Introduction
This paper will analyze the differences between net cash provided by operating activities and net income. We will compare the three restaurants among themselves based on the data provided from their cash flow statements and determine which company appears to have a cash flow problem.
Summary
As we know, net income is the bottom line in the income statement and is calculated by deducting the cost of sales, operational expenses as well as depreciation, amortization, interest and taxes from total sales or revenue. It is probably the most important measure of company’s profitability or financial health, because generating profits is the main reason why many companies exist. Shareholders are also interested in net income, not only
…show more content…
This means that these two restaurants are generating enough cash to pay off their debts. In addition, they do not have any current long-term debt and notes payable, which means the cash is available to invest in expanding the business. Therefore, Yum Brands, Inc. has more chance of experiencing financial problem as it has the lowest operating cash flow/total debt ratio.
Among the three restaurants, Panera Bread has the highest per share operating cash as compared to Yum and Starbucks, which means, company’s stock price is likely to increase. On the other hand, Starbucks recorded the lowest operating cash flow per share.
Looking at companies’ net cash provided by operating activities and net income-including non-controlling interest we notice that Yum Brands, Inc. has the lowest operating cash flow/net income ratio. When this ratio rises above 1, it indicates that a company has strong ability to fund its activities through generation of operating cash flow. In other words, a higher ratio means that the firm's earnings are of a higher quality (thevalueatrisk).