Ratio Analysis - Yum! Brands

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Yum! Brands’ consolidated net profit margin lies within the industry average and for 2 years have shown slow yet steady growth. While sales from US operations declined by 5%, the company continued to gain momentum in China, where operating profit increased at an average of 26% year-on-year. Meanwhile, their Return on Assets fairs better than competitors such as McDonald’s and Domino’s Pizza, showing that management efficiently manages its asset base. The company’s efficiency can be seen in its Cash Conversion Cycle, with -49.12 in 2009. This number is much lower from its competitors, which suggests a liquid working capital position. Yum generates sales from its inventory and cash from its sales at a faster rate than the time its pays its suppliers. This means that it utilizes the average 60-day period before it has to fully purchases with suppliers, giving them “free cash” in principle. However, while this suggests less need to borrow, the company still received cash by issuing long-term debt in 2008 and 2009. Due to the nature of the business, on average, 56% of its total assets are fixed. And as Yum ventures into Asian countries, especially China and India, it allocates part of its cash to capital spending. However, in utilizing its fixed assets to generate sales, Yum scores lower compared to Wendy’s and McDonald’s. This may be due to its focus on aggressively adding new stores, with 2008 and 2009 serving as introduction years, before sales can fully pick up. One could also note, however, that sales in the US and International Divisions (ex-China) have decreased from 2007 to 2009. The company’s solvency, however, provides another story. As mentioned, Yum reported negative equity in 2008 mainly due to repurchase of sales. The company used its cash surplus to repurchase sales at a time when its stock price decreased, making it gain economic profits. This may also show the company’s belief and commitment that the stock price will increase again,...
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