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Tim Hortons Company Analysis

Autor:   •  March 13, 2018  •  2,424 Words (10 Pages)  •  9 Views

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In the case of Tim Hortons, all ratios were compared to fellow competitors within the fast-food industry, McDonalds, Starbucks, Dunkin’ Brands and Yum! Brands which encompasses the Taco Bell, Pizza Hut and Kentucky Fried Chicken franchises. Of particular importance when examining Tim Hortons are Starbucks and Dunkin’ as they have the most direct link to the company via product offerings however, companies such as McDonalds have begun to move into more similar products.

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Short-Term Liquidity Ratios

When looking for information about the firm’s liquidity and ability to pay its bills over the short run we analyze the short-term solvency and liquidity ratios. Potentially the best and most commonly used of these ratios is the current ratio. This simply compares current assets to current liabilities to determine the firm’s ability to cover its short term debts using short term assets. Tim Hortons’ current ratio in 2012 was 1.31, up from 1.30 in 2011 (see Appendix 2). The rule of thumb for current ratios is a minimum of one which would suggest that Tim Horton’s is doing quite well and improving in terms of liquidity.

This is also supported when examining some of their close competitors within the fast food business. Although Dunkin’ Brand has a current ratio of 1.39, eight tenths higher than Tim Hortons, McDonalds, Yum! Brands Inc. and Starbucks are all well below Tim Hortons’ current ratio. Conversely, Yum! does not even have a current ratio reaching the rule of thumb value of one[8] (see Appendix 2).

Another measure of short-term liquidity that was analyzed was the quick ratio. The quick ratio, is very similar to the current ratio, however, because inventory is often the least liquid current asset it is not included. As this is not always consistent, the quick ratio is sometimes less reliable. In the case of Tim Hortons, the quick ratio is improving and once again meets the benchmark of one.

The other two measures of liquidity, cash ratio and net working capital are both decreasing for Tim Hortons. The cash ratio was a very small decrease and is still quite high considering that more than twenty-five percent of Tim Hortons current debt is covered by cash. Conversely, the net working capital ratio has decreased from 65% in 2011 to 63% in 2012 (see Appendix 2). This value is still high enough that this is not cause for concern as a lower value might be an indicator or low liquidity.

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Long-Term Debt Ratios

The first ratio that needs to be examined when looking at long-term debt is the total debt ratio. This ratio did not increase substantially; however, it did move from 0.476 in 2011 to 0.479 in 2012 (see Appendix 3). Total debt is a function of a company’s leverage as the higher the ratio, the higher the financial risk associated with the company. Since Tim Hortons’ ratio increased slightly, their financial risk is increasing as well. This situation likely results from the corporation increasing their debt to return more money to and appease their shareholders.

To further build off their total debt ratio, Tim Hortons debt to equity, equity multiplier and long-term debt ratios also all increased from 2011 to 2012 (see Appendix 3). An increase in repurchased shares has increased Tim Hortons debt to equity as more of their assets are being financed through debt and equity. Since these changes is very minimal at the current time this should not be of huge concern to potential investors however should it continue to increase potential shareholders should seek further reasoning for the declines.

Additionally, Tim Hortons’ debt ratios are not cause for concern at this point as upon comparison with their closest competitors; Starbucks is the only firm with a smaller debt to equity ratio[9].

The last long-term debt ratio that must be examined is the cash coverage ratio. This ratio decreased from 26.49 in 2011 to 23.89 in 2012 (see Appendix 3). In looking at this change it is apparent that Tim Hortons is making changes within their organization. As demonstrated by the ratio decreasing, the corporation has had a decrease in cash flow. Currently Tim Hortons has repurchased more than $200,000 in shares and given out more than $118,000 in dividends all in all increasing their net cash flow used in financing activities by almost $100,000 in the last year alone (see Appendix 4). This is very good news for investors as Tim Hortons’ increased cash flow to investors indicates strong opportunities for return on investment.

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Utilization Ratios

Next it is particularly important to analyze asset utilization ratios. For a company in the business of food preparation, proper inventory management is of the utmost importance. To begin this analysis, inventory turnover was examined. This takes into account cost of goods sold as a function of remaining inventory at year end. The higher the inventory turnover ratio the more efficiently the company is managing their inventory. Tim Hortons had an inventory of 18.3 in 2012, up from 12.9 in 2011 (see Appendix 5). The inventory turnover ratio is then used to calculate the days’ sales in inventory in which the fewer days the better. Tim Hortons is also doing well in this category with approximately 20 days’ sales in inventory improved from 28 days in 2011.

Perhaps the most important asset utilization ratio is the total asset turnover ratio. Using this measure, every dollar Tim Hortons spent on assets in 2012 generated 97 cents in sales. Once again this increase from 91 cents in 2011 places Tim Hortons in the middle of the industry in this category (see Appendix 5). Both Starbucks and Yum! have total asset turnovers well above the one dollar mark, however, McDonalds barely made fifty cents in sales for every dollar of assets and Dunkin’ only made four cents (see Appendix 5). Though this does show that Tim Hortons is below some industry competitors in this category, they are well on their way to breaking the one dollar mark should their improvements from 2011 and 2012 carry into the future.

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Profitability Ratios

Lastly, the best known and most widely used of all financial ratios are the profitability measures. These ratios are intended to measure how efficiently the firm uses its assets and manages its operations by focussing on net income. The analysis of these ratios will be key in order to determine whether or not a firm should be invested in from a shareholder’s point of view.

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