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3 Important Metrics To Know When Looking at Restaurant Stocks

There are quite a number of restaurant stocks listed in Singapore. Despite operating in a notoriously challenging industry, some of these stocks have grown from strength to strength, while others have faltered. So how can investors sieve out the winners from the losers? Here are three important aspects of the business all investors should look out for when investing in restaurants.

Same store sales growth or comparable store growth

Organic growth is the bread and butter of any business, especially so for restaurants and retailers. A business that can grow organically signifies that it has the ability to grow its top and bottom line without the need for acquisitions or additional capital expenditure. As such, they will be able to sustain larger profit margins in the future.

With that in mind, the most basic metric that we should look out for is a strong same store sales growth.

In this respect, there are two keys ways that same store sales can grow.

First, is the ability to increase prices and in turn, ticket size per customer. Second, is a restaurants ability to attract new customers to their business, hence increasing the volume of receipts overall.

If a company can sustain healthy growth in these two aspects of their business, investors can feel comfortable about its future prospects.

Look out for a stable gross profit margin

Some companies that rely heavily on promotions to attract customers are willing to sacrifice profit margins for growth. However, this may not be sustainable in the long run.

Therefore, it is vital that investors beware of companies that constantly report lower gross profit margins as it may mean that they are struggling to win customers without ongoing promotions. This may also mean an inability to increase prices due to a very inelastic demand.

Ability to open new stores seamlessly

Opening new stores is a great way for restaurant businesses to grow their bottom line. However, new store openings pose a few challenges for businesses. First is the additional capital expenditure involved and second is the varying demands of consumers in different locations.

Businesses that have a strong brand reputation and a capable management would be able to grow store count profitability and consistently. Looking out for these businesses are extremely important when finding a good restaurant stock to invest in.

The Foolish bottom line

The food and beverage industry is notorious for being a difficult industry to operate in. This is especially so in Singapore where rental prices are high and capable wait staff are difficult to find. Yet, companies that can overcome these challenges and build a reputation for themselves can be rewarded immensely due to the sheer size of the industry.

Finding winners in this sector can hence, be hugely beneficial to any investor. Hopefully, by looking out for these three fundamental characteristics of a restaurant business, can investors sieve out the winners from the losers.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.