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 Puventhran S/O Nadaraja (BBA00069) (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 Statement5 Definition of Financial Ratios....6-7 The Ratio calculation ...8-13 Conclusion14

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 KFCs 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.

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

Currency in Millions of Malaysian Ringgits Revenues TOTAL REVENUES INCOME STATEMENT AS OF : 31-Dec 2009 31-Dec 2010

2,297.40 2,297.40

2,522.40 2,522.40

Cost of Goods Sold GROSS PROFIT Selling General & Admin Expenses, Total Other Operating Expenses OTHER OPERATING EXPENSES, TOTAL OPERATING INCOME Interest Expense Interest and Investment Income NET INTEREST EXPENSE Other Non-Operating Income (Expenses) EBT, EXCLUDING UNUSUAL ITEMS Gain (Loss) on Sale of Assets Other Unusual Items, Total EBT, INCLUDING UNUSUAL ITEMS Income Tax Expense Minority Interest in Earnings Earnings from Continuing Operations NET INCOME NET INCOME TO COMMON ITEMS INCLUDING EXTRA ---

1,078.50 1,218.90 1,037.30 -15.6 1,021.80 197.2 -5.4 0.4 -5 -192.2 -2.1

1,167.90 1,354.40 1,144.90 -31.1 1,113.80 240.6 -4.4 0.4 -4

236.7 -3.9 -10.9

190 57.2 -2.4 132.8 130.4 130.4 130.4

221.8 62.1 -2.9 159.7 156.8 156.8 156.8

NET INCOME TO COMMON EXCLUDING EXTRA ITEMS

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

Currency in Millions of Malaysian Ringgit BALANCE SHEET AS OF:31-Dec 2009 123.4 45.7 169.2 31-Dec 2010 131.7 52.9 184.6

Assets
Cash and Equivalents Short-Term Investments TOTAL CASH AND SHORT TERM INVESTMENTS

Accounts Receivable Notes Receivable Other Receivables TOTAL RECEIVABLES Inventory Other Current Assets TOTAL CURRENT ASSETS Gross Property Plant and Equipment Accumulated Depreciation NET PROPERTY PLANT AND EQUIPMENT Goodwill Long-Term Investments Other Intangibles Other Long-Term Assets TOTAL ASSETS LIABILITIES & EQUITY Accounts Payable Accrued Expenses Short-Term Borrowings Current Portion of Long-Term Debt/Capital Lease Current Income Taxes Payable Other Current Liabilities, Total TOTAL CURRENT LIABILITIES Long-Term Debt Minority Interest Pension & Other Post-Retirement Benefits Deferred Tax Liability Non-Current TOTAL LIABILITIES Common Stock Additional Paid in Capital Retained Earnings Comprehensive Income and Other TOTAL COMMON EQUITY TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

50.3 15 23.2 88.4 172.3 17.7 447.7 1,183.00 -409.8 773.2 43.4 -25.3 0.9 1,290.50 145.3 111.3 4.2 27.9 12.2 65 365.8 84.4 12.5 3.1 32.9 486.2 198.3 18.7 547.5 27.2 791.8 804.2 1,290.50

46.5 6.6 24 77.1 200.8 23.7 486.1 1,468.70 -468.7 1,000.00 50 22.4 23.6 0.9 1,583.00 155 127.8 10.7 36 12.7 75.1 417.2 105.8 15 2.9 51.8 577.8 396.6 0.4 482.2 111 990.2 1,005.30 1,583.00

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

i)

Net Working Capital Is 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 companys total current liabilities from its total current assets.

ii)

Current Ratio The 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 Ratio A 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 Turnover An 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 Period The 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 Turnover A ratio showing how many times a company's inventory is sold and replaced over a period.

3. Leverage Ratio (LvR)

i)

Debt Ratio 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 Ratio A 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 Multiplier Like 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 Margin A 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
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goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

ii)

Earnings Per Share The 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 Equity The 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

1. Liquidity Ratio (LR)

i) Net Working Capital

current assets current liabilities 2009 447.7 365.8 = 81.9 2010

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
447.7 / 365.8 = 1.224

2010
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

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

2009
447.7 (172.3 + 45.7) / 365.8 = 447.7 218 / 365.8 = 229.7 / 365.8 = 0.628

2010 [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 companys 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
2297.40 / 50.3 = 45.673

2010
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.

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ii) Average Collection Period

360 / account receivable turnover

2009
360 / 45673 = 7.882

2010
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
1078.50 / 172.3 = 6.259

2010
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
486.2 / 1290.50 = 0.377

2010
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
120.4 / 791.8 = 0.152

2010
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 1/1 0.377 = 0.623

2010
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
1218.90 / 2297.40= 0.531

2010
1354.40 / 2522.40= 0.54

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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.

ii) Earnings Per Share

Profit available to ordinary shareholder / number of ordinary shares issued

2009
130.4 / 198.3 = 0.658

2010
156.8 / 396.6 = 0.395

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

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iii) Return On Equity

Profit after tax / shareholders equity

2009
130.4 / 791.8 = 0.165

2010
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.

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

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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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