* Data collected from Reuters and Forbes

Interpretation of the financial ratios:

The price to earnings ratio indicates values lower than the industry averages, revealing as such decreased investor expectations regarding future gains. Nevertheless, it is noted that the P/E ratio has increased when compared to its past values at the Cheesecake Factory, to as such indicate an increasing financial strength and enhancing possibilities for the shares to become even more profitable in the future.

The sales ratio is an indicator of organizational growth and the current values reveal decreasing consumer interest in the products of the Cheesecake Factory relative to the past years, as well as relative to the other players in the industry.

The debt to equity ratio is a rate of financial strength, which, in this case, indicates a decreased level of the organizational strength. Still, it is noted that the values hereby assumed are inconclusive as insufficient data is made available by the firm.

The gross and net profit margins have evolved at low rates compared to the past recent years, but they are significantly higher than the industry averages. It as such means that the company is able to retain more money from its sales than most players in the restaurants industry.

The returns on assets and investment capitals are only slightly different from the returns of the previous years; nevertheless, they are significantly higher than the average returns in the industry. This specifically means that the Cheesecake Factory is better able to generate money from its assets and is better able to make profitable investments that generate positive returns.

6. Future strength and position

The valuation analysis of the Cheesecake Factory has revealed both positive as well as negative aspects of the organization. Nevertheless, it is now estimated that the negative dimensions of the ratio analysis would be overcome and that they are linked to forces in the external environment. Additionally, the internal environment has revealed increased strength and the ability to capitalize on its strong points and transform them into gains. It is expected that the future would witness a growingly stronger organization, generating higher sales, more profits and occupying a more competitive position within the industry. The market share of the Cheesecake Factory is also expected to increase, especially as it ventures into new markets. In other words, it is believed that the company would come to perform at levels higher than the industry averages and from this standpoint, a recommendation is made to purchase the Cheesecake Factory, as this would generate a positive return on investment.

7. Control of external forces

As it has been mentioned throughout the previous stages of the analysis, the Cheesecake Factory relies on a strong internal structure, due to which it maintains high levels of profitability and positive returns on its investments. Nevertheless, it continues to be challenged by forces in the external environment, such as the reduced purchasing powers of the customers, the intensity of the competition, the bargaining power of the unions or the changing consumer demands and consumption trends. To all these issues, the Cheesecake Factory has to respond through processes of development and adaptation. In terms of the economic crisis which reduces purchasing powers, a solution is represented by the expansion so that wider markets can be accessed, combined with the further diversification of the menu in order to ensure that buyers have a greater access to the company's products.

Another important challenge of the external environment is represented by the changing consumer demands. In this order of ides, the Cheesecake Factory is renowned for its highly rich and tasty foods, but which contain high quantities of sugar, calories and carbohydrates. This means that an unhealthy dimension is added to the foods. This dimension is worrying in a context in which more and more diseases of the twenty first century are pegged to inadequate nutrition. In such a context then, consumers across the world come to place an increased emphasis on a healthier nutrition, which is not currently the focus of the Cheesecake Factory. Similar to other external challenges, the company can overcome this threat by readjusting its business model to fit emergent demands and features in the environment. The past successes and the current position indicate the company's ability to withstand and overcome external challenges.

8. 5-year projections of cash flows and net incomes

8.1. Net income projection

2006

2007

2008

2009

2010

Net income

$81,282,000.00

$73,964,000.00

$52,293,000.00

$42,833,000.00

$81,713,000.00

Annual growth

-9.003223346

-29.29938889

-18.09037538

90.77113441

Average growth 2006-2010

8.594536696

2010

2011

2012

2013

2014

2015

Projected growth

$81,713,000

$88,732,147

$96,354,238

$104,631,067

$113,618,876

$123,378,737

The net income projection was based on the net income for years 2006-2010, as shown in the company's annual report. For each year (except for 2006, since there is no data for 2005, the annual growth for that year was calculating as Net Income for current year minus Net Income for previous year, divided by the Net Income for previous year. The result was multiplied by 100 to have a percentage result of this evaluation. With these results, an average net income growth was calculated as an...

The result was 8.59%, which was used as the basis of the net income projection for the next five years.
There are several important notes and comments to be made with relation to this income projection. First, one needs to point towards the trend of the net income figures at the Cheesecake Factory. Starting at a certain level in 2006 (level which was only equaled in 2010), the net income at the company has gradually decreased over the next years, with as much as -29% in 2008.

Looking over the Income Statement, it appears that this decrease is explained not necessarily through a problem on the revenues side of the organization (these have gradually and constantly grown over the 2006-2010 period), but rather because of higher costs of sales during the years of decreasing net income. It is difficult to understand whether this has occurred because of the economic crisis or because of organizational problems within the company. However, while the projection rate that was used is an average of the yearly increases or decreases, it is important to note that the fluctuations from year to year during the analyzed period were often significant.

The projection may also be affected by several factors, including a returning of an economic downturn, which would again, most likely, increase the costs of sales and potentially produce additional costs for the company that will need to be considered at that respective moment. Overall, the projection seems an objective one and should give a reasonable idea of where the net income should be in 5 years.

8.2. Cash flow projections

For the cash flow projections, there are several steps involved. First, the projected net income is used as a starting point. These are the projections calculated in the previous subchapter. Second, the non-cash charges are calculated as projections for 2011-2015. From the existing financial documents, the only non-case charge that needs to be considered is the depreciation and amortization expense for each of the years from 2006 to 2010.

For the projection of the depreciation and amortization expense, the same methodology was used as in the case of the net income. An annual rate of increase/decrease of the depreciation value was calculated, then a 5-year arithmetic average was calculated based on this. The average annual change over the period 2006-2010 for the depreciation and amortization was 8.42% and this percentage will be used as the rate of growth for the 5-year projection of the depreciation value.

Finally, the net income and the depreciation/amortization expenses (non-cash charges) are added and result in the net cash flow from operations, as a projection for the period from 2011 to 2015. The table below summarizes the main findings of these projections.

2006

2007

2008

2009

2010

Net income

$81,282,000.00

$73,964,000.00

$52,293,000.00

$42,833,000.00

$81,713,000.00

Annual growth

-9.003223346

-29.29938889

-18.09037538

90.77113441

Average growth 2006-2010

8.594536696

Depreciation and ammortization

$53,064

$64,202

$73,290

$75,184

$72,140

Annual change

20.99%

14.16%

2.58%

-4.05%

Average annual change

8.42%

2010

2011

2012

2013

2014

2015

Projected Net Income

$81,713,000

$88,732,147

$96,354,238

$104,631,067

$113,618,876

$123,378,737

Projected Depreciation and Ammortization

$72,140.00

$78,214.19

$84,799.82

$91,939.97

$99,681.31

$108,074.48

Net cash flow from operations

$81,785,140.00

$88,810,360.89

$96,439,037.92

$104,723,007.12

$113,718,557.14

$123,486,811.74

8.3 Final valuation

For each of the years 2011-2015, the present value (PV) of the projected net cash flows was calculated by the formula PV = CF/(1+0.1)n, where CF is each of the discounted cash flows, n -- the number of years for which the projection was made (n = 5), 0.1 = 10% - the discount rate or expected rate of return. In the case of the final year, 2015, a final residual value was calculated by dividing the fifth year cash flow by the required rate of return. The final value was considered in the present value analysis.

The resulting present value of the company was given by the sum of the PVs in the period 2011-2015. As such, this was equal to $397,041,007.35, which is a reasonable representation of the company's value in the present. The purchase price should, thus, be $397,041,007.35.