Financial Report

CB 3986 Financial Management IN Hospitality- COHORT 35

CW1 Pair work Report Financial Statement Analysis with

Benchmark

Yum China Holding, Inc.

Financial Statement 2020 Analysis

Lecturer: Gianpiero Di Battista

May Thu Aung (2120894)

Cohort 35: BA Hotel and Hospitality Management

3 February 2022

2. Table of Contents

1
Contents
2. Table of Contents..........................................................................................................2
3. Executive Summary.......................................................................................................3
3.1 Introduction..................................................................................................................3
3.1.1 Aim and Objective.....................................................................................................3
3.1.2 Method......................................................................................................................4
3.1.3 Structure...................................................................................................................4
4. Theoretical Background.................................................................................................5
5. Data Collection and Measures......................................................................................7
5.1 Data Analysis.............................................................................................................13
5.1.1 Liquidity Ratios.......................................................................................................14
5.1.2 Profitability Ratios...................................................................................................17
5.1.3 Capital Structure Ratio...........................................................................................20
5.1.4 Asset Management Efficiency Ratio.......................................................................22
6. Key Results..................................................................................................................24
7. Implications and Recommendations...........................................................................25
8. References..................................................................................................................25

3. Executive Summary

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This report aims to analyze and evaluate the financial statement of Yum China
Holdings, Inc and compare it with the previous year’s figures (before the COVID-19
outbreak). This report is also a comparison of financial performance between the
company’s opponent, Restaurant Brands International, Inc. The report includes multiple
financial accounting topics and data from annual reports or financial statement
information. Moreover, the readers will find out about the theoretical background of both
companies. In the data collection and measures section, the report shows detailed
financial ratios such as cash, debit, interest costs, revenue, profit, and profitability. In the
end, implications and recommendations are to confirm the financial stability, to
acknowledge the suitability of solutions for the company’s problems.

3.1 Introduction

Yum China went public on the NYSE (New York Stock Exchange) on November 1,
2016, and on September 10, 2020, it was secondary-listed on the HKEX (Hong Kong
Exchanges and Clearing Limited). The financial status of Restaurant Brand International
and Yum China Holdings Inc will be examined in depth in this research. By analyzing
the firm’s annual report, readers can predict how well the company performed in 2020.
The writer will clarify the report’s purpose and objectives, as well as its methodology
and structure, in this part.

3.1.1 Aim and Objective

The objective of this study is to investigate Yum China’s productivity over the course of
a financial year. Additionally, the goal of this article is to identify and highlight the
financial statistics from the 2020 annual report to assess the company’s financial
condition in contrast to its benchmark, Restaurant Brands International Inc.

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3.1.2 Method

The numbers and ratios on financial reports used to show Yum China and their
competitor, RBI, financial performance were the major sources of this report. In addition,
various sources differentiated refer to Yum China and Restaurant Brands International
profitability (such as previous year record) that are useful in evaluating financial
progress. As a result, while assessing and calculating financial ratios, precise data and
resources are fundamental.

Besides that, the resources used by the writer to obtain and compile all of the data are
freely accessible over the internet at both firms’ annual reports 2020, which are
acknowledged as references. Financial statistics from the firms’ annual reports which
are published online in 2020 can be used to differentiate and evaluate the overall
effectiveness of Yum China Holdings and their competitor Restaurant Brands
International.

3.1.3 Structure

The report’s format is separated into four sections. The goals, objectives, and approach
utilized to assess Yum China and Restaurant Brands International are described in the
first part. The second section focuses on the theoretical background to show a clear
understanding of the financial stability of both firms. In the following, the paper will
present balance sheet and income statement information to outline the measurement of
the various relevant financial ratios’ tests for the companies. The report’s major point is
to discover and quantify the financial ratios tests between Yum China and Restaurant
Brand International. Lastly, the writer will make a recommendation on how the company
can solve the problem, how earnings can be improved in the future.

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4. Theoretical Background

Yum China Holdings, Inc.

Yum China Holdings, Inc is a company operating in China. The headquarters of Yum
China Holdings, Inc are in Shanghai, China. KFC and Pizza Hut as well as East
Dawning, Little Sheep, Huang JI Huang, Taco Bell, and COFFii & JOY, are most
popular among China’s restaurant concepts. These brands have become part of local
popular culture as well as clients’ everyday lives. The company has grown from a single
restaurant in 1987 to over 11,000 outlets in over 1600 cities and towns in mainland
China, reaching every region and autonomous area. The company also collaborates
with Lavazza in China to invest and improve the Lavazza coffee shop idea. Yum China
has grown into China’s largest restaurant company over the last three decades, not only
the size but also the brand awareness, social media and digital engagement, national
supply chain management, product quality, and innovation. The company put
employees as a foundation of it and a skilled management team aims to cultivate a
culture that values energy, opportunity, and fun.

Yum China constructs menus that appeal to local tastes while also offering worldwide
classics like KFC's Original Recipe chicken to build strong consumer loyalty. To deliver
excellent and convenient cuisine, each of their brands features distinctive menu items,
many of which were developed in China, as well as unique recipes and special
seasonings. All brands are entrenched into popular culture and consumers' daily lives in
China, thanks to decades of accumulated consumer know-how and loyalty.

The company is committed to meeting customers' changing demands by improving the

in-store experience, boosting mobile connectivity, offering creative new goods, and
always delivering value. It also remains committed to increasing shareholder value by
increasing brand relevance, opening new stores, and improving unit economics across
our portfolio of brands. Yum China is well-positioned for long-term growth, with a rapidly
growing consumer class and increasing urbanization. (Yum China, 2020)

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In 2021, Yum China is ranked No.363 of Fortune 500 and also included in TIME Most
Influential Companies. The company is also one of the highest scores out of 28
companies assessed in the Restaurant & Leisure Facilities Industry under Dow Jones
Sustainability Indices. Yum China's market cap as of February 1, 2022, is $20.62B. Yum
China's revenue for the twelve months ending September 30, 2021, was $9.821B,
a 22.26% increase year-over-year. Yum China's annual revenue for 2020
was $8.263B, a 5.85% decline from 2019. Yum China's annual revenue for 2019
was $8.776B, a 4.29% increase from 2018. (CCPA, 2022)

Restaurant Brands International, Inc.

With more than $35 billion in annual system-wide sales and over 28,000 outlets in more
than 100 countries, Restaurant Brands International Inc. is one of the world's largest
quick-service restaurant enterprises. The company was founded in 1954 and its
headquarters is in Toronto, Canada. RBI owns TIM HORTONS®, BURGER KING®,
POPEYES®, and FIREHOUSE SUBS®, four of the world's most well-known and
famous quick-service restaurant brands. It is the parent company of Tim Hortons Inc.
and Burger King Worldwide, INC. Burger King is one of the biggest fast-food hamburger
chains. For decades, these independently owned and run brands have served their
unique guests, franchisees, and communities. RBI is enhancing sustainable outcomes
connected to its food, the environment, and people and communities through its
Restaurant Brands for Good approach. (Restaurant Brands International Inc, 2020)

Vision of RBI

“At RBI, our big dream is to build the most-loved restaurant brands in the world.”
(Restaurant Brands International Inc, 2020)

Values of RBI

RBI believes in “dreaming big, ownership, Meritocracy, Diversity, Creativity & Innovation
and Authenticity.” The company is achieving its vision by being a brand-led company,
focusing on exceptional guest experience, driving digital innovation and leadership,
modeling industry excellence as a franchisor, and living a culture that attracts and
retains the best talent in the world.
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The company’s mission is to create the most well-known restaurant brands in the world.
The company has a varied set of perspectives which helps them to improve in serving
the different types of guests who visit the restaurant daily. RBI has witnessed more
voices and various viewpoints from employees in any discussion to get better results, to
get considered solutions for a more engaging, inclusive culture for their valued
employees. (Restaurant Brands International Inc, 2020)

Restaurant Brand's market cap as of February 01, 2022, is $17.31B. Restaurant

Brand's revenue for the twelve months ending September 30, 2021, was $5.551B,
a 9.08% increase year-over-year. Restaurant Brand's annual revenue for 2020
was $4.968B, an 11.33% decline from 2019. Restaurant Brand's annual revenue for
2019 was $5.603B, a 4.59% increase from 2018. (CCPA, 2022)

Based on market cap, Revenue & Profit, Yum China Holdings has been performed
better than Restaurant Brands International during the pandemic. As a result,
Restaurant Brand International is picked as the benchmark and competitor to
Yum China Holdings.

5. Data Collection and Measures

The financial status of the two firms, Yum China Holdings Inc. and Restaurant Brand
International, Inc., is examined in this section. The research focuses on firms’ annual
reports as of 31 Dec 2020 and outlines the measurement of the various relevant
financial ratios’ tests for both companies. Both companies use USD in Million as their
currency.

According to Layton (2021), an annual report is a statement that covers financial data
on public firms, small and large enterprises, non-profit organizations, partnerships, and
other businesses. It covers the previous fiscal year’s financial performance and
operations. The annual report is also to assist in attracting new investors, to maintain
the trust of present stakeholders, and to give business researchers and investors

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information about the company’s financial situation. The financial statements include
Balance Sheets, Statements of Operations, Statements of Comprehensive Income,
Shareholders’ Equity, and Cash Flows. In this report, financial ratios are calculated on
the balance sheet and income statement.

Bennett, Coleman & Co.Ltd.(2022) defined a company’s balance sheet as a financial

statement that shows its assets, liabilities, equity capital, total debt, and other financial
information at a specific point in time on The Economic Times, E-Paper. Assets are
presented on one side of the balance sheet and the other, liabilities. Assets should
equal liabilities by adding Equity (Assets= Liabilities + Equity), to present the actual
picture in the balance sheet.

Mattews (2021) described that the income statement is one of three major financial
statements used to analyze a company’s financial performance with the balance sheet
and cash flow statement. An increase in sales from year to year may be appealing to a
potential investor, and this information may be seen on the first line of an income
statement. In contrast, growing costs might be noticed on the income statement,
prompting an investor to inquire further about the company's long-term viability. The
income statement is also known as the profit and loss statement or simply “P&L,” starts
with the amount of money earned by the firm and subtracts costs incurred during the
reporting period to arrive at either a net profit or a net loss.

The purpose of this research is to examine and compute between two companies Yum
China Holdings and Restaurant Brand International about their financial ratios which are
mentioned above.

Balance Sheet and Income Statement Analysis

Yum China Holdings, Inc’s Balance Sheet

8
(Yum China Holdings Inc. Annual Report 2020)

Restaurant Brands International Inc.’s Balance Sheet

9
(Restaurant Brands International Inc. Annual Report 2020)

Yum China Holdings Inc’s Income Statement in 2020

10
(Yum China Holdings Inc. Annual Report 2020)

Restaurant Brands International Inc’s Income Statement in 2020

11
(Restaurant Brands International Inc’s Income Statement in 2020)

5.1 Data Analysis

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The financial performance of both organizations will be discussed and analyzed in the
following section using significant ratios such as liquidity, profitability, capital structure,
and asset management. As a result, a comparison of the two companies' financial
situations would be given. The information and numbers are taken from the company's
annual report, the year 2020, and are all in millions of dollars.

5.1.1 Liquidity Ratios

According to Hill (2021), financial ratios are used to assess the financial stability of a
business or other organization. The capacity of a corporation to satisfy its financial
commitments as they become due is characterized by the word liquidity in accounting.
The liquidity ratio is a calculation that determines a company's capacity to pay short-
term loans. Liquidity ratios can be categorized into three different types of computations.
The most generous of the three is the current ratio. The quick ratio and the cash ratio
are the following two ratios.

Current Ratio

The current ratio is a measurement of a company's capacity to pay current liabilities with
current assets. This is a fast way to determine a company's liquidity. (Hill, 2021)

Current Ratio = Current Assets

Current Liabilities
Yum China:

Current Ratio = 4936

2067
= 2.4

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Yum China can cover nearly two times its current liabilities, according to the current
ratio assessment. This is a favorable indicator for investors since it shows that the firm
can pay its short-term debt if necessary.

RBI:

Current Ratio = 2264

1601
= 1.41

The current ratio of RBI is 1.41, indicating that the company's current assets will likely
cover its current obligations. This is also a signal to potential investors that the firm is
worth investing in.

Quick Ratio

The quick ratio is a measure of a company's capacity to satisfy short-term commitments

using its most liquid assets and is indicative of its short-term liquidity situation. The
typical quick ratio is defined as a result of one. A firm with a quick ratio of less than one
may not be able to pay off all of its current liabilities in the short term, whereas a
company with a fast ratio of greater than one may pay off all of its current liabilities
immediately. (Seth, S. 2021)

Quick Ratio = Current Assets – Inventory – Prepaid Expenses

Current Liabilities
Yum China:

Quick Ratio = 4936-398-176

2067

= 2.1

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RBI:

Quick Ratio = 2264-96-72

1601
= 1.31

Yum China has a greater than one in quick ratio, so the company can pay off its current
liabilities instantly. RBI has a normal quick ratio.

Cash Ratio

A company's liquidity is measured by the cash ratio, which is the ratio of total cash and
cash equivalents to current liabilities. Creditors can use this information to determine
how much money, if any, they are willing to lend a firm (Kenton, W. 2021).

Cash Ratio = Cash & Cash Equivalents

Current Liabilities

Yum China:

Cash Ratio = 1158

2067
= 0.56

RBI:

Cash Ratio = 1560

1601
= 0.97

Both companies’ cash ratio is equal to 1, then organizations have precisely the same
amount of current obligations as cash and cash equivalents to pay down those debts.

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5.1.2 Profitability Ratios

Gross margin, operating margin, return on assets, return on equity, return on sales, and
return on investment are all ways to calculate a company's profitability. A profitability
ratio is a metric for assessing a company's profitability. Profitability is simply the ability
to produce a profit, and profit is the amount of money left over after all costs and
expenses associated with obtaining the money have been eliminated. Gross profit
margin (GPM), Net Profit margin (NM), return on assets (ROA), return on equity (ROE),
return on sales (ROS), and return on investment (ROI) are all common profitability
measures used to evaluate a company's performance (ROI). (Grimsley, S. 2021)

Gross Profit Margin

The gross margin of goods and services informs how profitable they are. It informs the
product's manufacturing expenses. (Grimsley, S. 2021)

Yum China:

Gross Profit Margin = (Net Sales – Cost of Goods Sold) x 100

Net Sales
Gross Profit Margin = (8263-6298) x 100
8263

= 23.78%

RBI:

Gross Profit Margin = (4968-2138) x 100

4968

= 56.96%

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RBI got more profit than Yum China even the company annual revenue for 2020
was $4.968B, an 11.33% decline from 2019. Yum China’s gross profit margin is less
than its competitor while annual revenue for 2020 was $8.263B, only a 5.85%
decline from 2019 during the COVID-19. RBI is successfully effectively making a profit
over and above its costs.

Net Profit Margin

The net profit margin of a firm or business sector is the ratio of net profits to sales. The
net profit margin, expressed as a percentage, indicates how much of a company's
revenue is converted into profit. (Maverick, J.B, 2021)

Yum China

Net Profit Margin = Net Income x 100

Revenue

Net Profit Margin = 784 x 100

8263

= 9.48%

RBI:

Net Profit Margin = 486 x 100

4968

= 9.78%

Both gross profit margin and net profit margin are commonly used by investors and
analysts to determine how efficient a company's management is at making profits
concerning the expenses of providing products and services. In this case, the net profit
margin of RBI is 9.78%, which is 47.18 % less than the gross profit margin. This implies
that the company's other expenditures are excessive and that some efforts to minimize
them are required. Yum China is only 14.3% less than the gross profit margin.

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Return On Equity

The ratio of net income to shareholders' equity is used to determine the return on equity
(ROE). ROE is defined as the return on net assets, which is equal to a company's
assets less its debt. ROE is a measure of a company's profitability and efficiency in
producing profits. (Fernando, J. 2021)

Return on Equity = Net Income

Average Shareholders’ Equity

Yum China

Return on Equity = 784

6459
= 12.14%
RBI

Return on Equity = 486 = 13.06%

3721

Both companies performed well at more than 10%. 11% is average for the service
industry.

Return on Assets

Return on assets is determined by dividing net income by total assets, and the result
can reveal how well a company uses its assets to create net income. (Galloway, T.
2021)

Return on Assets = Net Income

Total Assets

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Yum China:

Return on Assets = 784 = 7.21%

10875

RBI:

Return on Assets = 486 = 2.13%

22777

According to the estimate, RBI has a return on assets of only 2.13 percent, which is
lower than Yum China. Yum China performed normal ROA.

5.1.3 Capital Structure Ratio

According to (Tuovila, A. 2021), A company's capital structure refers to the mix of debt
and equity it employs to fund its overall operations and expansion. The balance sheet
includes both debt and equity. Debt or equity are used to acquire company assets,
which are also recorded on the balance sheet. Ownership shares in a firm, as well as
claims on future cash flows and earnings, are sources of equity capital. Bonds and
loans are examples of debt, whereas ordinary stock, preferred stock, and retained
earnings are examples of equity. The capital structure includes short-term debt as well.
Analysts evaluate a company's capitalization structure using these two ratios in general.
The debt ratio (total debt divided by total assets) and time interest earned ratio
(earnings before interest and taxes EBIT divided by the total interest payable on bonds
and other debt). (Chen, J. 2020)

Debt Ratio

The debt ratio refers to how much money an organization has in assets compared to
how much money it owes in liabilities. Assets are items that a company owns and
utilizes to generate revenue. Liabilities are the debts owed by the company. The debt
ratio indicates how much a business relies on debt to fund its assets. (Hill, R. 2021)

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Yum China

Debt Ratio = Total Liabilities

Total Assets

Debt Ratio = 4404

10875

= 0.40

Restaurant Brands International

Debt Ratio = 19056

22777

= 0.83 =1

Both companies have handled their debts very well, with debt marginally above total
assets. Therefore, a ratio of less than one is desired, as it indicates that the company's
assets are financed by equity.

Time Interest Earned (TIE)

The TIE ratio measures a company's debt-free status. It's preferable to generate
enough cash flow to keep investing in the company rather than just having enough
money to avoid bankruptcy. A higher TIE score indicates that an organization has
sufficient cash after paying its obligations to continue investing in the business. TIE is
also referred to as the interest coverage ratio. (Chen, J. 2020)

Yum China

Time Interest Earned = Net Operating Income (EBIT)

Interest Expense
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Time Interest Earned = 961
147
= 6.54

RBI

Time Interest Earned = 1422

508

= 2.79

Both companies have enough cash to continue investing in the business after paying
their debts. However, Yum China Holdings has a better TIE number than Restaurant
Brands International.

5.1.4 Asset Management Efficiency Ratio

The efficiency ratios assess a company's capacity to effectively utilize assets and
manage liabilities in the short term. Inventory turnover, asset turnover, and receivables
turnover ratios are examples of efficiency ratios. These ratios assess a company's
capacity to manage assets and how well it uses its assets to produce income. It's best
to compare a company's financial ratio to that of its rivals in the same industry when
calculating any financial ratio. (Nickolas, S.2021)

Asset Turnover Ratio

Every business has assets, which are items that the firm owns and utilizes to generate
revenue. The asset turnover ratio is a figure that illustrates how much money a firm
makes for every dollar it spends on assets. It shows how well a corporation makes
money with its assets. (Rikxoord, T.V., Scalia, S., 2021)

Yum China

Asset Turnover = Sales

Total Assets

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Asset Turnover = 8263
10875

= 0.76

RBI

Asset Turnover = 4968

22777

= 0.22

As both companies operate in the fast-food industry, Yum China is more productive
than Restaurant Brand International. This might imply that RBI is having trouble selling
its products or that its fixed assets aren’t being used to their full potential.

Inventory Turnover Ratio

The inventory turnover ratio compares the quantity of stuff a firm has on hand, termed
inventory, to the amount it sells and is an essential efficiency statistic. In other words,
inventory turnover is the number of times inventory is sold during a certain period.
(White, C.B. 2021)

Yum China

Inventory Turnover Ratio = Cost of Goods Sold

Inventory

Inventory Turnover Ratio = 6298

398

= 15.82

RBI

Inventory Turnover Ratio = 2138

96
22
 = 22.27

As can be seen in the equation, Yum China has a high inventory turnover ratio,
indicating that demand for the company's products is so great that inventory is sold
quickly. Furthermore, the inventory turnover ratio of RBI's is greater than that of Yum
China, indicating that it fared well last year.

6. Key Results

This section will examine and contrast major aspects of financial performance in 2020
between two rivals. Additionally, the performance of Yum China is evaluated. The ratios
were computed above and the findings were based on information received from yearly
reports.

To begin, the liquidity ratios are used to compare the two firms' performance. In terms of
current ratio and quick ratio, Yum China is more liquid than Restaurant Brands
International. This shows that the company can convert its assets to cash quickly
enough to meet its existing creditors. The fast ratio, on the other hand, shows that RBI
cannot pay short-term financial obligations without transforming inventories and prepaid
costs into cash. Furthermore, the cash ratio shows that both organizations are unable to
repay the present debt due to a lack of cash on hand. If current obligations are
demanded immediately, both companies may have difficulties.

Moving on to the profitability measures, it is clear that RBI has outperformed Papa
John's in terms of increasing revenue and reducing costs and expenses. RBI's gross
profit margin is two times larger than Yum Chins, which are 56.96 percent and 23.78
percent, respectively. However, their net profit margin ratios are nearly the same. As a
result of these ratios, both companies have demonstrated that they have great cost and
expense control. In addition, return on equity and assets are calculated using the other
two profitability ratios. Both companies have more than 10 percent on ROE. Yum China

23
has a high return on assets ratio. Yum China performed better than the RBI in terms of
earning income from their assets, with 7.21 percent and 2.13 percent respectively.

The capital structure ratios for each firm are then calculated and examined. To begin
with, when it comes to the debt ratio, both companies put themselves in a precarious
position and limit their companies’ ability to continue operating after repayment. The
time interest earned ratio, on the other hand, illustrates that both firms can fulfill their
debt obligations while still having the capital to invest.

Finally, when it comes to producing money through asset management, both Yum
China’s and RBI’s thrive. The asset turnover ratios of the two firms appear to be
identical, at 0.76 for Yum China and 0.22 for RBI. However, RBI's inventory turnover
ratio is 22.27, which is better than Yum China. As a result, this ratio suggests that Yum
China has a better capacity to sell items and manage stocks.

7. Implications and Recommendations

Yum China’s financial situation is not troubling because it does not have a significance
of losses or bigger debts and liabilities evening during the COVID-19 outbreak. After
assessing the company's performance in the past year, this section will present some
critical recommendations for Yum China.

To begin, the organization should increase its liquidity by obtaining additional funds to
avoid unforeseen circumstances. To be more exact, the company must increase cash to
the point where it can instantly refund existing liabilities without converting other assets.
Furthermore, the organization should improve its ability to control expenditures and
expenses, as well as generate greater revenues without significantly impacting
customer service. Last but not at least, recommendations are to increase grow profit
margin of Yum China Holdings. The company will increase the margin if it can receive a
substantial buy discount or discover a less costly supplier while purchasing inventory.
Then the cost of goods sold will be cheaper.

8. References

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