Professional Documents
Culture Documents
Group 1 Fra Final Report Secb
Group 1 Fra Final Report Secb
Submitted by:-
Group-7, Sec-B
Raunak Aggarwal (ABM16016)
Ishaan (ABM16015)
Siddhi Goel (PGP350594)
Lekshmy (PGP35069)
Aditya Raizada (ABM16012)
Jyoti Garg (FPM20018)
1
INTRODUCTION
India’s economic growth in the past decades, have not only led to an increase in the purchasing power
but also has played a major role in socio- cultural transformation. Globalisation and urbanisation has
also contributed to this shift.
India has seen enormous ascent in the consumption of fast food over the ongoing couple of years.
There are sufficient number of reports that indicate, fast food has become an integral component in
all major sections of the society. The consumption of fast food has been the highest in the group of
school goers and university students.
Also, India is considered to be a culinary heaven by the tourists who visit the country large and wide.
It is not just about the sparkling five-star hotels but also the street food, roadside dhaabas to the
evolving culture of cafes that attract the tourists.
The increased demand for the on-the-go products is the driving element for the development of this
market. Analysts have forecasted that the fast food industry to grow at CAGR of 5.22 % and 5.54 %, in
terms of volume and revenue, by the year 2019.
India has observed a significant growth in fast food industry in the past decade. The concept has been
successful in the country due to its shorter lead time and quicker food consumption alternatives to
the consumers. Quick service restaurants like McDonalds, KFC, Burger King, Pizza Hut, Subway, are
widely present in all major cities. In this analysis we have primarily focussed on Mc Donalds, KFC and
Burger King.
2
COMPANY PROFILES
Mc Donald’s
Mc Donald’s, the American fast food company was founded in 1940 by Richard and Maurice Mc
Donald. It is the largest restaurant chain by revenue, serving over 69 million people in more than 100
countries with 37,855 outlets as of 2018. The major revenue for the company comes from the rental
payments from franchises. The company predominantly sells hamburgers and have also catered to
the changing demands and needs of the consumers by providing them with salads and smoothies too.
KFC
Kentucky Fried chicken, popularly known as KFC, is head quartered at Louisville. It is the second largest
food chain after MC Donald’s, with a global presence in 136 countries with 22,621 outlets. Colonel
Sanders is the founder and Roger Eaton is the current CEO of KFC. 11 % of the outlets are company
owned and the rest by the franchises. In India, there are about 350 outlets with menu options that
ranges from fried chicken, sandwiches to rice bowls. In 2014, KFC released the "So Veg, So Good"
menu as a part of an India-unique promotional strategy centered on improving their vegetarian range.
The major revenue streams are sale of menus, rental , franchising fees and royalties.
Burger King
The company was founded in 1953 by James Mc Lamore and David Edgerton, US. It is headquartered
at Miami, Florida. Daniel Schwartz is the current CEO. It has a total outlet of 17,796 in 100 countries.
99.7 % of these are privately owned and operated. The company licenses its franchises depending on
the region. The major sources of revenue are franchises, income from sub-leased or leased properties,
sales at restaurants.
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4
MACROECONOMIC FACTORS AFFECTING THE FAST FOOD INDUSTRY
POLITICAL FACTORS
The fast-food industry must react to political laws and regulations in all the countries they cater to
their food. They should follow all the safety guidelines and adhere to the regulations of the food
authority of that particular country. Many countries today are stressing on the nutrients being
provided by the fast-food offerings and companies not complying with the stated nutritional values
may have to face some kind of backlash. Their representatives should likewise stick to all local laws in
which they are working.
Brands like McDonald's and Burger King are feeling the pressure from the government authorities on
account of the high measures of sodium and sugar siphoned into their menu. Sugar and sodium are
connected to numerous basic wellbeing sicknesses like Type 2 diabetes, hypertension, and coronary
illness. Expending a lot of these nourishments can prompt corpulence, stroke, and cardiovascular
failure.
ECONOMIC FACTORS
The economic conditions of the country where a particular brand is operating can have a huge effect
on its operational policies. Countries with high purchasing power can allow a brand to charge more
whereas in a price-sensitive market like India the companies have to price accordingly. Healthy
alternatives to fast food tend to be expensive than the regular fast food items which might not fetch
them the number of sales they are looking for.
The cost of fast food can despite being not for health can be outweighed as they are more readily
available and take less effort than making your own food from scratch.
SOCIAL FACTORS
What we’re seeing is an ascent in natural and entire nourishments as weight control plans and way of
life changes become an integral factor. Veggie lover, vegetarian and pescatarian eating are winding
up to a lesser extent a craze and even more a direction for a living — especially with the more youthful
age.
Catering to the needs of for example Indian markets where the population is pre-dominantly
vegetarian the foreign brands like McDonalds and KFC have introduced vegetarian offerings for the
Indian markets like Aloo Tikki burgers replacing the local hamburgers of US. This adaption to the local
taste and cultural differences has fetched huge success to these companies.
TECHNOLOGICAL FACTORS
It may seem like tech is not required by the fast-food industry but tech is important to improve staff
efficiency, correspondence among groups, and produce nourishment as fast as their clients anticipate.
Notwithstanding, the fast-food chains have as of late redesigned their menus with gaudy TV screens
swinging from the roof behind their clerks. They likewise utilize their site to exhibit wholesome data.
In certain areas, you can arrange your sustenance web-based, enabling you to walk around and snatch
your feast without holding up in line.
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ACCOUNTING POLICES GOVERNING THE INDUSTRY
Accounting and proper bookkeeping are very important for food sector as they have grueling
working hours. Also, along with revenues there is a huge list of expenses as well. Therefore, it is
necessary to understand and follow accounting principles. The major accounting principles for fast
food industries are:
Revenue recognition: the revenue recognition model as of December, 2018 says that the companies
will recognize revenues only after the goods and services have been transferred to the customers
and not when the risk of potential loss to the company from the selling of services has been passed
to the buyers.
Intangible resources: these represent the future expansions the fast food sector can expect. These
are usually mentioned at the acquisition cost minus the amortization and any damage losses. This
asset is recognized, when it is attributable to say that the upcoming economic benefits on assets will
flow to the company and the costs are reliably measured.
Inventory: Inventories for the fast food companies are of 2 types. One being the work in progress i.e.
ingredients, raw materials and all the supplies needed and other one that is produced for long term
use like syrups, jam etc. The inventory could be the cost of production and the cost of purchasing
from the market.
Plant, Property and Equipment: Fast food sectors spend high on property, plant to open multiple
chains across different cities and earn revenue. Company should capitalize individual plant, property
and equipment that are bought, materialized, made in own house, including modification and
improvements if these changes have the useful life of more than 2 years.
Taxes and Fees: for a fast food sector one must record the taxes and fees incurred to the company.
This includes GST (for India), service taxes, value added taxes.
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IMPACT OF IFRS
IFRS 15 which came in effect from january1, 2018 has affected accounting for revenues for food
companies. It not only affects the accounting but also affects customer contracting, measuring tools
for recording the revenue, time of revenue recognition
• The goods and services promised in the contract to the customers must be distinct. These
are the performance obligation imposed on the company.
• As per the IFRS 15, if there is variable consideration in pricing then the estimation method
should be clear and the expected values should be defined. This is applicable in the area of
price concessions and discounts to the customers.
• In regard to credits, payments to the distributors and retailers the company needs to
recognize if these payments shall be netted against revenue or not.
• For the franchises the time of recognition need to be considered. Whether it is recorded
when the customers obtain control or it is recorded over time as the criteria are met.
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MAJOR ACCOUNTING POLICIES:
McDonald’s Corporation
1. Revenue Recognition:
McDonald’s revenue recognition mainly consists of two components: sales and franchise fees. The
sales they record are by company-operated restaurants. McDonald’s records these sales using a
cash-basis system. This system means that the accountants record revenues when the company
receives cash, and records expenses when it pays.
According to Generally Accepted Accounting Principles (GAAP), an item should meet four criteria
to gain recognition as an asset, liability, expense, or in our case, revenue. The item should meet
the definition of the financial element and should be measurable, relevant, and reliable. Revenues
are inflows of assets of an entity or settlements of its liabilities during the appropriate earning
period. The element must also be measurable with sufficient reliability and have relevance in user
decisions. Once the item meets this criterion and the company determines that the item should
be recognized, the company must determine when to recognize it. The recognition of revenue
depends on two factors: being realized or realizable and being earned. Revenues are realized
when a company exchanges asset for cash or claims to cash. Revenues are realizable when assets
received can be readily convertible to known amounts of cash or claims to cash. Companies view
revenues as earned when the entity has met all of its obligations to the corresponding benefits.
McDonald’s conforms with GAAP in recognizing revenues. McDonald’s records product sales
through the company-owned stores on a cash basis. However, they record their services and sales
to franchisees on an accrual basis.
2. Intangible Resources:
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible
assets of acquired restaurant businesses. McDonald’s goodwill primarily results from purchases
of McDonald’s restaurants from franchisees and ownership increases in subsidiaries or affiliates,
and it is generally assigned to the reporting unit (defined as each individual market) expected to
benefit from the synergies of the combination. If a Company-operated restaurant is sold within
24 months of acquisition, the goodwill associated with the acquisition is written off in its entirety.
If a restaurant is sold beyond 24 months from the acquisition, the amount of goodwill written off
is based on the relative fair value of the business sold compared to the reporting unit.
McDonald’s conducts goodwill impairment testing in the fourth quarter of each year or whenever
an indicator of impairment exists. If an indicator of impairment exists (e.g., estimated earnings
multiple value of a reporting unit is less than its carrying value), the goodwill impairment test
compares the fair value of a reporting unit, generally based on discounted future cash flows, with
its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is measured as the difference between the implied fair value of the
reporting unit’s goodwill and the carrying amount of goodwill. Historically, goodwill impairment
has not significantly impacted the consolidated financial statements. Accumulated goodwill
impairment losses on the Consolidated Balance Sheet at December 31, 2018 and 2017 were $15.6
million and $14.5 million, respectively.
• McDonald's goodwill and intangible assets for the quarter ending June 30, 2019 were $2.581B,
a 9.94% increase year-over-year.
• McDonald's goodwill and intangible assets for 2018 were $2.332B, a 2.03% decline from 2017.
• McDonald's goodwill and intangible assets for 2017 were $2.38B, a 1.85% increase from 2016.
8
• McDonald's goodwill and intangible assets for 2016 were $2.337B, a 7.15% decline from 2015
3. Inventory
McDonalds follows a Just in Time (JIT) system of inventory management. JIT, as the name suggests,
is the system of supplying products to customers as soon as they have ordered for it, with minimal
delay between placing the order and getting it in hand. McDonalds doesn’t begin to cook or
assemble or preheat their stuff until they receive a customer order. This was not the case earlier.
They had a different approach to inventory management wherein they used to pre-cook a batch
of hamburgers and sit under heat lamps. It used to keep them under the lamps for as long as
possible and eventually discard what they couldn’t sell. Stock inventory for different products
takes place either on a daily, weekly or monthly basis at the end of the business day.
• McDonald's inventory for the quarter ending June 30, 2019 was $0.044B, a 10.89% decline
year-over-year.
• McDonald's inventory for 2018 was $0.051B, a 13.1% decline from 2017.
• McDonald's inventory for 2017 was $0.059B, a 0.17% decline from 2016.
• McDonald's inventory for 2016 was $0.059B, a 41.16% decline from 2015
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Burger King- Restaurant Brands
1. Revenue Recognition:
Burger King uses the franchise business model to generate profits. Under the franchise
arrangement, the franchisees invest in the equipment, signage, seating, and decor of the
restaurant, while the company owns or leases the land and building. The company generates
revenues mainly from three sources: sales at the company restaurants, royalties and franchise
fees, and property income from certain franchise restaurants that lease or sub-lease property
from the company.
According to Generally Accepted Accounting Principles (GAAP), an item should meet four criteria
to gain recognition as an asset, liability, expense, or in our case, revenue. The item should meet
the definition of the financial element and should be measurable, relevant, and reliable. Revenues
are inflows of assets of an entity or settlements of its liabilities during the appropriate earning
period. The element must also be measurable with sufficient reliability and have relevance in user
decisions. Once the item meets this criterion and the company determines that the item should
be recognized, the company must determine when to recognize it. The recognition of revenue
depends on two factors: being realized or realizable and being earned. Revenues are realized
when a company exchanges asset for cash or claims to cash. Revenues are realizable when assets
received can be readily convertible to known amounts of cash or claims to cash. Companies view
revenues as earned when the entity has met all of its obligations to the corresponding benefits.
Burger King conforms with GAAP in recognizing revenues. Burger King records product sales
through the company-owned stores on a cash basis. However, they record their services and sales
to franchisees on an accrual basis.
2. Intangible Resources
Highly qualified and experienced executive management team is a great value to Burger King,
promising effective operations and high and stable earnings growth. A globally recognized brand,
Burger King, is another powerful asset to the corporation, as well as reputation and products
associated with it. And last, but not the least is the knowledge, which mainly brought Burger King
fame for its products. They definitely possess unique production technology, which is constantly
updated and successfully implemented.
3. Inventory
This strategic decision area highlights the need for operations management practices that
maximize capacity and satisfaction, and minimize inventory management costs. Burger King
addresses this need through localized inventory practices based on restaurant performance, as
well as global inventory management for moving products to various restaurant locations.
Burger King also follows a Just in Time (JIT) system of inventory management. JIT, as the name
suggests, is the system of supplying products to customers as soon as they have ordered for it,
with minimal delay between placing the order and getting it in hand. Burger King doesn’t begin to
cook or assemble or preheat their stuff until they receive a customer order. This saves waste and
gives the chain bragging rights for the freshness of its food.
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• Restaurant Brands property, plant, and equipment for 2017 was $2.133B, a 3.81% increase
from 2016.
• Restaurant Brands property, plant, and equipment for 2016 was $2.055B, a 4.46% decline from
2015.
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Kentucky Fried Chicken- Yum! Brands
1. Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable. Amounts
disclosed as revenue are net of returns, trade discount taxes and amounts collected on behalf of
third parties. The Company recognizes revenue when the amount of revenue can be reliably
measured and it is probable that future economic benefits will flow to the company. Interest
Income is recognized in time proportionate method.
• Yum! Brands revenue for the quarter ending June 30, 2019 was $1.310B, a 4.24% decline year-
over-year.
• Yum! Brands revenue for the twelve months ending June 30, 2019 was $5.513B, a 4.16%
decline year-over-year.
• Yum! Brands annual revenue for 2018 was $5.688B, a 3.23% decline from 2017.
• Yum! Brands annual revenue for 2017 was $5.878B, a 7.52% decline from 2016.
• Yum! Brands annual revenue for 2016 was $6.356B, a 0.97% decline from 2015.
2. Intangible Resources
KFC brand ranks as no. 86 on Forbes list of World’s Most Valuable Brands, as of May 22, 2019.
• Yum! Brands goodwill and intangible assets for the quarter ending June 30, 2019 were $0.769B,
a 29.9% increase year-over-year.
• Yum! Brands goodwill and intangible assets for 2018 were $0.767B, a 5.65% increase from
2017.
• Yum! Brands goodwill and intangible assets for 2017 were $0.726B, a 5.68% increase from
2016.
• Yum! Brands goodwill and intangible assets for 2016 were $0.687B, a 6.53% decline from 2015.
3. Inventory
KFC follows a Just-in-Time (JIT) and First in First Out (FIFO) to manage inventory. Inventory is
divided into three categories: daily, weekly and monthly inventory. The daily inventory consists of
fast-moving products like ice creams, non veg items etc.
Here the orders are placed by the inventory department every night after the restaurant closes
for its customers. The weekly inventory consists of Dru Storage items like disposal plates,
equipment and recipes needed to cook. The monthly inventory consists of detailed stock
verification of items present in the store and the products disposed due to non-consumption on
reaching the standard time are also recorded.
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NEWS ARTICLES
Burger King expansion plan not slowed down; has turned EBITDA positive: India CEO
burger king has decided not to slow down its expansion plans in our country, India as they believe that
the food industry is recession proof and the upcoming slowdown is temporary.
“Last fiscal we had set up 58 new stores in India. This year we have already done 26 stores and 30
more are in the pipeline which will come up. We plan to grow at this pace or higher next year too,”
said Varman.
Burger King, which claims to be the second largest fast food burger chain in the world, said it grew by
double digit pace last fiscal and continued double digit pace of growth in April-June quarter of this
fiscal. Varman said while the restaurants are profitable, at the company level the business has become
positive in earnings before interest, tax, depreciation and amortization (EBITDA) in 2018-19.
Analysts said this signals more fund infusion in the days to come.
“The deficit in current paid up of Rs 366.48 crore and authorized capital of Rs 405 crore leads to the
inference that there could be another round of capital infusion from Everstone in the near future,”
said Mohit Yadav, founder of business intelligence platform Veratech Intelligence.
He said the line of credit of up to Rs 150 crore, which Burger King can borrow in 12 months,
demonstrates Everstone’s confidence in its Indian business to generate considerable cash flow in
coming years for timely service of the debt.
Burger King India, which runs more than 214 outlets across the country, has no borrowings as of now.
An email sent to Burger King India CEO Rajeev Varman remained unanswered till Monday press time.
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As per RoC filings, the company has raised around Rs 612 crore till now, of which Rs 100 crore was
raised in last fiscal.
Varman had last month told ET that the chain is not slowing down its expansion plans due to the
consumption slowdown since it believes the food industry is recession proof and the slowdown is a
temporary hiccup. This year, he had said, the chain has already opened 26 stores and 30 more were
in the pipeline, and the same pace will continue next year too. Last fiscal, it had set up 58 new stores.
In FY18, Burger King India had reported 66% increase in sales at Rs 389 crore higher than the world’s
biggest coffee chain Starbucks that grew its India revenue 28% to Rs 348 crore — on the back of store
expansion, entry-level pricing, and a larger vegetarian menu. Burger King, which entered India in 2014,
reported loss of Rs 62 crore in FY18. It has yet to file financials for FY19.
A food services report by National Restaurants Association of India has estimated the industry at over
Rs 4 lakh crore in FY19, and expected to grow to Rs 5.5 lakh crore by 2021. It listed real estate costs
and multiple levels of taxation as the key challenges.
Industry officials said the withdrawal of the input tax credit and deep discounting by aggregators have
severely impacted their profitability. In November 2017, the government slashed GST rates on
restaurants to 5% from 18%, but scrapped input tax credit which the industry said escalated capital
expenses and rentals by 15-18%.
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restructuring charges of $0.09 per share, diluted earnings per share was $2.05 for the quarter, an
increase of 3% (7% in constant currencies).
The Company returned $2.0 billion to shareholders through share repurchases and dividends.
In the U.S., second quarter comparable sales increased 5.7%, reflecting successful national and local
deal offerings, including the 2 for $5 Mix and Match deal, the continued positive impact from our
Experience of the Future deployment, and strength in our core menu items. Operating income for the
quarter increased 5% as a result of the comparison to the strategic restructuring charge in the prior
year. Excluding this charge, operating income decreased 3%, reflecting lower gains on sales of
restaurant businesses, partly offset by higher franchised margin dollars.
In the International Operated segment, second quarter comparable sales increased 6.6%, reflecting
positive results across all markets, primarily driven by the U.K., France and Germany. The segment's
operating income increased 3% (8% in constant currencies), primarily due to sales-driven
improvements in franchised margin dollars.
In the International Developmental Licensed segment, second quarter comparable sales increased
7.9%, reflecting strong sales performance across all geographic regions.
Steve Easterbrook concluded, "By engaging our guests on their terms, whether it's through delivery,
an enhanced dining experience at one of our Experience of the Future restaurants, or through our
evolving digital offerings, we're becoming a better McDonald's. We will continue to focus on our
customers with innovative solutions to further elevate the guest experience and drive growth."
Yum Brands Stock Keeps Climbing as Taco Bell, KFC Sales Grow
Yum Brands stock touched a 52-week high Thursday thanks to upbeat second-quarter same-store
sales growth at Taco Bell, KFC, and Pizza Hut. Yum Brands delivered second-quarter earnings of 93
cents per share, though that includes about 6 cents per share that came from the company’s
investment in GrubHub.
“Second-quarter results maintained early year momentum and helped us to exceed our already high
expectations for a strong first half of 2019,” CEO Greg Creed said in a statement. “I’m especially
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pleased to report that we delivered 10% system sales growth in the quarter, supported by broad based
strength at KFC International and Taco Bell.”
Global same-store sales grew 5%, ahead of estimates of 3.1%. Taco Bell, KFC, and Pizza Hut all posted
meaningful estimate beats, according to Bernstein analyst Sara H. Senatore.
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CALCULATION OF RATIOS AND TREND ANALYSIS
KFC
For KFC, Yum! Brands is the parent company. The current ratio and quick ratio first decreases then
increases then again decreases in the last 5 years. The debt equity ratio has been negative in last 3
years, due to accumulated deficit caused stock repurchasing. The debt service coverage ratio has
been healthy throughout the years. The asset turnover has increased continuously over the years.
Similarly, with the inventory turnover ratio but in last year it was not there but the firm has
explained it is not uncommon in their industry. The debtors’ turnover ratio has been steadily
decreasing over the years while the creditors turnover ratio has been steadily rising over the years.
Gross Profit and Net Profit Margin and return on asset has been steadily rising over the period but
ROE has turned negative for 3 last years. But the firm has a consistent EPS throughout the years.
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McDonald
McDonald's
2014 2015 2016 2017 2018
Liquidity Ratios
Current Ratio 1.52 3.27 1.4 1.84 1.36
Acid Test Ratio 1.2 3.05 0.78 1.54 1.11
Solvency Ratios
Debt Equity Ratio 1.16 3.4 -11.78 -9.04 -4.97
Debt Service Coverage Ratio 16.64 13.63 10.47 11.85 10.5
Turnover Ratios
Asset Turnover Ratio 0.77 0.67 0.79 0.68 0.64
Inventory Turnover Ratio 145.36 148.73 181.35 207.48 186.34
Inventory Holding Period (in days) 2.51 2.45 2.01 1.76 1.96
Debtors Turnover Ratio 21.66 20.22 17.76 13.23 9.52
Average Collection Period (in days) 16.85 18.05 20.55 27.59 38.34
Creditors Turnover Ratio 17.44 18 17.63 14.52 9.59
Average Payment Period (in days) 20.93 20.28 20.7 25.14 38.06
Profitability Ratios
Gross Profit Margin(%) 38.1 38.52 41.45 46.54 51.3003
Net Profit Margin(%) 17.34 17.82 19.03 22.75 28.18
ROA(%) 13.43 12.55 13.59 16.02 17.79
- -
ROE(%) 32.97 45.43 -94.66
212.61 158.88
EPS (in USD millions) 4.85 4.82 5.49 6.43 7.61
For McDonalds, both Current and Quick ratio first increase then decrease and then again increase.
As seen in the case of Yum! Brands, its Debt Equity Ratio too is negative for last 3 years, which is an
industry practice. The firm has a very good debt service coverage ratio, meaning it can meet its fixed
payment obligations very well. The Asset Turnover Ratio has been kept steady in the last 5 years.
The Inventory Turnover Ratio has been increasing in the period. Both Debtors and Creditors
Turnover Ratio has increased over the years. The Gross Profit and Net Profit Margin and ROA has
increased over the years. ROE, like Yum! Brands, has been negative in last 3 years. EPS of McDonalds
has been increasing over the years.
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Burger king
Burger King
2014 2015 2016 2017 2018
Liquidity Ratios
Current Ratio 1.36 1.22 1.73 1.06 1.07
Acid Test Ratio 1.15 1.05 1.54 0.92 0.97
Solvency Ratios
Debt Equity Ratio 1.34 1.4 1.29 2.66 3.36
Debt Service Coverage Ratio 0.88 2.85 3.9 3.56 3.81
Turnover Ratios
Asset Turnover Ratio 0.09 0.2 0.216 0.23 0.266
Inventory Turnover Ratio 6.78 25.83 28.5 31.08 29.87
Inventory Holding Period (in days) 53.83 14.13 12.81 11.74 12.22
Debtors Turnover Ratio 3.86 9.39 10.04 10.65 11.8
Average Collection Period (in days) 94.56 38.87 36.35 34.27 30.93
Creditors Turnover Ratio 0 0 0 0 0
Average Payment Period (in days) 0 0 0 0 0
Profitability Ratios
Gross Profit Margin(%) 72.02 42.93 47.38 49.13 58.19
Net Profit Margin(%) 13.46 9.26 14.85 14.18 11.42
ROA(%) 1.19 1.89 3.28 3.22 2.96
ROE(%) -23.5 6.46 22.74 31.87 31.9
EPS (in USD millions) -1.16 0.51 1.48 2.64 2.46
Current and Quick Ratio first decreased then increased then decreased for Burger King. The Debt
Equity Ratio has increased over the years, meaning the firm is becoming more leveraged. While the
debt service coverage ratio in 2014 was alarmingly low, the firm is now maintaining a healthy ratio.
The Asset Turnover Ratio has been rising over the years. The inventory Turnover Ratio has been
rising over the years. While the Debtors Turnover Ratio has increased, the Creditors Turnover Ratio
has remained zero in last 5 years, an exceptional case. The Gross Profit Margin and Net Profit Margin
decreased significantly in 2015 but now are rising slowly recently. The ROE and EPS while being
negative earlier has shown an increase over the subsequent years.
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Comparison of Ratios Across Firms
1. Current Ratio
Current Ratio
3.5
3
2.5
2
1.5
1
0.5
0
2014 2015 2016 2017 2018
KFC 0.6447 0.5465 1.08 1.6581 0.9277
McDonald's 1.5232 3.2684 1.398 1.8429 1.3631
Burger King 1.36 1.22 1.73 1.06 1.07
Current Ratio is a liquidity ratio that measures a company’s ability to pay short term
obligations. The higher the current ratio, the more capable the company is of paying its
obligations. While the ideal ratio is considered to 2, the industry standard stays less than
that. Only McDonalds in 2015 was able to maintain a ratio d 3.2 which is also not a good
sign. For burger king, current ratio hovered around 1-1.7 while for KFC, it was very low in the
beginning but they increased over the years.
2. Quick Ratio
Quick Ratio
3.5
3
2.5
2
1.5
1
0.5
0
2014 2015 2016 2017 2018
KFC 0.37 0.21 0.78 1.27 0.66
McDonald's 1.2 3.05 0.78 1.54 1.11
Burger King 1.15 1.05 1.54 0.92 0.97
The Quick Ratio measures a company’s ability to meet its short-term obligations with its
most liquid assets. For this reason, the ratio excludes inventories from current assets. The
ideal ratio is 1 and except for KFC, the other 2 firms have been able to maintain a ratio well
above the target. Currently KFC has a quick ratio of 0.66 while Burger King has of 0.97 which
is below industry standard.
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3. Debt Equity Ratio
DE Ratio
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
2014 2015 2016 2017 2018
KFC 2.0848 4.03 -1.6251 -1.5478 -1.2708
McDonald's 1.162 3.4033 -11.775 -9.0381 -4.9654
Burger King 1.34 1.4 1.29 2.66 3.36
Debt equity ratio is a measure of a company’s financial leverage calculated by dividing its
total liabilities by stockholders’ equity. The DE ratio also depends on the industry in which
the company operates. Since these are American corporations, it is not uncommon to see a
negative DE ratio, which is an industry practice there. While both KFC and McDonalds show
it, this is not the case with Burger King. The ideal ratio remaining 2, both KFC and McDonalds
prefer to buy back their shares hence the negative DE Ratio.
The debt service coverage ratio is a measurement of the cash flow available to pay current
debt obligations. The ratio states net operating income as a multiple of debt obligations due
within one year, including interest, principal, sinking fund and lease payments. The ideal
ratio is more than 1 meaning the firm can comfortable meet its obligations. Since the ratio
changes according to the prevalent situation, all the firms have been able to keep their debt
service coverage ratio more than 1
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5. Asset Turnover Ratio
Asset Turnover is calculated as the ratio of sales and assets and is one of the levers to
increase Return on assets for a firm, which in turn affects RoI. Higher the turnover, better it
is for the firm. KFC has a high asset turnover which explains its high RoA. McDonalds has
hovered between 0.6-0.7. Burger King is the least at 0.266
Inventory Turnover Ratio is calculated as the ratio of the cost of goods sold and the average
inventory during the period. High inventory turnover is generally an indicator of efficient
inventory management, in McDonalds has shown an improved show over the years. For KFC
the turnover is zero however according to their working notes, this doesn’t have an impact
on their liquidity or operations. The inventory turnover is just too small. Burger king has also
shown continuous improvement with 29.87 being current ratio
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7. Debtors Turnover Ratio and Average Collection Period
The Receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its
assets. It can be calculated by dividing the net value of credit sales during a given period by
the average accounts receivable during the same period. Lesser debtors’ turnover ratio
implies better collection policy of the firm. With KFC at 11.84, McDonalds at 9
52 and Burger King at 11.8, all 3 firms have shown more or less similar collection policy.
Along with time all 3 firms have tried to bring their collection policy at par with the industry
standards
Accounts Payable turnover ratio is computed by dividing the net credit purchases by average
accounts payable. It measures the number of time, on average, the accounts payable is paid
during a period. Ideally a company wants to generate enough revenue to pay off its accounts
payable quickly. But not so quickly the company misses out on opportunities because they
could use that money to invest in other endeavours. The Creditors turnover ratio for KFC is
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around double than that for McDonalds which means it takes double the time to repay its
creditors. One peculiar thing to notice is that the Creditors Turnover Ratio is 0 for Burger
King as they have almost no short term credit payment obligations.
Gross Profit Margin is a financial metric used to access a company’s financial health and
business model by revealing the proportion of money left over from revenues after
accounting for the cost of goods sold. Gross profit Margin is calculated by dividing gross
profit by revenues. The declining trend of Burger King states troubling time for the firm but
at present it is better than McDonalds. Both KFC and McDonalds have shown a rising trend
over the years.
Net Profit margin is the percentage of revenue left after all expenses have been deducted
from sales. The measurement reveals the amount of profit that a business can extract from
its total sales. The net sales part of the question is gross sales minus all sales deductions,
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such as sales allowances. While KFC and McDonalds have a high net profit margin of 27-28%
, Burger King has a lower but still respectable 11.42%.
ROA
35
30
25
20
15
10
5
0
2014 2015 2016 2017 2018
KFC 12.34 15.77 24.27 24.84 32.67
McDonald's 13.43 12.55 13.59 16.02 17.79
Burger King 1.19 1.89 3.28 3.22 2.96
Return on Assets is an indicator how profitable a company is relative to its total assets. ROA
gives the senior management how efficient they are at using assets to generate earnings.
While Burger King is quite poor on its RoA, McDonalds is relatively better. KFC on the other
hand has an impressive ROA of 32.67% indicating its position as a leader.
ROE
150
100
50
0
-50
-100
-150
-200
-250
2014 2015 2016 2017 2018
KFC 56.61 105.21 -18.13 -21.1557 -19.455
McDonald's 32.97 45.43 -212.61 -158.88 -94.66
Burger King -23.5 6.46 22.74 31.87 31.9
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King has a positive one. This means KFC and McDonalds are in financial distress since ROE is
a profitability indicator because ROE comprises aspects of performance.
EPS is calculated as a company’s profit divided by the outstanding shares of its common
stock. The resulting number serves as an indicator of a company’s profitability. As can be
seen from the data, the EPS of all the three firms has increased over the years and as on
December 2018, McDonald’s has the highest EPS at 7.61(in USD millions).
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CURRENT VALUATION OF THE SHARES
To assess if the company’s shares are undervalued or overvalued, the intrinsic value of the shares is
compared with the current market price(CMP) of the share. The share is said to be overvalued if the
CMP is more than the intrinsic value and undervalued if the CMP is less than the intrinsic value.
To find out the intrinsic value of the share, the price-earnings ratio is multiplied with the forecasted
earnings per share of the company.
The data regarding the three companies under consideration are as below:
P/E Ratio (TTM) Forecasted EPS ($) Intrinsic Value Current MP($)
YUM Brands (KFC) 35.61 0.96 34.18 111.60
McDonald's 27.86 2.22 61.84 212.58
Burger King 34.67 1.47 50.96 95
From the above data, it can be concluded that the shares of all the three companies are overvalued
as the CMP is more than the intrinsic value for all the companies.
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REFERENCES
1. https://phdessay.com/kfc-inventory-and-process-management/
2. https://www.clearspider.com/blog-supply-chain-management-disasters-kfc/
3. https://www.moneycontrol.com/annual-report/gromotradeconsultancy/accounting-
policy/KFC?classic=true
4. https://www.macrotrends.net/stocks/charts/YUM/yum!-brands/goodwill-intangible-assets-total
5. https://www.ukessays.com/essays/marketing/facts-about-burger-king-holdings-marketing-
essay.php
6. https://www.stock-analysis-on.net/NYSE/Company/YUM-Brands-Inc/Analysis/Goodwill-and-
Intangible-Assets
7. https://www.forbes.com/companies/kfc/#7bfc840b44ee
8. https://www.sec.gov/Archives/edgar/data/1547282/000119312514061827/d648966d10k.htm
9. https://www.macrotrends.net/stocks/charts/MCD/mcdonalds/goodwill-intangible-assets-total
10. https://www.stock-analysis-on.net/NYSE/Company/McDonalds-Corp/Analysis/Goodwill-and-
Intangible-Assets
11. https://www.scribd.com/document/92340984/McDonalds
12. Annual Reports of Yum! Brands(KFC) , McDonald's and Restaurants Brands International (Burger
King)
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