Analysis Cash Flow Position of Each Firm - Case Study Example

The case “Eat at My Restaurant” reviews the cash flow of several companies such as Panera Bread, Starbucks, and Yum Brands. Starbucks is the premier retailer and roaster of specialty coffee and it operates in more than 50 countries around the world. Panera Bread Company and its subsidiaries are popularly referred to as “Panera” or “Panera Bread”. The company is a national bakery-cafe that owns over 1450 companies and also operates with franchisees in the bakery.

The company has a dominant presence in Columbia and Ontario, Canada where it operates in 40 states. Yum Brands Inc. operates six in different segments including YUM Restaurant International, Pizza Hut (US), Taco Bell (US), KFC (US), A&W All American Food Restaurant (US), YUM Restaurant China, and JLS Long John Silver’s (US). This paper comments on the difference between net cash provided by operating activities and net income by speculating on which is likely to be a superior sign of profitability for the firms in the long term.

The paper also comments on the data reviewed by each firm and analyzes the cash flow position of each firm. After analyzing the cash flows of the companies as per the information given in the case, the paper finally ends with a conclusion that comments on whether these companies have any cash flow problems or not. Net Cash Position of the Firms According to the given case study, the financial statements of the three restaurant firms for the financial year 2009 and 2010 was extracted from their respective form 10-K annual reports and the following results were found: It is important to mention that the net income of all three companies include non-controlling interest (that is, non-equity shareholders).

From the above analyses, it is clear that there is a difference between net cash provided operating activities and net income including non-controlling interest. The net income from operating activities is obtained from the cash flow statements of the firms and represents the net cash flow from operations. Operating activities are the key sources from where the company generates cash. Hence, operating activities are sources of internal funds as compared to external funds such as equity or debt.

This amount is arrived at by adjusting all non-cash expenditures and charges as well as an increase (or decrease) of working capital changes. On the other hand, net income including non-controlling interest is the income of the company from all its operations and also includes external finances such as non-controlling interest (which is basically earnings from preferential equity or other fixed financial instruments). The value is not adjusted for non-cash incomes or expenditures such as working capital and depreciation (Porter and Norton, 2010, pp.666-676). Also, it does not classify the exact cash amount realized from operations.

This is the main reason why there was a difference between net income including non-controlling interest and net cash provided operating activities. Regarding the speculation of which number is likely to be a better indicator of long-term profitability, it is generally believed that net cash provided by operating activities is a better indicator. This is because it is useful to determine whether the firms will be able to make the necessary future investments and pay their dues in the long term.

The companies may look great from their balance sheet and income statements, but if there isn’t sufficient cash, then it might run the risk of liquidation (Plewa, 1995, pp.1-18). Data Review of the Firms The summarized data review of the three firms reveals the following results: Operating cash flow/total debt – It represents the amount of total debt that could be covered from the cash flows generated by the firms from operating activities. Higher values indicate that there is sufficient cash to repay total debt.

Among the three firms under observation, this ratio was highest for Panera Bread and there was a general increasing trend in the values. Operating cash flow per share – It indicates exactly how much of cash generated from operating activities is attributable to shareholders of respective firms. Higher values indicate higher profitability and that the shareholders’ are expected to earn more cash per share, proportionate to their holdings.  Operating cash flow/cash dividends – It represents what proportion of total cash generated from operating activities is distributed to equity shareholders’ in the form of cash dividends.

Panera has not declared dividends in 2009 and 2010 while Starbucks did not declare dividends in 2009.Conclusion All the three firms have been found to have positive cash flows implying that these companies generate more cash than it spends. Alternatively, the difference between cash inflow and outflow is positive and that the firms have generated sufficient cash from their operations to run their activities smoothly and also service their total debt. In short, it can be said that on the basis of the information provided by Data Review it is apparent that these firms do not have any cash flow problems.