About Aramark
You have either seen their trucks barreling through your local downtown area or parked in the back alley of your favorite restaurant. They supply restaurants, schools, prisons (and many more) with products and services ranging from first aid kits and mops to uniforms and meals.
Enter the myth, the Philadelphia-based legends, one of the largest uniform and food providers in the world, Aramark!
Aramark’s stock financials
Aramark is a $9.2 billion company. The company offers a $.44 annual dividend alongside its equally subpar historical shareholder returns.
In fact, if you purchased one share of Aramark stock when it debuted in its initial public offering (IPO) in 2013, you would have achieved a 38% return on investment. While that doesn’t seem like anything to scoff at, their IPO price was $26.22 and Aramark shares currently, and have for a while, trade around $36.00.
Why has an industry giant such as Aramark not delivered as impressive of returns as comparable competitors such as Cintas or Sysco?
Let’s look deeper into the numbers.
Starting with their balance sheet, Aramark has $14.4 billion is total assets and $11.7 billion in total liabilities. Their aggregate liabilities are a little close for comfort compared to their assets, however, Aramark is a big, reputable publicly traded corporation that can likely pay down its debts over time.
However, on their balance sheet, there is an extra section (not found on many other company’s financial statements) categorized as “Prov. for Doubtful Accts.” In layman’s terms, this metric is meant to disclose the amount of payments (receivables) that are due that Aramark has yet to collect (and is unlikely to collect). This number as of last quarter is $80 million for Aramark.
Aramark’s stock fundamentals
While not a huge cause for concern, as it won’t likely push the needle regarding the efficacy or financial stability and viability, we think they need to be better about collecting money.
Shifting gears to the income statement, under the operating expenses section, their total cost of revenues has been steadily increasing over the last handful of quarters. At first blush, this should make an investor somewhat uneasy. However, their increased cost of revenues is matched with a proportionate increase in net revenues. As long as Aramark attempts to keep their costs down, this shouldn’t cause any major problems for the company.
Finally, jumping to the cash flow statement, a notable positive is the company’s total cash from operations. While standing at -$115 million in the Q1 of 2021, in the most recent quarter (Q4, 2021), it stands at $657 million.
Aramark has seemingly done fantastic with respect to increasing their total cash from operations in 2021 (likely due to the economy opening back up). The problem, however, is that the long-term sustainability of this increase in cash from operations is unlikely.
As briefly mentioned, this figure likely surged due to schools, restaurants, and other establishments opening up. Aramark likely received a huge influx from these institutions resuming their operations because it meant Aramark could resume theirs as well. In other words, Aramark’s capital, equipment, and other assets were finally being put back to work efficiently for the company.
Let’s talk about their ability to carve out a profit.
It’s not great!
Specifically, we found their annual gross profit margin somewhat appalling. Their 8.89% gross profit margin is abysmal compared to their industry’s 30.42%. Their annual revenue growth of -5.72% compared to the industrywide 32.27% is atrocious too. Aramark is also not getting the biggest bang for their invested bucks!
For example, their annual return on assets sits at -0.69% compared to the industry’s 1.25%. While these are both relatively low numbers, we expected Aramark to achieve a greater net return on their investments given their relative size and scale.
Here comes the boom!
Aramark’s interest coverage ratio is terrifying. This metric is used to measure how many times a company is able to make the interest payments on their debt. The industry’s average coverage ratio is 101.33 whereas Aramark’s is -1.05.
This effectively means that the company cannot currently pay the interest on its debt obligations. TD Ameritrade notes on their platform that “neither operating profits nor current assets alone are great enough to satisfy interest obligations.” This is alarming at best.
The future of Aramark
Given that Aramark has money they’ve yet to collect and they currently can’t pay the interest payments (alone) on their debt, we find the financial future of Aramark depressing.
However, let’s step back from the numbers and think about the outlook for the industry and where the company stands to gain.
As previously mentioned, restaurants, schools, and other public health and dining establishments were opening back up and then omicron happened. Regardless of whether the country goes on lockdown again or if COVID-19 ceases to exist, Aramark’s stock sadly hasn’t rebounded in the past and is unlikely to rebound in the future no matter how good things get.
Should you buy Aramark stock?
Simply put, we wouldn’t touch Aramark with a one-hundred-foot poll. The company checks our ubiquity box, however, as we dove into the financials of the company, we got instantly bearish in the short and long term.
We currently give the company a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.