EAT AT MY RESTAURANT-CASH FLOW
With this case, we review the cash flow of several restaurant companies. The restaurant companies
reviewed and the year-end dates are as follows:
1. Yum Brands, Inc.
(December 30, 2008; December 30, 2007)
"Through the five concepts ofKFC, Pizza Hut, Taco Bell, LJS and A & W (the "Concepts")
the company develops, operates, franchises and licenses a world system of restaurants which
prepare, package and sell a menu of competitively priced food items." 1 0-K
2. Panera Bread
(December 30, 2008; December 25, 2007)
"As of December 30, 2008, Panera operated and through franchise agreements with 39 franchisee
groups, 1,252 cafes." 1 0-K
3. Starbucks
(September 28, 2008; September 30, 2007)
"Starbucks Corporation was formed in 1985 and today is the world's leading roaster and retailer
of specialty coffee." 1 0-K
Yum Brands, Inc. Panera Bread Starbucks*
Data Reviewed
Net cash provided by operating
activities
Net income
Operating cash flow/current maturities
of long-term debt and current notes
payable
Operating cash flow/total debt
Operating cash flow per share
Operating cash flow/cash dividends
*Includes commercial paper and short-tenn borrowings.
Required
2008 2007
(In millions)
1,521
964
60.84
22.92
3.10
4.72
1,551
909
5.39
25.64
2.87
5.68
2008 2007 2008 2007
(In thousands) (In millions)
156,282 154,014 1,258.7 1,331.2
67,436 57,456 315.5 672.6
No current maturities oflong- 176.36* 187.20*
term debt and current notes
payable
87.43 60.97 39.56 43.51
5.14 4.79 1.70 1.73
No cash dividends No cash dividends
a. Comment on the difference between net cash provided by operating activities and net income.
Speculate on which number is likely to be the better indicator of long-term profitability.
b. Comment on the data reviewed for each firm.
c. Do any of these firms appear to have a cash flow problem? Comment.
a. The difference between net cash provided by operating activities and net income indicates the impact of non-cash items and changes in working capital on the cash flow of these restaurant companies. Net cash provided by operating activities represents the actual cash generated from the core business operations, while net income is a measure of profitability calculated using accrual accounting principles.
In general, net cash provided by operating activities is considered a better indicator of long-term profitability because it reflects the actual cash generated by the company's operations, which can be used for investing in the business, paying off debts, and distributing dividends. Net income, on the other hand, includes non-cash items such as depreciation and amortization, which do not require an immediate cash outflow.
b. Looking at the data reviewed for each firm:
- Yum Brands, Inc. had net cash provided by operating activities of $1,521 million in 2008 and $1,551 million in 2007. They had a net income of $964 million in 2008 and $909 million in 2007. Yum Brands operates several concepts of restaurants and has a strong cash flow from its operating activities.
- Panera Bread had net cash provided by operating activities of $964 million in 2008 and $909 million in 2007. They had a net income of $1,258.7 million in 2008 and $1,331.2 million in 2007. Panera Bread operates a chain of cafes and has a relatively consistent cash flow from its operating activities.
- Starbucks had net cash provided by operating activities of $60.84 per share in 2008 and $5.39 per share in 2007. They had a net income of $22.92 per share in 2008 and $25.64 per share in 2007. Starbucks is the leading roaster and retailer of specialty coffee but has a lower cash flow from its operating activities compared to Yum Brands and Panera Bread.
c. Based on the information provided, none of these firms appear to have a cash flow problem. All three companies have positive net cash provided by operating activities, indicating that they are generating sufficient cash from their operations to support their day-to-day activities. Additionally, none of the firms have current maturities of long-term debt and current notes payable, meaning they are not facing any immediate cash repayment obligations.
a. To comment on the difference between net cash provided by operating activities and net income, you need to understand the difference between these two metrics. Net cash provided by operating activities refers to the actual cash generated from the day-to-day operations of a company, while net income is the profit or loss reported on the income statement.
Sometimes, the net cash provided by operating activities can be higher or lower than the net income due to various reasons. For example, non-cash items such as depreciation and amortization are added back to net income when calculating the net cash provided by operating activities. Additionally, changes in working capital, such as accounts receivable or accounts payable, can also impact the net cash provided by operating activities.
In this case, you can compare the values of net cash provided by operating activities and net income for each firm in both the 2008 and 2007 periods to comment on the difference. For example, for Yum Brands, Inc., in 2008, the net cash provided by operating activities is $1,521 million, while the net income is $964 million. This shows that Yum Brands, Inc. generated more cash from its operating activities than the net income reported.
To speculate on which number is likely to be the better indicator of long-term profitability, you should consider factors such as the nature of the business, industry norms, and the company's specific circumstances. Generally, net cash provided by operating activities is considered a more reliable indicator of long-term profitability as it reflects the actual cash generated by the company's operations. However, net income also plays a significant role as it represents the accounting profit and includes other income and expenses that may impact the company's overall financial health.
b. To comment on the data reviewed for each firm, you need to analyze the key metrics provided in the question. These include net cash provided by operating activities, net income, operating cash flow per share, and operating cash flow to debt ratios.
For example, for Yum Brands, Inc., in 2008, the net cash provided by operating activities is $1,521 million, which indicates a positive cash flow from its core operations. The net income is $964 million, showing a profit generated by the company. The operating cash flow per share is $3.10, revealing the cash flow generated per share of the company's stock. The operating cash flow to debt ratio is 22.92, indicating the company's ability to generate cash to cover its debt obligations.
Similarly, you can analyze the data reviewed for Panera Bread and Starbucks using the provided metrics.
c. To determine if any of these firms appear to have a cash flow problem, you need to analyze their cash flow data and compare it to their financial obligations. For example, you can examine their operating cash flow to debt ratios and their ability to generate enough cash to cover their current maturities of long-term debt and current notes payable.
If a company has a low operating cash flow to debt ratio or struggles to generate enough cash to cover its debts, it may indicate a potential cash flow problem. Additionally, if a company consistently reports negative net cash provided by operating activities, it may also suggest a cash flow issue.
Based on the provided data, you can analyze the operating cash flow to debt ratios, the ability to cover current maturities of long-term debt and current notes payable, and overall cash flow trends for each firm to comment on whether they may have a cash flow problem or not.