Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-20, FY ended December 31, 2025) + Yahoo Finance
Auditor: KPMG LLP — Unqualified opinion
One-line verdict: Yum! Brands operates 63,000+ restaurants across 155 countries with 97% franchised — a capital-light model that generates $2.0B in operating cash flow on $8.2B in revenue. But the franchise model's financial engineering creates a structurally leveraged balance sheet: $13.2B in debt, $0.7B in cash, negative total equity, and Debt/EBITDA of 4.7x. Cash covers only 5% of total debt. The company also initiated a strategic review of Pizza Hut and saw goodwill surge 63% year-over-year. The M-Score of -2.58 is clean and the business is a cash machine, but the framework correctly identifies the leverage and goodwill concerns.
| Metric | Result |
|---|---|
| ❌ Red Flags | **1** (cash covers 5% of $13.2B debt) |
| ⚠️ Watch Items | **3** (Debt/EBITDA 4.7x; goodwill +63%; CapEx +44%) |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.58** (clean; threshold is -2.22) |
| Altman Z-Score | **-0.75** (distress zone) |
| Auditor | KPMG LLP — Unqualified opinion |
The World's Largest Restaurant Franchisor
Per the filing, "YUM has over 63,000 restaurants in 155 countries and territories primarily operating under the four concepts of KFC, Taco Bell, Pizza Hut and Habit Burger & Grill." The key structural fact: "At December 31, 2025, 97% of our Concepts' units are operated by independent franchisees or licensees." This means Yum collects franchise fees and royalties with minimal capital deployed in restaurant operations.
The filing discloses that "In 2025, we began a review of strategic options for the Pizza Hut brand" with the objective of "determining the optimal approach to best capitalize on Pizza Hut's structural advantages."
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $6.8B | $7.1B | $7.5B | $8.2B | +8.8% in FY2025 |
| Net Income | $1.32B | $1.60B | $1.49B | $1.56B | Stable ~$1.5B |
| Gross Margin | 48.3% | 49.4% | 47.5% | 46.2% | Declining from peak |
| CFFO | $1.4B | $1.6B | $1.7B | $2.0B | Growing |
| FCF | $1.1B | $1.3B | $1.4B | $1.6B | Growing |
Per the filing, "Total revenues 8,214 7,549" — revenue grew 8.8% year-over-year. "Net cash provided by operating activities was $2,010 million in 2025 versus $1,689 million in 2024. The increase was primarily driven by an increase in net income and favorable working capital changes."
Cash Flow: The Franchise Model's Strength
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $1.6B | $1.7B | $2.0B |
| Net Income | $1.60B | $1.49B | $1.56B |
| **CFFO / Net Income** | **1.00** | **1.14** | **1.29** |
| Free Cash Flow | $1.3B | $1.4B | $1.6B |
| **FCF / Net Income** | **0.81** | **0.94** | **1.05** |
FCF/NI of 1.05 means free cash flow exceeds reported net income — a strong quality signal. The accruals ratio of -5.5% confirms low reliance on non-cash income. No inventory to manage (97% franchised), no significant receivables issues (AR tracking revenue), and minimal capital expenditure requirements. This is exactly what a capital-light franchise model should look like from a cash flow perspective.
The Deliberate Leverage: Negative Equity by Design
| Metric | Value | Context |
|---|---|---|
| Cash | $0.7B | Minimal |
| Total Debt | $13.2B | Including lease liabilities |
| Cash/Debt | 5% | Red flag |
| Debt/EBITDA | 4.7x | Watch item (>4x) |
| Total Equity | **Negative** | Intentional from buybacks |
| Z-Score | -0.75 | Distress zone |
| Goodwill + Intangibles | $1.9B | Surged 63% |
Yum's balance sheet has negative total equity — this is deliberate financial engineering common among franchise-model companies (McDonald's has the same structure). The company borrows cheaply against predictable franchise cash flows, then returns capital to shareholders through buybacks and dividends. Per the filing, the company maintains "$13.2B in total debt" with "the effective overall interest rate on our total debt outstanding, excluding the Revolving Facility balance, finance leases and debt issuance costs and discounts, is fixed."
The Z-Score of -0.75 — deeply in the distress zone — is a limitation of the Altman model when applied to asset-light businesses with negative equity. The model was designed for capital-intensive manufacturers, not franchise royalty companies.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 37 days, unchanged YoY |
| A2 | AR vs Revenue Growth | ✅ | AR +8.5% vs revenue +8.8% |
| A3 | Revenue vs CFFO | ✅ | Revenue +8.8%, CFFO +19.0% |
Revenue quality is clean. AR tracking revenue, DSO stable, operating cash flow growing faster than revenue.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | No material inventory (franchise model) |
| B2 | CapEx vs Revenue | ⚠️ | CapEx +44.4% vs revenue +8.8% |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 33.3% |
| B4 | Gross Margin | ✅ | 46.2%, -1.3pp |
B2 — CapEx grew 44.4% versus 8.8% revenue growth. For a 97% franchised company, any CapEx at all is notable. The filing mentions the company "cannot predict the effect on our operations due to possible future environmental legislation" regarding company-owned restaurants. CapEx likely went toward technology platforms, digital ordering systems, and the few company-owned restaurants.
Gross margin declined from 47.5% to 46.2% — a 130bp contraction. Combined with the 63% goodwill surge, this warrants investigation. The margin decline could reflect increased company-owned restaurant costs or higher franchise support spending.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.29 |
| C2 | Free Cash Flow | ✅ | FCF $1.6B, FCF/NI = 1.05 |
| C3 | Accruals Ratio | ✅ | -5.5% |
| C4 | Cash vs Debt | ❌ | Cash $0.7B covers 5% of $13.2B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ✅ | $1.9B = -26% of equity (equity is negative) |
| D2 | Leverage | ⚠️ | Debt/EBITDA = 4.7x |
| D3 | Soft Asset Growth | ✅ | Other assets +10.5% |
| D4 | Asset Impairment | ✅ | Write-offs normal |
D2 — Debt/EBITDA at 4.7x exceeds the 4x threshold. For a franchise-model company with predictable cash flows, this is elevated but manageable. The fixed-rate debt structure provides certainty on interest costs.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF positive |
| E2 | Goodwill Surge | ⚠️ | Goodwill +63% YoY |
The 63% goodwill surge demands explanation. Yum likely made an acquisition during FY2025 that added approximately $0.7B in goodwill. Combined with the Pizza Hut strategic review, this suggests the company is actively reshaping its brand portfolio.
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | ✅ | -2.58 (clean) |
Key Risks from the 10-K
1. Pizza Hut Strategic Review — Structural Uncertainty
The filing states: "In 2025, we began a review of strategic options for the Pizza Hut brand." This could mean a spin-off, sale, or restructuring of a brand with "strong brand equity, experienced franchise partners and meaningful scale in the highly fragmented pizza market." Any transaction could materially alter Yum's revenue mix, debt structure, and goodwill balance.
2. International Franchise Execution Risk
With 63,000+ restaurants in 155 countries, Yum depends on independent franchisees to maintain brand standards, comply with local regulations, and invest in their restaurants. Per the filing, "approximately 61,000 franchise restaurants around the world are responsible for the employment of over an estimated 1 million people." The company cannot directly control food quality, labor practices, or customer experience at these locations.
3. Tariff and Supply Chain Exposure
While franchisees bear most operating costs, Yum's company-owned restaurants and franchise support costs are exposed to tariff pressures. The filing warns about "capital expenditures" related to environmental compliance and notes cost pressures on food inputs.
4. Brand Reputation Risk
Per the filing, "We rely on a combination of legal protections, including trademark registrations, contractual terms, copyrights, patents" to protect brand value. With three global mega-brands, any food safety incident, labor controversy, or regulatory action in any of 155 countries could damage brand equity globally.
Summary
Grade: F. One red flag on cash/debt coverage; three watch items on leverage, goodwill, and CapEx.
Yum! Brands' F grade reflects the mechanical screening of a deliberately leveraged franchise model. The business fundamentals are strong: $2.0B in operating cash flow, FCF exceeding net income, a clean M-Score, and a capital-light model with 97% franchised restaurants. The negative equity and high debt/EBITDA are features, not bugs, of a franchise royalty business that borrows against predictable cash flows.
The genuine concerns are the 63% goodwill surge (what was acquired?), the Pizza Hut strategic review (what happens next?), and the slight margin compression from 47.5% to 46.2%. These warrant investigation beyond the quantitative screening. The books are clean, but the strategic direction is in flux.
**Disclaimer**: This report is based on Yum! Brands' FY2025 10-K filed with SEC EDGAR on February 20, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: KPMG LLP (Unqualified opinion)
Fiscal year ended: December 31, 2025