Yum! Brands Analysis

Yum! Brands Incorporation, formerly Tricon Global Restaurant Incorporation, is a fast-food American enterprise headquartered in Louisville, Kentucky. The company's new CEO is Greg Creed, and the executive chairperson is David Novak. Taco Bell, Pizza Hut, and KFC are among the licensed brands operated by the company. Yum! Brands' three operating divisions are its three registered brands. The company's three corporate divisions are engaged in the sale of pizza, chicken, and Mexican-style food categories. Yum! Brands Company is among the largest fast-food chains in the world in terms of worldwide distribution and system units. Indeed, the firm has 42,692 restaurants that are distributed across 130 countries. Similarly, the company had owned A&W Restaurant prior to 2011 sellout. Equally, the firm has been listed among the fortune 500 corporations. Moreover, Yum! Brands Incorporation has been listed as a public owned company at the New York Stock Exchange (NYSE). Consequently, it is a significant business organization. The financial statements of the Yum! Brands Incorporation are audited by the KPMG LLP. According to the opinion of the auditors in the recently audited financial results of 2016, the consolidated financial statements prepared by the firm reflect a fair financial position of the Yum! Brands Incorporation in conformity with the Generally Accepted Accounting Principle (GAAP) of the U.S. Additionally, the auditor indicates that the financial reporting internal control employed is effective as provided by the 2013 internal control integrated framework (Yum-Brands, 2017). Consequently, the KPMG LLP auditor responsible for auditing the company's financial statements has given an unqualified opinion regarding the results given. The current stock price of the Yum! Brand's stock is $65.03 while the recent dividend per share is $0.30 distributed on January 11, 2017.
Yum! Brands Incorporation operates under the restaurant industry; its close industry peers are McDonald's Corporation, Starbucks Incorporation, Compass Group Corporation, Restaurant Brands International Incorporation, Chipotle Mexican Grill Incorporation, and Dominos Pizza Incorporation (Yum-Brands, 2017). The outlook of the restaurant industry indicates it is experiencing growth. The industry has been registering sales growth over the recent years, which is attributed to the growing American economy that has seen more people consuming food outside as their disposable income increases (Yum-Brands, 2017). However, the growing advocacy against the fast and preserved food due to the health concerns is threatening the growth of the industry. The industry is likely to experience the sales decline in the future, as more people prefer to eat at home for health safety. Thus, the management of the Yum! Brands Incorporation has initiated plans of introducing natural foods to counter the fear of the consumers (Yum-Brands, 2017). Equally, the management is considering expanding further internationally to increase the revenue generation source in the future.
Another essential aspect reflected in the annual report of the Yum! Brands Incorporation is the firm's financial position. The total assets of the company are derived from the summation of total liabilities and shareholders' equity. Thus, the total assets of the firm in 2016 and 2015 amount to $5,478 million and $8,061 million respectively (Yum-Brands, 2017). The total assets in 2015 are comprised of $7,086 million liabilities and $969 million equity. In contrast, the total assets of 2016 are attributed to $11,134 million liabilities and -$5,656 equity (Yum-Brands, 2017). Thus, the 2016 total shareholders' equity is a deficit amount compared to the amounts in the 2015 financial year. The gross operating profit of the company in 2016 has increased from $1,402 million in 2015 to $1,625 million (Yum-Brands, 2017). The operating net income increased from $1,293 million in the 2015 financial year to $1,619 million. Consequently, the profitability of the Yum! Brands Incorporation is expanding. However, the cash flow statement indicates that the cash flow from operating activities is on a decreasing trend. The cash flow from the operating activities in the 2016 year amounts to $1,204 million while $1,213 million in the 2015 year (Yum-Brands, 2017). The cash flow from the operating activities in these two years is lower compared to the net income reported. The cash flow employed in the investing activities reflected in the cash flow statement indicates the firm's expansion of its investments is diminishing. This trend is reflected by the decreasing amounts allocated to the investing activities from the 2014 financial year to the 2016 financial year. Moreover, the cash flow statement indicates that the major source of the financing activities involved proceeds from the long-term debt issued (Yum-Brands, 2017).
The preparation of the Yum! Brands Incorporation's financial statements follow the U.S GAAP. Some significant accounting policies had been observed by the management in the preparation of the financial statements. The revenue is recognized once the payment has been tendered at the sale point (Yum-Brands, 2017). The fair value of assets and liabilities is measured using the quoted market prices. Equally, the present value of the cash flows expected in the future in consideration of the risks involved is applied in determining the fair value of the assets and liabilities in the absence of quoted market prices of the same or similar assets or liabilities in the market (Yum-Brands, 2017). The accounting policy employed in the accounting for the inventories is the first-in-first-out (FIFO). The property, plant and equipment of the firm is accounted using the straight-line depreciation method over the estimated useful period (Yum-Brands, 2017). Thus, the cost model is employed in the valuation of the plant, property, and equipment.
The financial ratios have been employed in evaluating the financial performance and position changes of the company. The financial ratios used in the analysis cover the profitability, liquidity, solvency, and the efficiency of financial areas. Thus, the attached appendix demonstrates the computed financial ratios covering 2015 and 2016 financial years. The profit margin in 2016 financial year has increased from 20.08% in 2015 to 25.43%, which is an indication of an increasing profit generation from the sales revenue realized. The profit margin is used to assess the proportion of the sales revenue that is turned to the net income (Gabriel & Marcus, 2010). The operating profit margin measures the proportion of the sales revenue turned to the operating profit. Thus, the increase in the operating profit margin in 2016 of 25.53% from the 21.77% in 2015 implies the firm's profitability is expanding. The current ratio computed in the attached table measures the extent to which the current assets can be employed to cover the current liabilities (Gabriel & Marcus, 2010). Accordingly, the current ratio in 2016 indicates the Yum! Brands Incorporation liquidity is improving positively compared to the position in the 2015 financial year. The cash ratio is a liquidity financial ratio that measures the capability of a firm to use its cash and cash equivalents to cover the short-term financial obligations. Thus, the cash ratio in the two financial years indicates the Yum! Brand Incorporation does not have adequate cash and cash equivalents to cover the short-term financial obligations but is on an improving trend (Gabriel & Marcus, 2010). Consequently, the current ratio and the cash ratio show that the liquidity position of the firm is improving positively. The debt-equity and the interest coverage ratios reflected in the appendix attached are used to assess the solvency position of the company (Gabriel & Marcus, 2010). The debt-equity ratio in the two financial years under the analysis indicate that the capital structure of the firm is highly financed using the debt capital over the equity capital. The proportion of the debt capital compared to the equity capital in the capital structure of the company is increasing, which indicates a high solvency riskiness level against the firm (Gabriel & Marcus, 2010). The interest coverage ratio indicates the company's capability of servicing its long-term financial obligations promptly is diminishing. The interest coverage ratio measures the ability of a firm to meet its interest expenses using the earnings before interest and taxes (Gabriel & Marcus, 2010). The interest coverage ratio of the company has decreased from 9.94 times in 2015 to 5.29 times in 2016. Even though the potential of the firm to service its interest expenses is high, the trend of the interest coverage ratio is decreasing affecting its ability to attract debt financing at a favorable cost in the future. The inventory turnover, receivable turnover, and the asset turnover ratios are used to assess the efficiency of the firm in utilizing its resources (Gabriel & Marcus, 2010). The position and trend of the inventory turnover in the two financial years indicate the firm's efficiency in turning the inventories to sales is improving. However, the trend of the asset turnover ratio implies that the ability of the firm to utilize its asset resources to generate revenue is decreasing. The receivable turnover ratio indicates the efficiency of the firm to collect the sales made of credit is decreasing.
Owing to the analysis of the Yum! Brand Incorporation annual report covering the 2016 and the 2015 financial years, it is recommendable for a prospective investor to consider investing through the Yum! Brands Incorporation. One of the reasons behind the recommendation is the strategic plans the management is diversifying to natural foods and expanding internationally further. This strategic plan has the potential of promoting the firm's performance, which will enhance the shareholders' wealth. Equally, the trend of the profitability amounts and ratios in the last two years is an indication that investors are likely to receive high dividends in the future. Consequently, the Yum! Brands Incorporation is a favorable target for an investor intending to maximize wealth in the future.

References
Gabriel, S. J., & Marcus, A. (2010). Financial Accounting. New York: McGraw-Hill Education.
Yum-Brands. (2017). Annual Report. Retrieved from http://yumcreativeservices.com/investors/phoenix.zhtml?c=117941&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExNDEyNjMwJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

Appendix
Financial ratio 2016 2015
Profit margin = net income/ net sales revenue 1,619/6366 = 25.43% 1,293/6,440 = 20.08%
Operating profit margin = operating profit/ net sales revenue 1625/6366 = 25.53% 1402/6440 = 21.77%
Return on equity = net income/ shareholders' equity 1,619/-5,656 = -28.62% 1,293/969 = 133.44%
Current ratio = current assets/ current liabilities 1,482/1,369 = 1.08 1,687/3,087 = 0.55
Cash ratio = cash and cash equivalents/ current liabilities 704/1,369 = 0.51 313/3,087 = 0.10
Debt-equity ratio = total liabilities/ total equity 11,134/-5,656 = -1.97 7,086/969 = 7.31
Interest coverage ratio = EBIT/interest expense 1,625/307 = 5.29 1,402/141 = 9.94
Inventory turnover = sales/ inventories 6,366/36 = 177 6,440/40 = 161
Receivable turnover ratio = sales/ receivables 6,366/370 = 17.2 6,440/324 = 19.88
Asset turnover = total assets/ sales revenue 5,478/6,366 = 0.86 8,061/6,440 = 1.25