Module 5 FIN 400
Current paper analyzes the cash flows of several restaurant companies. These companies include Yum Brands, Inc., which consists of six operating segments, Panera Bread, and Starbucks.
Answering the first task, it would be reasonable to identify the difference between net cash provided by operating, investing and financing activities. First of all, it should be noted that cash flow is the companys input cash flows minus its output cash flows. In addition, cash flow can be considered as the sum of companys earnings and payments generated by the companys activity. The companys strong financial state is provided by effective management of enterprises cash flows. It should be stated that the cash flow statement reflects such information as cash generated from operations, cash flow from investing activities, and cash flow from financing activities, as well as changes in cash and cash equivalents.
Cash flow from operating activities is characterized by cash payments to suppliers for raw materials, salaries of staff employed in operational processes, the companys tax payments to budgets of all levels and extra-budgetary funds, other benefits associated with the implementation of the operational process. At the same time, this type of cash flow reflects revenues from buyers of products, from the tax authorities and certain other payments provided by the international accounting standards.
Cash flow from investing activities describes the payments and receipts associated with the implementation of real and financial investments, the sale of fixed assets, which are eliminated, and intangible assets, long-term financial instruments rotation of the investment portfolio and other similar cash flows.
Cash flow from financing activities characterizes the receipt and disbursement of funds related to the involvement of additional equity or share capital, obtaining long-term and short-term credits, payment of cash dividends and interest on deposits and certain other cash flows associated with the implementation of external financing business of the company.
The difference between net cash provided by operating activities and net income can be considered. As it has been previously mentioned, the net cash flow provided by operating activities characterizes the difference between input and output cash flows from operating companys activities, i.e. purchasing raw materials, paying the salaries of staff employed in operational processes, selling the final products to the customers, calculations with tax authorities. Accordingly, the operating activity can be considered as the key companys activity, since it is related with production of goods and services and their realization.
On the other hand, net income is a general indicator of any companys activity. Net income is a companys total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses (Net income NI, n.d). In other words, net income can be calculated by deducting from total sales the amount of cost of products sold, depreciation, interest payments, taxes, etc. As it is known, market economy is based on the companies desire to receive profit. However, there is one very significant difference between these two indicators of the companys effectiveness. Net income can be considered as static indicator, which characterizes the companys effectiveness on a specific date, while net cash from operating activities characterizes the difference between the input and output cash flows over a certain period of time. Consequently, net income is a static indicator, while net cash from operating activities is a dynamic indicator. The main disadvantage of current methods of financial analysis is that all financial ratios characterise the companys financial state on a certain date or, in other words, they are static. Such indicators can not reflect the companys effectiveness between two dates. Therefore, the net cash is a better indicator in terms of determining the companys results of activity. However, net income is a final indicator that measures the companys effectiveness from all kinds of operations, while net cash provided by operating activities takes into account only results of the companys operating activity.
Next section of the paper discusses the data reviewed for each firm. First of all, it should be noted that the Yum Brands net cash from operating activities increased by 40.1% from $1,404 billion in 2009 to $1,968 billion in 2010, while the Panera Breads net cash increased by 10.5%, and the Starbucks by 22.7%. However, the companies net income increased by 8.7%, 28.4%, and 142.2%, respectively. That is why the Yum Brandss net cash increased the most, while its net income increased the least, only by 8.7%. It seems like the Yum Brands had problems with the cash flows from investing and financing activities. Additionally, Starbucks net income increased by 142.2%.
Also, it is noteworthy that the Panera Bread and Starbucks has no current long-term debts and current notes payable, while the Yum Brands operating net cash to current maturities of long-term debt ratio decreased from 23.8 in 2009 to 2.92 in 2010. It means that the company became less financially stable in 2010, and its possibilities to meet its debts are doubtful. Such fact that the Panera Bread and Starbucks have no current long-term debts and current notes payable is very positive.
The dynamics of the companies operating cash flow to total debt ratio only approves the previously mentioned conclusion, since the Yum Brands value of this ratio increased from 23.27% in 2009 to 30.57% in 2010. In fact, this ratio characterizes the both, companys effectiveness and its liquidity, since operating cash flow to total debt ratio can be considered in terms of profitability of the companys total debt and as the ratio that measures the companys ability to meets its debts. That is why the Panera Bread is the most financially stable company, but its scales of activities and dynamics of operating net cash and net income are not the best. Moreover, the companys operating cash flow to total debt ratio decreased in 2010 as compared with 2009, while this ratio for other two companies was increased.
Such indicator as the operating cash flow per share can be considered as a characteristic of the companys attractiveness for potential investors. This ratio was the highest for the Panera Bread, but this company does not pay dividends and such fact nullifies the companys highest value of the mentioned ratio. The operating cash flow to cash dividends ratio reflects the amount of operating net cash per dollar paid as dividends. The Starbuck had the highest value of this ratio in 2010. However, it may mean that the company pays petty amount of dividends.
Taking into account the entire range of considered aspects, it can be concluded that the Yum Brands in the most attractive company, since in accordance with its annual report the company consists of six operating segments. Therefore, the Yum Brands activity can be considered as the most diversified and, as a result, the least risky. Indeed, the values of some indicators are not good in comparison with other two companies, but they are within the normative values.
- Cash Flow From Operating Activities (CFO) Definition
- Net Income (NI)
- Non-Operating Cash Flow Definition