Financial Statement Analysisof KFC PDF

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Financial Statement Analysis of KFC

Saree Abdullah Brake Abu Dhabi University, Email: [email protected]

Supervised by:

Professor Haitham Nobanee

Abstract Financial ratios derived from past data are adapted in many research studies to analyze and estimate the uncertain future of business and related industries in general. These ratios give the general health of an entity and are critical in evaluating the strengths and weaknesses of a business entity. Besides, these ratios are significant in ascertain vulnerabilities and challenges that businesses face. The information obtained from such data is not only important to the top management but also varied users of information in determining investing decisions. In this context, financial ratios are employed to assess the health and performance of a company. This study aims to conduct an in-depth ratio analysis of KFC limited, using data derived from the past four years.

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Introduction KFC Founded on1952, North Corbin, Kentucky, United States . Presently, KFC is among the best chicken restaurants recognized globally. It has in excess outlets of 21,000 in more than 130 countries and regions globally (Achola, 2016). KFC is operated partly as equity, and partly as a franchised model with the reports as late as December 2018, 98% of its restaurants are operating as franchises. The corporation is part of Yum! Brands, which has its headquarters in Louisville, Kentucky. Besides having has over 43,5000 restaurants, operating in more than 135 countries and regions (Dittfurth, Gerhardt & Joiner, 2019). With the main focus being on fried chicken, the company also sells chicken pieces, wraps, salads, and sandwiches. KFC is one of the best-established brands in the Western Quick Service Restaurants. The two main strategic intents of any entity are profitability and solvency. Profitability refers to the capability of an entity to ascertain profits, while solvencies can be defined as the capability of a firm to offset its obligations (Öztekin, 2015). On the contrary, the achievement of these aims requires proper management of a company’s resources. This is concisely conducted through planning, budgeting, forecasting, controlling, and decision making [CITATION Alk19 \l 1033 ]. Besides, the strengths and weaknesses of a business entity should be identified so that corrective and appropriate measures should be applied (Öztekin, 2015). In a completive market, there is always the freedom of entry and exit. Stockholders and investors use financial ratios in evaluating the value of institutions for investment decisions. Some studies demonstrated the insufficiencies of disclosed financial ratios in satisfying shareholders' information needs (Chiaramonte & Casu, 2017). Assessment of investment opportunities is very

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critical due to the need for maximizing returns. Corporate entities require capital funds which are then made available by the investors after they can evaluate the firm’s value through conducting financial reports analyses [ CITATION AlM20 \l 1033 ] Basic knowledge of ratio analysis is required for wealth maximization (Minnis & Sutherland, 2017). This facilitates the production of goods and services, and for the growth of an economy in general. A financial ratio is a widely adopted technique in financial analysis [CITATION Alk19 \l 1033 ]. The application of financial ratios in the interpretation of financial statements demonstrates a quick indication of an entity’s performance and financial position to varied users of financial statements (Robinson, 2020). analyses The information needs of potential investors can be ascertained through financial ratio analysis. If the finale information disclosed in a corporate’s financial statements does not satisfy the investor’s need for information, they might make wrong economic decisions [ CITATION Aln20 \l 1033 ] This will adversely affect their investments should they ignore to consider the importance of financial ratio analysis, as a source of additional information about the company (Minnis & Sutherland, 2017).

Methodology Robinson, (2020) define ratio as the fractional relationship pf one number to another. On the other hand, it defines ratio analysis as a “tool of financial analysis where a meaningful relationship is derived between the financial statement components” (Robinson, 2020).

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Ratio analysis if adapted to proportionality express the relationship between figures in a finical statement [ CITATION AlM20 \l 1033 ] . Ratios are quick guides or shortcuts that are important in evaluating a firm's financial position and activities and making comparisons with previous years' results of other businesses in the same industry (Ichsani & Suhardi, 2015). The key purpose of this ratio is to identify key areas that require further investigation. They are used proportionately in understanding the firm and its environment. Arkan, (2016) noted that ratios are most meaningful when used in comparison since making generalizations regarding what good or bad is difficult for any particular value ( Arkan, 2016). A single measure cannot show the whole situation about a company and one measure should not be adopted as the sole criteria for a final decision. Minnis and Sutherland, (2017). added that a "standing alone", a single ratio in the financial analysis may not be informative. Greater insights are achieved by computing and analyzing several related ratios for a business entity (Minnis & Sutherland, 2017). Hence, in this study, ratio analysis was conducted for KFC. The data was obtained from three years compilation of KFC’s financial statements from 2017-2019.

Table 1: Financial Data (KFC LTD,) Item/Year

2019

2018

2017

Current Assets

15,635,927

15,664,181

13,800,437

Current Liabilities

9,031,197

9,365,981

8,040,503

Inventories

2,274,748

2,189,041

1,863,081

Cash

4,493,594

2,086,668

3,779,199

Receivables

4,819,042

6,816,728

4,019,250

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Total Assets

23,777,212

23,542,631

20,669,136

Total Liabilities

9,561,779

10,328,015

9,114,572

Total Equity

14,211,339

13,209,115

11,554,564

Sales

24,674,004

25,716,165

23,497,760

Cost of Goods Sold

17,567,841

17,944,952

15,881,985

EBIT

2,330,797

2,636,218

2,798,914

Interest

12,739

16,485

22,879

Net Income

1,562,779

1,762,520

1,869,780

All Numbers in millions, Source: Yahoo Finance Results and Discussion Liquidity ratio analysis allows a company to measure its ability in managing short-term obligations (Chiaramonte & Casu,2017). It mainly highlights if an entity can offset its liabilities should they arise. In this paper, we apply the Current ratio, Cash ratio, and Quick ratio to analyses if KFC Inc has the necessary liquidity. Liquidity Ratios of (KFC LTD) Ratio/Year Current Ratio Quick Ratio Cash Ratio

2019 1.73 0.73 0.50

2018 1.67 0.67 0.22

2017 1.72 0.72 0.47

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Current Ratio

Current Ratio 1.74 1.73 1.72 1.71 1.7 1.69 1.68 1.67 1.66 1.65 1.64

2019

2018

2017

This measures the capability of a firm to offset short term debts and meet unexpected cash demands. For the past three years, KFC has maintained an average value of more than 1.6 of its current ratios. This implies KFC has a good position in meeting short-term obligations should they fall due. Quick Ratio of (KFC LTD)

Quick Ratio 0.74 0.72 0.7 0.68 0.66 0.64 2019

2018

2017

This ratio discloses the extent of cash and other current assets to be readily converted into cash in meeting the firm’s short-term obligations. From the data, KFC can convert its current assets into cash easily, with 2019 recording the highest value, which is a good indication.

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Cash Ratio of (KFC LTD)

Cash Ratio 0.6 0.5 0.4 0.3 0.2 0.1 0 2019

2018

2017

This ratio shows the capacity of a company to offset its short-term obligations with its cash and cash equivalents. Compared to other liquidity ratios like quick ratio and current ratio, this is Moe stricter measure since it focuses on a company’s most liquid assets-cash and cash equivalents. The company does not show a positive indication of its position to use cash and cash equivalents to meet its short-term obligations. In 2018, it could only meet 22% of its short-term obligations. In 2019 however, it could only meet 50% of its short-term demands.

Activity Ratios of (KFC LTD) Ratio/Year Inventory Turnover Receivable Turnover Total Asset Turnover

Inventory Turnover

2019 7.72 5.12 1.04

2018 8.20 3.77 1.09

2017 8.52 5.85 1.14

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Inventory Turnover 8.6 8.4 8.2 8 7.8 7.6 7.4 7.2 2019

2018

2017

One can see that KFC has a positive trend in inventory turnover over the 3-year period. A higher value of inventory turnover means that KFC is efficient in purchasing and selling its inventory.

Receivables Turnover

Receivable Turnover 7 6 5 4 3 2 1 0

2019

2018

2017

The company reported fluctuations in its receivable’s turnover, with 2018 recording the lowest value at 3.77, even though it is within acceptable limits. A higher value was achieved in 2017 and reduced slightly in 2018. This implies that KFC collects its receivables about 5 times a year or twice in every 110 days.

Total Asset Turnover

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Total Asset Turnover 1.16 1.14 1.12 1.1 1.08 1.06 1.04 1.02 1 0.98 2019

2018

2017

This is the third measure. Total Assets are resources used by a business entity to obtain more sales. This means that a higher value of total assets significantly increases sales. Considering this, the highest ratio denotes a high investment of total assets which can be recovered by sales. The data shows that KFC is reporting a decreasing trend in its total asset turnover, meaning that KFC has lower recovery on the investment into fixed assets in the 3year period.

Debt Ratios of (KFC LTD) Ratio/Year Debt Ratio Times Interest Earned

2019 0.40

2018 0.44

2017 0.44

Ratio

182.97

159.92

122.34

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Debt Ratio This Is à Financial leverage ratio used to measure a portion of a company’s resources concerning assets that are funded by debt (Chiaramonte & Casu,2017). In the 3 years, the company is managing its debt ratio, with a decreasing trend at the lowest recorded in 2019. This low ratio implies that KFC is more stable and has longevity potentials since it has a lower overall debt.

Debt Ratio 0.45 0.44 0.43 0.42 0.41 0.4 0.39 0.38 2019

2018

2017

Times Interest Earned Ratio

Times Interest Earned Ratio 200 180 160 140 120 100 80 60 40 20 0

2019

2018

2017

Times interest earned ratio is used to evaluate a company's capability to continually service its debts. This ratio indicates if a firm is may be run into financial challenges. In the past years, KFC has shown improving trends in servicing its debt. In 2019, at 182.97, it means that KFC is

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positioned to meet interest obligations since its annual interest obligations are lower than its earnings.

Profitability Ratios of (KFC LTD)

Ratio/Year Return on

2019

2018

2017

0.11

0.13

0.16

0.07

0.07

0.09

0.06

0.07

0.08

Equity Return on Assets Profit Margin

Return on Equity

Return on Equity 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

2019

2018

2017

Return on Equity is used to measure how efficiently a company can use shareholders’ money to generate revenue and achieve prospects of growth. KFC has a declining trend since 2017, attaining the lowest ratio in 2019. A lower ratio means that the company is not using the

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investor's fund effectively. The falling ROE may be an indication that KFC has a less efficient usage of its equity capital.

Return on Assets This is a profitability ratio indicating how a firm can manage its assets efficiently to generate profits in a given period. This ratio is essential to both the investors and the management to determine how efficiently the firm can convert its investments in assets into profits. KFC reported the highest value of ROA in 2017, which implies that it could convert the proceeds used in acquiring assets into net income efficiently. However, between 2018-2019, the companymaintained ROA value meaning that it has started gaining control of its investments in fixed assets to earn profits.

Profits Margin (KFC Ltd)

Profit Margin 0.09 0.08

This

evaluates

the

0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

amount of net income earned with a single

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dollar of sales. It is generated by a comparison of a firm’s net income sales and net sales. obtained by comparing the net income and net sales of a firm. The profit margin for KFC has demonstrated a declining trend in the past years. 2017 denoted the highest value of 0.08, while the lowest recorded in 2019 at 0.06. A reduction in profit margin compared to the previous periods signals a reduction in operational efficiency and profitability. A decrease of 0. 06 in 2019 from 0.07 in 2018 means KFC recorded a decline in its efficiency by 0.01%

Conclusion KFC performed better in 2017, as compared to 2018 and 2019. However, the company is more stable and has a better return on investment. The company showed concerns in areas of cash flow, debt, and capital debt even though it has higher growth rates and shows an upward trend. The company has as attracted a huge clientele, due to its exemplary performance and efficiencies of its services, KFC has managed to adopt an attractive workforce base in most of its outlets, which has improved efficiency and management in its services. The top management takes a keen interest in their financial statement analysis, using information derived from all their assessment in making top decisions, either increasing operating efficiency, improving its chains, and establishing new opportunities. Besides, data derived from financial ratio analysis exposes threats that the business may face, and develop mechanisms on how can be able to absorb shocks and improve their quality in service provision

References

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Alkaabi, Hamda and Nobanee, Haitham, A Study on Financial Management in Promoting Sustainable Business Practices & Development (2019). Available at SSRN: https://ssrn.com/abstract=3472415 or http://dx.doi.org/10.2139/ssrn.3472415 Al-Mahmoud, Maha and Nobanee, Haitham, Sustainability and Accounts Receivable Management: A Mini-Review (2020). Available at SSRN: https://ssrn.com/abstract=3538711 or http://dx.doi.org/10.2139/ssrn.3538711 Alnuaimi, Suhail and Nobanee, Haitham, Working Capital Management and Sustainability: A Mini-Review (2020). Available at SSRN: https://ssrn.com/abstract=3539427 or http://dx.doi.org/10.2139/ssrn.3539427

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