Part 1: Ratio Analysis

A financial ratio analysis of Yum Brands is performed to assess its profitability, efficiency,
leverage, and liquidity in light of the expected inflation rate and interest rates. The expected
inflation is estimated at 2.64% for the next 5 years based on the Treasury yield and the TIPS.
The inflation rate for 2021 was 4.69% (Worldwide inflation data, 2022) , which implies that
there will be a downward shift in inflation in the upcoming period.

Performance ratios:

The net profit margin of Yum Brands has declined due to increased operating costs from
2018 to 2020. But, in the year 2021, the company has made a comeback with an increase in
its net and operating profit margin due to a significant improvement in sales. In view of the
anticipated decline in inflation, the sales revenue will pick up due to an increase in demand
among the consumers and so the net, gross and operating profitability ratios will increase.

Figure 1 Performance ratios (ROA and Net Profit Margin)

ROA Net Profit margin

50.00% 30.00%
25.00%
40.00%
20.00%
30.00%
15.00%
20.00% 10.00%
10.00% 5.00%
0.00% 0.00%
2018 2019 2020 2021 2018 2019 2020 2021

ROA has drastically decreased, except for 2021, as the asset value has increased more than
the returns. Though the company has earned profit, ROE is negative due to an equity deficit
and has widely fluctuated during the period in response to the changes in the shareholder’s
equity. Since the company uses the LIFO method for inventory valuation, with the downward
shift of expected inflation, it would lead to overvaluation of inventory, causing the ROA to be
understated. Similarly, the ROE will also be affected by a downward bias because the equity
would be overvalued (Gaurang, 2018).

Leverage ratios:

Interest and cash coverage ratio kept declining during the years 2019 and 2020 mainly due to
fall in operating profit. In view of the declining expected inflation and changes in interest
rates, debts with variable interest rates will incur lesser interest charges due to the reduced
interest rate. So, the interest coverage ratio and debt burden would improve slightly if the
debt level remains the same.

Figure 2 Leverage ratios

Long-Term Debt-Equity Ratio Interest Coverage Ratio

3.5 6
3 5
2.5
4
2
3
1.5
2
1
0.5 1
0 0
2018 2019 2020 2021 2018 2019 2020 2021

During the analysis, the debt-equity ratio remained negative with moderate variations as the
equity remained deficit. With the expected inflation, it would cause a rise in equity value,
resulting in an improvement in the debt-equity ratio.

Efficiency ratios:

Figure 3 Efficiency ratios:

Asset Turnover
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2018 2019 2020 2021

The asset efficiency of Yum Brands in yielding profits is measured by analyzing the return on
assets. The asset turnover ratio is around 1 and indicates that Yum Brands is a capital-
intensive business. In the upcoming period, with respect to the anticipated inflation, the sales
will pick up, resulting in a higher value of the asset turnover ratio and the receivable turnover
ratio.
Liquidity ratios:

Figure 4 Liquidity ratios

Current ratio Cash ratio

1.10 0.50
0.45
1.05 0.40
0.35
1.00 0.30
0.25
0.95 0.20
0.15
0.90 0.10
0.05
0.85 0.00
2018 2019 2020 2021 2018 2019 2020 2021

The current ratio has improved due to a decline in current liabilities, implying that the
liquidity level Yum Brands has been improving its liquidity over the years. However, the
cash ratio has experienced a decline due to a decrease in the cash level in 2021. In the event
of a downward trend in future inflation, the liquidity level will continue to boost up for Yum
Brands.

Overall, it can be said that Yum Brands is expected to perform better with the expected
inflation and interest rates.
References
Gaurang, T. (2018, June). Retrieved from blogs.cfainstitute.org:
https://blogs.cfainstitute.org/investor/2018/06/04/inflating-equity-inflations-impact-
on-financial-statements-and-roe/#:%7E:text=Also%2C%20inflation%20increases
%20the%20amount,P%2FE)%20ratio%20drops.

Gurufocus. (2022). Retrieved from www.gurufocus.com:

https://www.gurufocus.com/term/wacc/YUM/Weighted+Average+Cost+Of+Capital+
%2528WACC%2529/Yum+Brands+Inc

Paramasivam, P. (2022, August). Reuters. Retrieved from www.reuters.com:

https://www.reuters.com/business/retail-consumer/kfc-parent-yum-brands-meets-
sales-estimates-taco-fried-chicken-demand-2022-08-03/

Worldwide inflation data. (2022). Retrieved from inflation.eu:

https://www.inflation.eu/en/inflation-rates/united-states/historic-inflation/cpi-
inflation-united-states-2021.aspx#:~:text=%20%20%20inflation%20%28monthly
%20basis%29%20%20,%204.16%20%25%20%208%20more%20rows%20

Yum. (2021). Retrieved from https://investors.yum.com: https://investors.yum.com/financial-

information/annual-reports/
Appendix:
1) Expected Inflation

2) Ratio Analysis

3) Graphical Analysis of Ratio Metrics

 Operating profit margin Long-term debt ratio
40.00% 6
35.00% 5
30.00%
4
25.00%
20.00% 3
15.00% 2
10.00%
5.00% 1
0.00% 0
2018 2019 2020 2021 2018 2019 2020 2021
 Receivables turnover Quick (acid-test) ratio
30.00 0.80
25.00 0.75
20.00
0.70
15.00
0.65
10.00
5.00 0.60
0.00 0.55
2018 2019 2020 2021 2018 2019 2020 2021

Total debt ratio

3.5
3
2.5
2
1.5
1
0.5
0
2018 2019 2020 2021

Total debt ratio