investor, the tax burden that the company faces is a concerning factor. Although some businesses could legally relocated their businesses to overseas countries in order to avoid taxes, it is often difficult for the company to see earnings in another foreign country when most of their locations are obviously in the United States.

On the other hand, if the company’s franchising business can continuously grow overseas, then the company could consider separating that unit from its main operations to benefit its shareholders.

Additionally, the company made massive improvement to their debt structure. According to statements released by the company’s management, their new debt is only 2.25 percent. It is also important to remember that interest is tax deductible. Thus the effective rate after tax on the company’s debt is 1.42 percent.

The company’s most prominent forte is its capability for rapid growth and their ability to grow margins during a competitive and difficult period that ended up reducing margins for the majority of their competition. Management has been very focused on their goal: to set a price point, decide a value proposition for the customer, and rapidly expand in the markets they are already established in.