Competitiveness between Yum Brands Inc and McDonalds - Research Paper Example

Competitiveness between Yum Brands Incl. and McDonalds Yum Brands Incl. Yum brands Incl. is a fast food company in United States of America. It has four wingstreet, brands namely KFC, Pizza Hut and Taco Bells. Headquarter is based in Louisville, Kentucky, it has more than 40,000 food outlets. McDonalds McDonalds is a fast food company famous for the hamburgers that are of high quality. It has 35,000 outlets globally. Headquarter is in Oak Brook, Illinois, USA. Both companies are competitors in the fast food industry not only in America but globally. With the increasing demand for fast food due to change in lifestyle fast food companies have focused on improving and increasing their services and customer base respectively. It is from the financial statement we can find out how efficient the two companies are, in their quest of satisfying their customer’s need. Competitiveness between Yum Brands Incl. and McDonalds Financial analysis between McDonalds and Yum Brands Incl. to determine their competitiveness since the figures in financial statements never lies. Analysis will be done on the cash flow, income statement and balance statement In financial analysis we analyze the company’s performance in terms of liquidity, debt position, risk, solvency etc. Liquidity ratios These ratios include current ratio, quick ratio and cash ratio. This ratio shows the extent at which the company is able to repay its short term liabilities using current liabilities. According to (Ross & Westerfield, 2000) a value of 1 or greater shows the firm is more liquid hence able to repay its short term obligations with ease. Current ratio Current ratio is found by dividing current assets by current liabilities McDonalds; current assets= $ 5,050,100,000 current liabilities=$ 3,170,000,000 Yum Brands Incl.; current assets= $ 1,691,000,000; current liabilities=$ 2,265,000,000 McDonalds; Current ratio, 5,050,100,000/3,170,000,000= 1.59 Yum Brands Incl.; Current ratio, 1,691,000,000/2,265,000,000= 0.75 From the above analysis we can see that McDonalds has higher liquidity ratio than Yum Brands Incl. thus it has $ 1.59 to pay $ 1 debt while Yum Brands Incl. only has $0.75 to settle $1 thus having a deficit of $ 0.25. Quick ratio This ratio uses current assets that are easily convertible to cash to settle current liabilities. It eliminates inventories. This ratio is got by: Quick ratio= (cash + cash equivalent + marketable securities)/current liabilities McDonalds; cash and cash equivalent= $ 2,798,700,000; total liabilities=$ 3,170,000,000 Notes receivable= $ 1,319,800,000 Yum Brands Inc.; cash and cash equivalent=573,000,000; total liabilities=$ 2,265,000,000 Notes receivable= $ 319,000,000 McDonalds; quick ratio, (2,798,700,000 + 1,319,800,000)/ 3,170,000,000=1.3 Yum Brands Incl.; quick ratio, (573,000,000 + 319,000,000)/ 2,265,000,000= 0.39 From the above analysis still McDonalds has higher quick ratio as compared to Yum Brands Incl. which has 0.39. This proofs that McDonalds is able to pay off its debt with ease as compared to Yum Brands Incl. Profitability This analysis measures the level of profit making a company is as compared to other competitors (Rowland, 1936). These ratios are one of those that attract investors to invest in a given firm. Some of the ratios are as follows; Net margin ratio This ratio is got by dividing the company’s income after tax by sales. The ratio is shows how much the company is able to retain from its sales (Ross & Westerfield, 2000). McDonalds; income after tax=$ 5,585,900,000; sales= $ 28,105,700,000 Yum Brands Incl.; income after tax=$ 1,091,000,000; sales=$ 13,084,000,000 McDonalds; Net margin ratio, 5,585,900,000/28,105,700,000=0.2 Yum Brands Incl.; Net margin ratio, 1,091,000,000/13,084,000,000=0.1 From the above analysis McDonalds is able to retain $ 0.2 for $ 1 it sales while Yum Brands Incl. can only retain $ 0.1. This proofs that McDonalds is more profitable than Yum Brands Incl. Return on asset (ROA) This profitability ratio shows how the company uses the asset invested in the company to generate profit. This ratio is got by; (Net income + tax expense)/total assets McDonalds; net income=$ 5,585,900,000; tax expense=$ 2,618,600,000 Total assets=$ 36,626,300,000 Yum Brands Incl.; net income=$1,091,000,000; tax expense=$ 497,000,000 Total assets=$ 8,695,000,000 McDonalds; ROA, (5,585,900,000+2,618,600,000)/ 36,626,300,000= 0.22 Yum Brands Incl.; ROA, (1,091,000,000+497,000,000)/ 8,695,000,000=0.18 From the above analysis McDonalds is able to $ 0.22 for every $ 1 invested in the company as opposed to Yum Brands Incl. which only gains $ 0.18. This shows that McDonalds receives great return from usage of its assets. Debt position This financial measure is used to measure the debt level of a given company and how it affects the company in its performance. Debt-equity ratio This ratio shows the proportion of the company’s equity financed by owner’s equity and debt. This ratio is supposed to be as low as possible because high level reflects the company is at a state of insolvency (Kieso & Weygandt, 2001). Debt-equity ratio= total liabilities/total equity McDonalds; total liabilities=$ 20,613,600,000; total equity=$16,009,700,000 Yum Brands Incl. total liabilities=$ 6,427,000,000; total equity=$ 2,166,000,000 McDonalds; Debt-equity, 20,613,600,000/16,009,700,000=1.28 Yum Brands Incl.; Debt-equity, 6,427,000,000/2,166,000,000=2.96 From the above analysis both firms its assets are financed more by debt by owner’s equity. For McDonalds its assets are financed 1.28 times than by owner’s equity as for Yum Brand Incl. it is terrible since it is asset is financed more than two times i.e. 2.96 its owner’s equity. It has to reduce its debt level or increase its asset base. Asset efficiency Is a financial analysis measure used to measure the company’s ability to generate sales from its assets. It is also referred to as asset turnover ratio. It shows how efficient a company is in turning over its assets into sales. Asset turnover ratio= sales or revenue/total assets McDonalds; asset turnover, 28,105,700,000/36,626,300,000=0.76 Yum Brands Incl.; asset turnover, 13,084,000,000/8,695,000,000=1.5 From the above financial analysis of asset turnover Yum Brands Incl. has a higher asset turnover than McDonalds. Yum Brands Incl. is able to get $ 1.5 for each $ 1 used asset. This is because it has a lower asset base as compared to McDonalds which has $ 0.33. Market value ratios These ratios are financial analyzing tools used to determine the economic value of a company. These ratios are the one that pulls a lot of investors. According to (Ross & Westerfield, 2005) Dividend policy is one that controls the limit if what the shareholders will get from the company’s income as dividend. Some of these ratios are price earnings ratio, dividend payout and dividend yield. Dividend payout This ratio compares the amount of income paid to the shareholders as dividend and the amount retained to be reinvested (Bodie, & Kane, 2005). Dividend yield ratio is got by; DYR= Dividend per share/ Earning per share * 100% DYR= Total dividend paid/net income McDonalds; net income=5,585,900,000; total dividend=$ 16,600,000 Yum Brands Incl.; dividend per share=$ 1.41; earnings per share=$ 2.41 McDonalds; DYR, 16,600,000/5,585,900,000 * 100%=0.29% Yum Brands Incl.; DYR, 1.41/2.41 * 100%=58.5% From the above analysis on dividend payout it is clear that McDonalds give their shareholders a small portion of the firm’s net income and reinvest the rest. This can explain why it has high asst base as compared to Yum Brands Incl. On the other hand Yum Brands Inc. gives 58% of its net income to its shareholders. Going by this percentage investor will choose the firm which has a higher return and definitely will fall for Yum Brands Incl. Cash flow coverage ratio This ratio shows the ability of the firm to pay its debt when the due from operation of its activities. The ratio is gotten buy dividing operating cash flow by total debt McDonalds CFCR, 7,120,700,000/16,009,700,000=0.4 Yum Brands Incl. CFCR, 2,139,000,000/6,427,000,000=0.33 From the above analysis it can be seen that McDonald is able to repay its due when by cash from its operating activities as opposed to Yum Brands Incl. Though both of them have a CFCR of less than 1, McDonalds is better off. Table of ratios for McDonalds Corporation and Yum Brands Incl. for the year ended 31 December 2013 Ratio McDonalds Yum Brands Incl. Current ratio 1.9 0.75 Quick ratio 1.3 0.39 Net margin ratio 0.2 0.1 Return on Asset (ROA) 0.22 0.18 Debt-equity ratio 1.38 2.96 Asset turnover ratio 0.76 1.5 Dividend payout 0.29% 58.5% Cash flow coverage ratio 0.4 0.33 References (n.d.). Retrieved December 3, 2014, from http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.pdf Bodie, Z., & Kane, A. (2005). Investments (6th ed.). Boston, Mass.: McGraw-Hill Irwin. Kieso, D., & Weygandt, J. (2001). Intermediate accounting (10th ed.). New York: Wiley. Ross, S., & Westerfield, R. (2000). Fundamentals of corporate finance (5th ed.). Boston: Irwin/McGraw-Hill. Ross, S., & Westerfield, R. (2005). Corporate finance (7th ed.). Boston: McGraw-Hill/Irwin. Rowland, S. (1936). Accounting. London: Thornton Butterworth. Yum! Financial Data. (n.d.). Retrieved December 3, 2014, from http://www.yum.com/investors/cash_flow_statement.asp Read More