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 2019 2018 2017

Current Ratio 1.73 1.67 1.72
Quick Ratio 0.73 0.67 0.72
Cash Ratio 0.50 0.22 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 2019 2018 2017

Inventory Turnover 7.72 8.20 8.52
Receivable Turnover 5.12 3.77 5.85
Total Asset Turnover 1.04 1.09 1.14

Inventory Turnover
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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 2019 2018 2017

Debt Ratio 0.40 0.44 0.44
Times Interest Earned

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 2019 2018 2017

Return on
0.11 0.13 0.16
Equity
Return on
0.07 0.07 0.09
Assets
Profit Margin 0.06 0.07 0.08

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 company-

maintained 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 amount of net income
0.05
earned with a single
0.04
0.03
0.02
0.01
0
2019 2018 2017
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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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