WEEK 3 PROJECT 2
Week 3 Project
RXXXX SXXX
Prof. XXXXXX
Managerial Finance
November 11, 2016
Introduction
The report discusses financial performance of YUM! Brands. The company was founded by Andrall E. Pearson on May 30, 1997. YUM! Runs its business from its Headquarters in Louisville, Kentucky. The company was formerly known as Tricon Global Restaurants, Inc. It is an American Fortune 500 fast food company.
The company runs over 41,000 restaurants and has its presence in more than 125 countries. It owns three brands KFC, Pizza Hut and Taco Bell. Primarily all three brands offer dine in experience and carry out. On limited basis the facility of drive through is also offered. Most of company’s restaurants are operated through franchise and licensing agreements. These restaurants offer innovative and trademarked food items cooked with quality ingredients. The products pricing is competitive.
The company earns its revenues from the franchise fee and royalties paid by franchisee holders.Globally the company operates its business through five separate divisions, YUM China, YUM India, KFC division, Pizza Hut division and Taco Bell Division. ("Yum! Brands Inc.", 2016)
In this paper the financial performance will be judged on the basis of company’s performance in the years 2016, 2015 and 2014. Additionally the companyperformance will be compared with industry average for the restaurant industry.
For the purpose of the calculations of the ratios financial statement were collected from Company’s annual reports. Industry averages were collected from www.csimarket.com. Ratios selected for the purpose of the evaluation are –
Short Term Solvency Ratios
· Current Ratio
The following table calculates the current ratio for year 2016, 2015 and 2014.
Current Ratio = / CA/CLCurrent Assets = / 4,003
Current Liabilities = / 2,299 / Historical: / 2015 / 2014 / Industry
Current ratio = / 1.74 / 0.55 / 0.64 / 1.2
· Quick Ratio
Quick Ratio = / CA-Inv/CLCurrent Assets = / 4,003
Inventory = / 255
Current Liabilities = / 2,299 / Historical: / 2015 / 2014 / Industry
Quick ratio = / 1.63 / 0.47 / 0.52 / 0.78
Analysis
From the calculated ratios one can see that company's liquidity position has improved over these three years. Value of current and quick ratio has gone up to be more than 1. This indicates that the company will be able to take care of its short term liabilities very comfortably. Also it must be noted that company ratios are greater than industry average for the year 2016. This is also indicates that company's liquidity position in the current year is quite strong.
Efficiency Ratio
· Inventory Turnover Ratio
Inventory Turnover Ratio = / Sales/InventorySales = / 7,560
Inventory = / 255 / Historical / 2015 / 2014 / Industry
Inventory Turnover Ratio = / 30 / 48.67 / 37.62 / 44.47
· Fixed Assets Turnover Ratio
Fixed Assets Turnover / = Sales/Net Fixed AssetsSales = / 7,560
Net Fixed Assets = / 4,010 / Historical: / 2015 / 2014 / Industry
Fixed Assets Turnover = / 1.89 / 2.66 / 2.52 / 0.68
· Total Assets Turnover Ratio
Total Assets Turnover / =Sales/Total AssetsSales = / 7,560
Total Assets = / 10,432 / Historical: / 2015 / 2014 / Industry
Total Assets Turnover = / 0.72 / 1.38 / 1.36 / 0.88
Analysis
Inventory Turnover: Inventory turnover ratio is an efficiency ratio which measures number of times inventory is sold within a specific period. Industry average for the restaurant industry is 44.47 while that of Yum! Brands is 30. This indicates that the company is able to sell its inventory at a more efficient rate than the industry. This efficiency has improved over the period of three years. Days Sales Outstanding: While industry average figure for days sales outstanding is unavailable it can be observed that the figure has gone up. Companies usually wish to keep DSO figure low however since the increase is not significant this may not be a matter of concern. Fixed Assets Turnover Ratio: This is also an efficiency ratio which indicates how efficiently the company management utilizes company's fixed assets. Yum! Brand Inc.’s ratio is greater than industry average which indicates higher efficiency than rest of the industry participants. The ratio has seen a steady fall over the three years however since the fall is not significant. It is not a matter of concern. Total Assets Turnover Ratio: This is also an important efficiency ratio, generally a higher figure is appreciated. In the years 2015 and 2016 the ratio was much higher than it is in the current ratio. Also the total assets turnover ratio this year is much lower than industry average. This can be looked in to deeply. Since fixed asset turnover ratio is high this may mean that the company would need to improve its efficiency in utilization of its other assets.
Debt Management Ratios
· Debt Ratio
Debt Ratio = / Total Debt/Total AssetsTotal Debt = / 9,119
Total Assets = / 10,432 / Historical / 2015 / 2014 / Industry
Debt Ratio = / 87.41% / 49.16% / 40.12% / 30%
· Times- Interest Earned
Times-Interest-Earned (TIE) = EBIT/Interest ExpenseEBIT = / 1,709
Interest Expense = / 164 / Historical: / 2015 / 2014 / Industry
TIE = / 10.42 / 14.34 / 11.98 / 7.36
Analysis
Debt Ratio indicates that the company has increased its debt burden in the year 2016. This has almost doubled its Debt ratio. However Times interest earned is high indicating that the company will be able to pay its interest obligations comfortably. However increased debt will increase company's risk.
Profitability Ratios
· Profit Margin
Profit Margin = / Net Income/SalesNet Income = / 1,362
Sales = / 7,560 / Historical: / 2015 / 2014 / Industry
Profit Margin = / 18.02% / 11.65% / 9.02% / 12.71%
· Return on Assets
ROA = / Net Income/Total Assets
Net Income = / 1,362
Total Assets = / 10,432 / Historical: / 2015 / 2014 / Industry
ROA = / 13.06% / 16.04% / 12.61% / 14.04%
· Return on Equity
ROE = / Net Income/Common Equity
Net Income = / 1,362
Common Equity = / (1,896) / Historical: / 2015 / 2014 / Industry
ROE = / -71.84% / 141.93% / 67.94%
Analysis
Net profit margin for the company has increased in past three years indicating that the company is extracting more from its sales. The figure is higher than industry average. Return on assets is lower than the industry average. A greater concern however is return on equity, which is negative. The balance sheet is showing accumulated deficit and accumulated loss. This indicates that the company's profitability can be a cause of concern to both its investors and its managers.
Market Value Ratios
· Price/ Earning
Price/Earnings Ratio = Price Per Share/Earnings Per ShareEarning Per Share = EPS = Net Income/Shares Outstanding
Net Income = / 1,362
Shares Outstanding = / 511
EPS = / 2.66 / Historical: / 2015 / 2014 / Industry
PPS = ($61.87 on 11/09/16) / 61.87 / PPS / 51.3 / 50.05
Price/Earnings Ratio = / 23.23 / 17.57 / 21.57
· Price/ Cash Flow Ratio
Price/Cash Flow Ratio = Price Per Share/Cash Flow Per SharePPS = / 61.87
Cash Flow Per Share = (Operating Cash Flows-Preferred Dividends)/Shares / Historical: / 2015 / 2014 / Industry
Operating Cash Flows = / 35,984 / Operating Cash flows / 2139000 / 2E+06
Preferred Dividends = / - / Preferred Dividends / - / -
Shares = / 43,774 / Shares / 43774 / 43774
Cash Flow Per Share = / 0.82
Price/Cash Flow Ratio = / 75.26 / 48.86 / 46.81
· Market/Book Ratio
Market/Book Ratio = Market Price Per Share/Book Value Per ShareBook Value Per Share = Common Equity/Shares Outstanding / Historical: / 2015 / 2014 / Industry
Common Equity = / (1,896) / 911 / 1,547
Shares Outstanding = / 511 / 511 / 511
Book Value Per Share = / -3.71 / 1.78 / 3.03
Market Price Per Share = / 46.85 / 51.3 / 50.05
Market/Book Ratio = / -12.64 / 28.78 / 16.53
Analysis
Price Earnings ratio for the company has increased to 23.23, this indicates that investors are expecting the company to grow. Similarly Price/Cash flow ratio is also high. This may indicate that the company stock may be overpriced. A negative value of market to book ratio also indicates that the company stock is overpriced.
Common Size Analysis
For this analysis the all other components of a balance sheet were expressed as a percentage of Total revenue while all other components of an income statement were expressed as a percentage of net income.
Common Size Balance Sheet Analysis
First observation from common size analysis is the fact that company's total liabilities are greater than company's total assets in the year 2016. This indicates that shareholder's equity is negative. This is because of a significant increase in long term debt in the year 2016. It can be see here that long term debt increased to 87% in 2016 from 38% in 2015. Another important observation is that percentage of fixed assets in 2016 has significantly reduced while percentage current assets has increased as compared to last year. Out of the current assets component also cash and its equivalents have increased. This may be because the loan amount being transferred to the company accounts by its creditors. The Company may be having some investment plans for the loan it availed.
Common Size Income Statement Analysis
The income statement analysis indicates a stable trend in case of company's revenue. 85% of company's revenue come from company sales while 15% comes from franchise and license fee. None of the components of income statements is showing any significant change.
Conclusion
The financial ratio analysis and common size financial statement analysis of the financial statements of Yum! Brands Inc. reveals that in comparison to industrial average company’s liquidity position is quite well. Its efficiency in utilization of fixed assets also exceeds industrial average. Debt ratios however indicate that the company has availed a long term debt in the year 2016. Common size analysis revealed that the company still has to invest the loan availed by it. Also Company derives most of its revenue from sales while 15% from franchise and licensee fee.
References
Restaurants Industry financial strength, leverage, interest, debt coverage and quick ratios. (2016). Csimarket.com. Retrieved 11 November 2016, from http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=914
Yum! Brands Inc.. (2016). Marketwatch.com. Retrieved 9 November 2016, from http://www.marketwatch.com/investing/stock/yum/profile