QUEST INTERNATIONAL UNIVERSITY PERAK

Faculty of Business, Management, and Social Sciences

PRINCIPLE OF ACCOUNTING

Prepared For:

Mr. Izdihar

Lecturer: BBA1101

Prepared by:

Malathi D/O Sundra Saigaran (BBA00069)

Puventhran S/O Nadaraja (BBA00105)

Topic: KFC Holdings Financial Ratio Analysis of Year 2009

Date : 17th January 2012

Contents

KFC Holding Background …………………………………..3

The Income Statement ………………………………………..4

The Balance Sheet Statement…………………………………5

Definition of Financial Ratios……………………………....6-7

The Ratio calculation ……………………………………...8-13

Conclusion……………………………………………………14

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KFC Holdings Background

Vision

To be the leading integrated food services group in the Asia Pacific region based on consistent quality products and exceptional customer-focused service.

Mission

To maximize profitability, improve shareholder value and deliver sustainable growth year after year.

About Company

The KFC chain of restaurants in Malaysia, Singapore, Brunei, Cambodia, and India (over 640 outlets). The RasaMas chain of restaurants in Malaysia and Brunei (27 outlets)

The Group also owns 74 Ayamas shop, making KFC the nation's first branded chicken and chicken-based retail chain.

In addition, to support KFC’s core activities, they are extensively involved in poultry production and processing, as well as a host of ancillary businesses such as vegetable farming, baking and sauce production. 

After a successful restructuring exercise, KFCH has emerged as a strong player in the Malaysian corporate, world with a high reputation for excellent products, efficient friendly service, and financial strength. Indeed, KFCH is the only KFC restaurant operator in the world whose Western Quick Service Restaurant market share is greater than that of McDonald's.

KFCH is part of QSR Brands Bhd (QSR Brands) a leading, fully integrated quick-service restaurant enterprise and the local franchisee and operator of the KFC and Pizza Hut restaurants. QSR Brands is in turn a subsidiary of Kulim (Malaysia) Berhad, a conglomerate focusing mainly on palm oil operations, oleo chemicals, biodiesel production, and quick service restaurants.

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Financial Statements for KFC HOLDINGS (MALAYSIA) BHD (KFC)Currency in INCOME STATEMENT AS OF : 31-Dec 31-DecMillions of Malaysian Ringgits

2009 2010

Revenues 2,297.40 2,522.40

TOTAL REVENUES 2,297.40 2,522.40

Cost of Goods Sold 1,078.50 1,167.90

GROSS PROFIT 1,218.90 1,354.40

Selling General & Admin Expenses, Total 1,037.30 1,144.90

Other Operating Expenses -15.6 -31.1

OTHER OPERATING EXPENSES, TOTAL 1,021.80 1,113.80

OPERATING INCOME 197.2 240.6

Interest Expense -5.4 -4.4

Interest and Investment Income 0.4 0.4

NET INTEREST EXPENSE -5 -4

Other Non-Operating Income (Expenses) -- --

EBT, EXCLUDING UNUSUAL ITEMS 192.2 236.7

Gain (Loss) on Sale of Assets -2.1 -3.9

Other Unusual Items, Total -- -10.9

EBT, INCLUDING UNUSUAL ITEMS 190 221.8Income Tax Expense 57.2 62.1

Minority Interest in Earnings -2.4 -2.9

Earnings from Continuing Operations 132.8 159.7

NET INCOME 130.4 156.8

NET INCOME TO COMMON INCLUDING EXTRA ITEMS 130.4 156.8

NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 130.4 156.8

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Financial Statements for KFC HOLDINGS (MALAYSIA) BHD (KFC)  

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Currency in BALANCE SHEET AS OF:- 31-Dec 31-Dec

Millions of Malaysian Ringgit 2009 2010

Assets    

Cash and Equivalents 123.4 131.7Short-Term Investments 45.7 52.9

TOTAL CASH AND SHORT TERM INVESTMENTS 169.2 184.6Accounts Receivable 50.3 46.5Notes Receivable 15 6.6Other Receivables 23.2 24

TOTAL RECEIVABLES 88.4 77.1Inventory 172.3 200.8

Other Current Assets 17.7 23.7

TOTAL CURRENT ASSETS 447.7 486.1

Gross Property Plant and Equipment 1,183.00 1,468.70

Accumulated Depreciation -409.8 -468.7

NET PROPERTY PLANT AND EQUIPMENT 773.2 1,000.00Goodwill 43.4 50

Long-Term Investments -- 22.4Other Intangibles 25.3 23.6Other Long-Term Assets 0.9 0.9

TOTAL ASSETS 1,290.50 1,583.00

LIABILITIES & EQUITY    Accounts Payable 145.3 155Accrued Expenses 111.3 127.8

Short-Term Borrowings 4.2 10.7Current Portion of Long-Term Debt/Capital Lease 27.9 36

Current Income Taxes Payable 12.2 12.7

Other Current Liabilities, Total 65 75.1

TOTAL CURRENT LIABILITIES 365.8 417.2Long-Term Debt 84.4 105.8Minority Interest 12.5 15

Pension & Other Post-Retirement Benefits 3.1 2.9Deferred Tax Liability Non-Current 32.9 51.8TOTAL LIABILITIES 486.2 577.8Common Stock 198.3 396.6

Additional Paid in Capital 18.7 0.4Retained Earnings 547.5 482.2

Comprehensive Income and Other 27.2 111

TOTAL COMMON EQUITY 791.8 990.2TOTAL EQUITY 804.2 1,005.30TOTAL LIABILITIES AND EQUITY 1,290.50 1,583.00

The definitions of financial ratios 1. Liquidity Ratio (LR)

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i) Net Working CapitalIs a measurement of the operating liquidity available for a company to use in developing and growing its business? The working capital can be calculated very simply by subtracting a company’s total current liabilities from its total current assets.

ii) Current RatioThe ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

iii) Quick RatioA indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

2. Asset Management Ratio (AMR)

i) Account Receivable TurnoverAn accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

ii) Average Collection PeriodThe approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

iii) Inventory TurnoverA ratio showing how many times a company's inventory is sold and replaced over a period.

3. Leverage Ratio (LvR)

i) Debt Ratio

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A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.

ii) Debt – Equity RatioA measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

iii) Equity MultiplierLike all debt management ratios, the equity multiplier is a way of examining how a company uses debt to finance its assets. Also known as the financial leverage ratio or leverage ratio.

4. Profitability Ratio (PR)

i) Gross Profit MarginA financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

ii) Earnings Per ShareThe portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

iii) Return On EquityThe amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. 

KFC Holdings Financial Ratio Analysis of Year 2009

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1. Liquidity Ratio (LR)

i) Net Working Capital

current assets – current liabilities

2009 2010

447.7 – 365.8 = 81.9 486.1 – 417.2 = 68.9

Analysis shows that the net working capital reduces 13 units in 2010 from the year 2009. Since the working capital of the company is positive, the company is able to pay off its short-term liabilities. The company is operating in most efficient manner.

ii) Current Ratio

Current assets / current liabilities

2009 2010

447.7 / 365.8 = 1.224 486.1/417.2 = 1.165

 Analysis shows that the current ratio reduces 0.059 units in 2010 from the year 2009. The capability of the company to pay its obligation is reduced. However the company is still able to pay all its obligations since the ratio is not under 1. The higher the current ratio, the more capable the company can pay its short-term liabilities.

iii) Quick Ratio

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[Current assets – (inventory + prepayments) / current liabilities]

2009 2010

447.7 – (172.3 + 45.7) / 365.8= 447.7 – 218 / 365.8= 229.7 / 365.8 = 0.628

 [486.1 – (200.8 + 52.9) / 417.2]= 486.1 – 253.7 / 417.2=232.4 / 417.2= 0.56

Analysis shows that the quick ratio reduces 0.068 units in 2010 from the year 2009. Since there is a reduction in the quick ratio, the position of the company is reduced as well since the quick ratio measures a company’s ability to meet it short-term obligation with its most liquid assets. The higher the quick ratio, the better the position of the company.

2. Asset Management Ratio (AMR)

i) Account Receivable Turnover

Credit sales / accounts receivable

2009 2010

2297.40 / 50.3 = 45.673 2522.40 / 46.5 = 54.23

 Analysis shows that the account receivable turnover increase 11.557 units in 2010 from the year 2009. Since there is an increase, the company operates in a cash basis and that its extension of credit and collection of accounts receivable is efficient. 

ii) Average Collection Period

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360 / account receivable turnover

2009 2010

360 / 45673 = 7.882 360 / 54.23 = 6.64

 Analysis shows that there is reduction of 1.242 units in the average collection period in 2010 from the year 2009. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash.

iii) Inventory Turnover

Cost of goods sold / inventory

2009 2010

1078.50 / 172.3 = 6.259 1167.90 / 200.8 = 5.82

 Analysis shows that there is a reduction of 0.439 units in inventory turnover in 2010 from the year 2009. Since there is a reduction, the company faces poor sales and therefore excess inventory. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

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3. Leverage Ratio (LvR)

i) Debt Ratio

Total liabilities / total assets

2009 2010

486.2 / 1290.50 = 0.377 577.8 / 1583 = 0.37

 Analysis shows that the debt ratio of the company remain almost the same in the two years. Since the debt ratio is lower then 1, indicates that a company has more assets then debt.

ii) Debt Equity Ratio

Long-term liabilities / shareholder equity

2009 2010

120.4 / 791.8 = 0.152 160.5 / 990.2 = 0.162

 Analysis shows that there is a increase of 0.01 unit in debt equity ratio. Since there is an increase, means that the company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

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iii) Equity Multiplier

1/1 – Debt ratio

2009 2010

1/1 – 0.377 = 0.623 1 / 1 – 0.37 = 0.63

 Analysis shows that there is an increase of 0.007 units in equity multiplier in 2010 from the year 2009. Since there is an increase, indicates higher financial leverage which means the company is relying more on debt to finance its assets.

4. Profitability Ratio (PR)

i) Gross Profit Margin

Gross profit / sales

2009 2010

1218.90 / 2297.40= 0.531 1354.40 / 2522.40= 0.54

 Analysis shows that there is an increase of 0.009 units in gross profit margin. Higher value indicates a higher efficient company. The company source of paying additional expenses and future saving is increased.

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ii) Earnings Per Share

Profit available to ordinary shareholder / number of ordinary shares issued

2009 2010

130.4 / 198.3 = 0.658 156.8 / 396.6 = 0.395

 Analysis shows that there is a reduction of 0.263 units of earning per share in 2010.

 

iii) Return On Equity

Profit after tax / shareholder’s equity

2009 2010

130.4 / 791.8 = 0.165 156.8 / 990.2 = 0.158

Analysis shows that there is a reduction of 0.007 units in return on equity in 2010 from the year 2009. Since there is a reduction, the profit which the company generate with the money shareholders have invested is reduce as well.

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Conclusion

Financial statement analysis is a tool used by accountants to interpret the financial performance

or position of a business entity. The analysis provides a meaningful data that can be used by

users to make informed and better decision.

KFC Holdings is in a secure financial position. However, improvements are needed in

some area for the company if it is intend to grow. KFC Holdings need to improve in the

capability of paying obligation and short-term obligation. The current ratio and quick ratio of

KFC Holdings is reduced in the year compare to 2009. The company may come out with some

strategy to overcome this problem because this will affect the financial performance of the

company.

KFC Holdings is also having trouble of poor sales and therefore excess inventory as the

inventory of the company is reduced in the year 2010 from 2009. Besides, the company has been

aggressive in financing its growth with debt and is relying more on debt to finance its assets

since there is an increase in debt equity ratio and equity multiplier in the year 2010 from 2009.

Furthermore, reduce in return on equity in the year 2010 from 2009 shows that the profit

which the company generate with the money shareholders have invested is reduced as well.

Overall, KFC Holdings should come with a strategy to overcome these problems to

improve the company growth.

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