Finance Business Project

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Yum! Brands, Inc. was the largest fast-food company in 2004.It operated more than 33,000 KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W restaurants Worldwide. It was the market leader in the chicken, pizza, Mexican, and seafood segments of the US. Fast-food industry brands also operated more than 12,000 restaurants outside the united states.KFC and Pizza Hut accounted for more than 96 percent of the company’s international restaurant base and managed restaurant in 116 countries.

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Finance I 
Table of Contents

 

 

 

Yum! Brands Inc.


Brief description of the business and history of the company

 

Yum! Brands, Inc. was the largest fast-food company in 2004.It operated more than 33,000 KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W restaurants Worldwide. It was the market leader in the chicken, pizza, Mexican, and seafood segments of the US.  Fast-food industry brands also operated more than 12,000 restaurants outside the united states.KFC and Pizza Hut accounted for more than 96 percent of the company’s international restaurant base and managed restaurant in 116 countries. Among the first fast food chains to go international in the late 1950s and 1960s, KFC and pizza hut were two of the world’s most recognizable brands. Both KFC and pizza hut expanded through the 1990s by growing their restaurants into as many countries as possible. However, Yum! Brands realized that different countries offered different opportunities to contribute to the company’s worldwide operating profits.

Similar to McDonald’s, Yum! has been focusing on its core business and selling off it’s ownership of smaller, less profitable operations. As of the fourth quarter 2010, both Long John Silver’s and the A&W brand restaurants have been put up for sale, allowing Yum! to focus on its main portfolio of Pizza Hut, Taco Bell, and KFC.

Yum! has a multi-branding strategy. Rather than opening a second unit, which requires capital and operational management, Yum! has been focusing on co-branded restaurants, such as a dual KFC / Taco Bell. This allows them to increase sales and points of distribution without the added business costs of 2 units.


 

 

 

 

 

 

 

 

 

 

 

 

 

                                         Chart: Yum Brands,

 

Inc.: Organizational Chart

Yum! Brands (YUM) SWOT Analysis

Strength

 

> Geographically Diverse Business

Geographically diverse business and revenue should help shield the business from shocks in any one part of their business. Different countries or locations around the world have different characteristics. Those characteristics do not always match, therefore, a company can lower their risk by investing in part of the world with low correlations. The lower the risk, the better. This lowers risk and increases the value of the business over the long-term.

> Loyal Customer Base

The company has many loyal customers. This always helps companies grow and make more money when they have repeat business.

> Big Market Share

KFC has fifty percent of market share in the fast food industry, keeping it difficult for competitors to gain market share from them.

Weaknesses

 

> Weak R&D

KFC does not pay much attention to the research and development part of their business. This hurts many businesses because they are not focusing on how to improve efficiency for the business. This will hurt the company in the long run.

> Overexposure

An overexposed, or over saturated market, makes it difficult to grow simple by adding restaurants, because the market is already full of restaurants. The only way to growth in this case is to take market share from competitors.

> Internal Conflicts With Employees

Problems within the company are a reflection of poor communication and bad management. When employees are fed up or feel that they are not motivated within the company their performance suffers. This can have a negative drawback on the company and affect future business.

 

 

Opportunities

 

> New Flavors and Recipes

New flavors and recipes give the company an opportunity to promote new products that can increase sales. With new healthy ideas being pushed into the recipes this may also help and gain more market share then before.

> Emerging Markets

The company can open up in different countries. With countries like India and China growing as fast as they are, this could be an opportunity for the company to gain market share in these regions of the world.

> Stays Open Late

Every Weekend, Taco Bell stays open late. This gives the company opportunities to make more sales from the night life crowds.

Threats

 

> Unhealthy Lifestyle

The products that the company sells are very unhealthy to the consumers. As more people become aware and educated on the effects of not eating properly, this could lower sales dramatically and hurt business.

> Competition

KFC has many competitors in the industry. This poses a threat because it takes away market share from the company.

> Farmers Rasing Prices

Farmers can raise prices to raise and keep up chickens. This would lower profit margins for the company over the long term.

 




 

Structural analysis of BS and P&L

 

 

(All the margins are shown in percentage)

 

 

 

Conclusions

With horizontal analysis we clearly see that YUM has gained more revenues with years and also increased expenses. Net Income also goes up. So, YUM became stronger on the market in 2010 in comparison to the previous 2009 and 2008 years.

With Vertical analysis we may confirm that YUM continues to decrease liabilities and collect more Assets, becoming more independent and profitable. From the point of view of this statement of condition, we may say that YUM is getting stronger in terms of financial health

 

Financial Ratio Analysis

 

I. Short-term solvency, or liquidity, ratios

     
       

Period of Ending

2008

2009

2010

       

Current ratio = Current assets/Current liabilities

0,55

0,73

0,94

Quick ratio = (Current assets - Inventory)/ Current liabilities

0,47

0,66

0,87

Cash ratio = Cash/Current liabilities

0,13

0,21

0,58

Net working capital to total assets = Net working capital/Total assets

-0,12

-0,06

-0,02

       

Comments:

         

The figures above suggest that YUM is not in the best position as it relates to liquidity. 

Current ratio (0.94) at 2010 EoY indicates that YUM can’t cover its’ ST liabilities not even once.

 

The Quick ratio is below 1 as is the Cash ratio, which indicates that the firm has low liquidity levels    and relies heavily on its’ ST debts.

 

Working Capital ratio is below zero and its’ much lower than the industry average.

 

II. Long-term solvency, or financial leverage, ratios

     
       

Total debt ratio = (Total assets - Total equity)/Total assets

1,02

0,86

0,81

Debt-equity ratio = Total debt/Total equity

-61,44

5,97

4,28

Equity multiplier = Total assets/Total equity

-60,44

6,97

5,28

Long-term debt ratio = Long-term debt/(Long-term debt + Total equity)

1,03

0,76

0,65

       

Comments:

         

YUMs’ Total debt ratio is greater than 0.5, it means that most of the company's assets are financed through debt. So, this company "highly leveraged", not highly liquid as stated above.

High D/E ratio shows that YUM has been aggressively financing its growth with debt. 

Equity Multiplier is very high for 2009 and 2010 EoY, so we can suppose that YUM can be caught short with the interest payments to bonds owners.

LT debt ratio of this company indicates that extent to which long-term debt is used for the firm's permanent financing shows negative dynamics through 2008-2010 years. It seems to be good, because YUMs’ “addiction” to debt is declining.

III. Asset utilization, or turnover, ratios

     
       

Receivables turnover = Sales/Accounts receivable

36,38

33,86

35,78

Days' sales in receivables = 365 days/Receivables turnover

10,03

10,78

10,20

NWC turnover = Sales/NWC

-14,63

-24,35

-84,02

Fixed asset turnover = Sales/Net fixed assets

2,14

1,90

2,01

Total asset turnover = Sales/Total assets

1,73

1,52

1,36

     

Comments:

     

The receivables turnover ratio of YUM indicates highly positive results in terms of managing their assets.

 
Days sales in receivables ratio (DSR) determines that it takes approximately 10 to 11 days to collect an accounts receivables for this company

Net Working Capital Turnover ratio of Yum! Brands. Inc indicates that the velocity of the utilization of net working capital in this company is very low. It is bad, because money don’t work.

Fixed Assets Turnover ratio means that this company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation is high. And YUM has been effective in using the investment in fixed assets to generate revenues.

ATO ratio displays that the amount of sales generated for every dollar's worth of assets in YUM is decreasing, which is obviously good. 

 

IV. Profitability ratios

     
       

Profit margin = Net income/Sales

0,09

0,10

0,10

Return on assets (ROA) = Net income/Total assets

0,15

0,15

0,14

Return on equity (ROE) = Net income/Total equity

-8,93

1,04

0,73


 

Comments:

         

Profit Margin is good (10.00%) for the big companies such as YUM – it’s normal.

ROA in this case shows that the company generates 15% of profit for each $1 in assets.

ROE reveals that this company earned 73% of profit in comparison to the total amount of shareholder

 

V. Market value ratios

 
       

Price-earnings ratio = Price per share/Earnings per share

16,42

14,05

17,30

Price-sales ratio = Price per share/Sales per share

1,32

1,35

2,22

Price-to-book-ratio = Price per share/Book value per share

-137,83

13,09

11,56

Earnings per share ratio = Net Income/# of shares outstanding

1,96

2,22

2,38

       

Comments:

     

P/E ratio of the company approximately 16.40-17.50 $ which is not cheap and not expensive, just medium.

P/S ratio shows that revenue per YUMs’ share is growing. And it is profitable to invest.

P/B ratio indicates a huge overvalue of company’s stock for last two years. We would like to note that EPS of YUM is growing, which is definitely increases an opportunity for future investments

 

VI. Dividend ratios

     
       

Divdend Payout ratio = Dividends/Net Income

32,63

34,06

35,61

Dividend Yield = Annual Dividends per share/Price per share

2,16

2,23

1,78

Dividends per share ratio = Dividends/# of shares outstanding

0,72

0,80

0,92

       

Comments:

     

YUMs’ Dividend Payout ratio (d) shows positive dynamics, it means that at the EoY of 2010 the company paid more than 35 % of dividends.

DY has been fall down a little bit, but nevertheless it displays positive return on investment for a stock.

DPS(dividend per share)  shows that the sum of declared dividends for every ordinary share issued  by this company becomes larger year by year. 

 

 

 

Industry / sector / market/competitor benchmarking

Main competitor MCD

I. Short-term solvency, or liquidity, ratios

     
       

 Period Ending

2008

2009

2010

       

Current ratio = Current assets/Current liabilities

    1,39

      1,14

     1,49

Quick ratio = (Current assets - Inventory)/ Current liabilities

    1,34

      1,11

     1,46

Cash ratio = Cash/Current liabilities

    0,81

      0,60

     0,82

Net working capital to total assets = Net working capital/Total assets

    0,03

      0,01

     0,05

       

II. Long-term solvency, or financial leverage, ratios

     
       

Total debt ratio = (Total assets - Total equity)/Total assets

    0,53

      0,54

     0,54

Debt-equity ratio = Total debt/Total equity

    1,13

      1,15

     1,18

Equity multiplier = Total assets/Total equity

    2,13

      2,15

     2,18

Long-term debt ratio = Long-term debt/(Long-term debt + Total equity)

    0,43

      0,43

     0,44


 

III. Asset utilization, or turnover, ratios

     
       

Receivables turnover = Sales/Accounts receivable

   25,26

     21,45

   20,42

Days' sales in receivables = 365 days/Receivables turnover

   14,45

     17,02

   17,88

NWC turnover = Sales/NWC

   24,01

     53,19

   16,67

Fixed asset turnover = Sales/Net fixed assets

    0,94

      0,85

     0,87

Total asset turnover = Sales/Total assets

    0,83

      0,75

     0,75

       

IV. Profitability ratios

     
       

Profit margin = Net income/Sales

    0,18

      0,20

     0,21

Return on assets (ROA) = Net income/Total assets

   0,152

     0,151

     0,15

Return on equity (ROE) = Net income/Total equity

    0,32

      0,32

     0,34

 

ROE = Net Income/Sales x Sales/Assets x Assets/Equity

    0,32

      0,32

     0,34

       

V. Market value ratios

     
       

Price-earnings ratio = Price per share/Earnings per share

   13,80

     15,10

   15,70

Price-sales ratio = Price per share/Sales per share

    2,46

      3,02

     3,23

Pricet-to-book-ratio = Price per share/Book value per share

    4,32

      4,90

     5,31

Earnings per share ratio = Net Income/# of shares outstanding

    3,76

      4,11

     4,58

       

  VI. Dividend ratios

     
       

Divdend Payout ratio = Dividends/Net Income

   41,99

     48,61

   48,27

Dividend Yield = Annual Dividends per share/Price per share

    2,61

      3,28

     2,94

Dividends per share ratio = Dividends/# of shares outstanding

    1,63

      2,05

     2,26


 

MCD is strongly ahead of its’ competitor.

1. Liquidity ratio

MCD leads with almost as twice as good result.

2. Financial leverage ratio

YUM! has more debts. Almost 4 times more debts than MCD.

3. Turnover ratio

Even here MCD is more preferable by the investors.

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