i

Investment Analysis Report

BUS320 Intermediate Accounting: Assets


Prepared for
Chief Executive Officer
Maureen Fizzell


Prepared by
Michelle Nguyen
301197387


Jacob Lee
301162203


Elaine Lee
301138304



Submitted
July 16, 201
i

Abstract
The purpose of this report is to analyze Tim Hortons Inc.s financial health standing to
determine whether or not it would be a worthwhile investment for investors. Several
ratios were determined using Tim Hortons and its competitors Financial Statements.
Quantified research shows that Tim Hortons may face financial difficulties in the long-
run if it continues to borrow money in the future. They are not earning enough funds
from operations to cover its borrowings. Expansion plans were also not as favourable as
projected in the 2013 year. This will influence the amount of investments that the
company is making, as well as its profits in the long-run. Further research is discussed
in-depth leads to the conclusion that the company needs improvement in order for it to be
considered a viable investment option.

Contents
Abstract ............................................................................................................................................. i
Introduction ..................................................................................................................................... 1
Company Profile: Tim Hortons Inc. ................................................................................................. 1
Risk Management ........................................................................................................................ 2
Brand and Marketing ................................................................................................................... 3
Operations Management ............................................................................................................ 3
Free Cash Flow............................................................................................................................. 4
Competitor Profile: Starbucks Corporation ..................................................................................... 4
Ratio Analysis................................................................................................................................... 5
Total Debt-Equity Ratio ............................................................................................................... 5
Cash Flow-to-Debt Ratio .............................................................................................................. 6
Receivables Turnover Ratio ......................................................................................................... 6
Dividend Yield .............................................................................................................................. 7
Price to Earnings Ratio................................................................................................................. 7
Return on Assets .......................................................................................................................... 8
Return on Equity .......................................................................................................................... 8
Current Ratio ............................................................................................................................... 9
Conclusion ....................................................................................................................................... 9
References ..................................................................................................................................... 11
Appendices .................................................................................................................................... 13









1

Introduction
The goal of this report is to determine whether or not Tim Hortons Inc. (THI) is a viable
investment option for current and potential shareholders. A brief company profile summarizing
Tim Hortons operations is provided, followed by a competitor profile of its main competitor;
Starbucks Corporation, a company deemed appropriate to compare Tim Hortons to. In order to
provide an in-depth analysis of Tim Hortons, its annual financial statement for 2013 will be
examined. The annual report is used, as opposed to the more recent 1
st
quarter report for 2014,
because the annual report offers a more complete view of Tim Hortons operations throughout the
year. Using various ratios derived from the annual report, predictions will be made regarding the
future profitability of Tim Hortons. These ratios will be set against competitor and industry ratios
to benchmark Tim Hortons performance compared to its comparable competitors. The industry
ratio will be an average of 3 companies: Mcdonalds Corporation, Starbucks Corporation, and
Tim Hortons Inc. In the North American region which Tim Hortons mainly operates, Mcdonalds
Corporation and Starbucks Corporation are the two main competitors. After the analysis,
recommendations will be made as to whether an investment in Tim Hortons is worthwhile.
Company Profile: Tim Hortons Inc.
Tim Hortons Inc. (THI) is a Canadian company traded on both the Toronto Stock Exchange (TSX)
and the New York Stock Exchange (NYSE). It is one of the largest quick service restaurants
(QSR) in North America with its markets highly concentrated in Canada. It is known for selling
coffee, donuts, and other breakfast foods. Established in 1964 in Hamilton, Ontario, it has
expanded into a multinational fast food restaurant (Tim Hortons Inc., 2014a). As of March 2013,
Tim Hortons has 4,288 locations throughout Canada, the US, and the Middle East.
The percentage and success of its Canadian locations has helped the company garner a large
market share in the QSR industry. Strong brand loyalty has also fostered Tim Hortons success in
2

Canada. Tim Hortons highest stock price on the TSX in the last 52-weeks was $64.18, with the
lowest being $56.12. They currently own $2,433,823 in total assets, and $1,672,304 in total
liabilities (Tim Hortons Inc., 2013). In the future, Tim Hortons plans to open 800 more stores
across the US and Canada by 2018 (Tim Hortons, 2014). They also plan to increase their
locations in the Middle East by 220 stores.
Today, Tim Hortons offers a larger variety on its menus to cater to the ever changing and
evolving economic trend. Nonetheless, the QSR is a highly saturated industry with multiple
companies competing for the most customers. In order for Tim Hortons to remain relevant, it
must seek ways to give itself a competitive advantage over its competitors such as McDonalds
and Starbucks. This report will examine Tim Hortons and its competitors to determine its
financial health in order to make a recommendation for potential shareholders deciding to invest
in the company.
Risk Management
Tim Hortons risk management will influence the potential profitability of an investment in the
company. Its growth strategy and competitive advantage are listed as the primary factors that
could affect its financial health in the future (Tim Hortons Inc., 2014). The QSR industry is
highly competitive, which will affect Tim Hortons market share, as Tim Hortons will have to
find innovative ways to attract new and current customers. In recent years, McDonald's has been
expanding its coffee and morning food menu items similar to that of Tim Hortons menu.
Starbucks is also expanding rapidly and has been able to find success in the Canadian and US
market. Although Tim Hortons is expanding, its location success, store management, food prices
and consumer demands are all elements that could impact its likelihood of being profitable.
Company growth was below Tim Hortons listed target of 2-4% in Canada and 3-5% in the US
(Tim Hortons Inc., 2013). Actual figures were 1.1% and 1.8% respectively. Such forecasts are
only estimates and not actual figures.
3

Brand and Marketing
The Tim Hortons brand is well known across Canada. The company spends a large amount on
advertising each year to attract customers and gain reputation for being sustainable (Appendix I).
In addition, customers exhibit a strong sense of brand loyalty to the company. Tim Hortons
reputation comes from serving fresh products, which is one of the main reasons for its success
(Tim Hortons Inc., 2013).
Tim Hortons is also very active in the communities in which they are present. It hosts its own
Minor Sports program and operate many fundraisers and summer programs for kids. During the
Tim Hortons Camp Day, Tim Hortons managed to raise $11.8 million for the Tim Horton
Childrens Foundation (Tim Hortons Inc., 2014b).
Additional marketing ventures include the recently launched mobile payment option for
customers who can use a free TimmyMe mobile application to pay for products (Tim Hortons
Inc., 2014c). Once their customers register their prepaid Tim Card with the mobile application,
they will be able to pay with the barcode on their mobile devices. This payment option was
introduced to improve customer convenience in order to attract more people.
Operations Management
A majority of Tim Hortons locations are franchises, which operate under separate and individual
owners (Tim Hortons Inc., 2013). Such franchises also play a large part in Tim Hortons revenue
recognition as revenues from franchise fees, rents and royalties.
Revenue is earned from the distribution of its food products from Tim Hortons warehouse. They
also receive revenue from the sales made at company-operated restaurant locations. From
franchise owners, revenue is earned through the rental of property and equipment, as well as
franchise fees which are collected at the time of sale. The revenue earned from Tim Cards are
considered restricted cash and cash equivalents.
4

In 2013, Tim Hortons decided to terminate its branding agreement with Kahala Franchise Corp.,
the parent company of Cold Stone Creamery. Tim Hortons paid out $19 million to restaurant
owners for renovation, depreciation, and other related costs.
Tim Hortons also no longer produces its donuts in-house; instead, the company sold off Tim
Hortons major line of business to a Swedish company that will produce the donuts instead (White,
2010). Tim Hortons aim was taken in efforts to reduce high costs and lack of skilled labour from
finding qualified bakers.
Free Cash Flow
In 2013, Free Cash Flow amounted to $355,765 million, the difference between the companys
operating cash flow and capital expenditures (see Appendix I). The company has a negative
investing cash flow, which reflects its current growth strategies of new store openings and more
products. Tim Hortons has a healthy Free Cash Flow figure as it is positive; however, its cash
flow is not able to meet its financing activities, which resulted in a decrease of $69,726 million in
cash and cash equivalents in the 2013 year (see Appendix I). Appendix I also shows that Tim
Hortons has taken out a large amount of debt to support its share repurchases and dividend
payouts (see Appendix I). Nonetheless, Tim Hortons, through its debt financing, intends to create
greater share value for its shareholders.
Competitor Profile: Starbucks Corporation
Starbucks Corporation (SBUX) is the worlds largest coffee company. It operates in 64 different
countries, with 1,550 locations in Canada. Starbucks specializes in hot and cold beverages, and
also sells snacks and pastries. It also sells instant coffee and other pre-packaged foods in retailers,
such as Walmart and Target. Currently, Starbucks is planning to expand into the Indian coffee
market and is hoping to expand its business to attract customers during lunch and dinner hours in
the US (Peterson, 2014).
5

We have chosen Starbucks as the main competitor for Tim Hortons because it operates during
similar hours, in similar niches. Like Tim Hortons, they provide smaller snacks and beverages
that are suitable for customers to consume when on-the-go. McDonalds is another major
competitor identified as it has been aggressively expanding in the coffee and coffee-based
beverage market, and has a large market share.
Ratio Analysis
To measure the performance of Tim Hortons, we have chosen seven ratios with which we can
benchmark Tim Hortons against itself over time - its main competitor, Starbucks, and the industry.
Total Debt-Equity Ratio
The debt-to-equity ratio is a companys ability to use its equity and debt to finance its assets,
which allow investors to compare the leverage of various companies (Investopedia, 2014c).
Ideally, the debt to equity ratio should be low, but it depends what industry the company is in
(Investopedia, 2014c). More debt may not necessarily be a bad thing because sometimes debt is
used to generate more earnings (Investopedia, 2014c). Tim Hortons debt to equity ratio in 2013
is 142.1, increasing significantly by 93.6 since 2012 (see Appendix A). The ratio in 2013 was
higher than Starbucks, McDonalds, and even the industry average, which were 30.1, 88.3, and
86.83, respectively (see Appendix A). Tim Hortons has a higher degree of leverage, lower degree
of financial flexibility, and more of tim hortons' assets are financed by equity and debt in
comparison with its competitors. Debt was increased a significant amount since 2012, due to its
share repurchase program. At first glance, Tim Hortons high ratio shows that Tim Hortons is a
fairly risky company. Tim Hortons justifies its debt usage as part of its intentions to increase
value for its shareholders and to maintain financial flexibility with its share repurchase program
(Tim Hortons Inc., 2013).
6

Cash Flow-to-Debt Ratio
The cash flow-to-debt ratio (coverage ratio) shows a companys ability to pay its debts with its
operating cash flow (Investopedia, 2014a). With a higher ratio, a company is able to take on more
debt, since it would be able to pay off its debt with its cash flow (Investopedia, 2014a). Tim
Hortons 2013 cash flow-to-debt ratio is 0.59, a decrease of 0.46 since 2012 (see Appendix B).
Compared with Starbucks, Tim Hortons ratio is very low, but Tim Hortons 2013 ratio is very
close to McDonalds ratio in the past couple of years (see Appendix B). Again, debt in 2012 was
high in order to fund their share repurchase program. Tim Hortons is offering unsecured 10-year
notes to fund their share repurchase program, which were both announced in 2013 (Reuters,
2013). It seems that there may be some difficulties paying off its debt due to its fairly low ratio
and high debt, especially because Tim Hortons is facing intense competition both in Canada and
in the US. As mentioned before, Tim Hortons plans to actively expand its stores in the future.
However, there will be difficulties, especially in the US, because McDonalds and Starbucks
already has a large presence there.
Receivables Turnover Ratio
The receivables turnover ratio determines a firms effectiveness in extending credit as well as
collecting debts (Investopedia, 2014g). The higher the ratio, the more frequent the debts are
collected. Tim Hortons receivables ratio was 16.5 in 2013, slightly higher than 15.1 in 2012. Its
competitors Starbucks and McDonalds both had higher ratios in 2012 and 2013 (see Appendix
C). Even the industry average ratio was almost 2 times Tim Hortons in 2013 (see Appendix C).
This indicates that Tim Hortons is not as efficient as its competitors, and even the industry as a
whole, in collecting its accounts receivables, and may need to stricken its credit policies.
7

Dividend Yield
A companys dividend yield can be calculated by dividing its annual dividends per share by the
price per share (Investopedia, 2014d). This ratio indicates the return on investment for each share,
or the amount of dividends you receive for each share.
Tim Hortons' dividend yield for 2013 was 1.67%. There has been a decline of .03% from the end
of the 2012 fiscal period (see Appendix D). However, it is above the 5-year average of 1.4%. It is
also above Starbucks dividend yield of 1.15%, meaning investors who require a steady cash-flow
from dividends will desire Tim Hortons stocks more. On the other hand, the industry average for
2013 was 2.03%, significantly higher than Tim Hortons.
Price to Earnings Ratio
The price to earnings ratio is derived by dividing the price per share by the earnings per share
(Investopedia, 2014f). This ratio gives us a prospective outlook of a companys stock
performance. A higher price to earnings ratio means that investors are currently willing to pay
more for lower earnings. This can be the result of a positive outlook on the companys
performance in the subsequent fiscal periods. A low earnings ratio indicates that investors are not
willing to pay low prices even for relatively higher earnings. There is a negative outlook and
investors expect the companys performance to drop. In the short-term, it is good to invest in
companies with a low price-to-earnings ratio since the earnings you receive are higher than the
price you pay for the shares. However, it is better to purchase shares with a high price-to-earnings
ratio because it is likely that the company will perform better in future fiscal periods.
Tim Hortons' price to earnings (P/E) ratio for this fiscal period was 22.0 (see Appendix E). This is
an increase from last years figure of 18.7. However, both the competitor ratio and industry
average was higher. Starbucks price to earnings ratio for 2013 was 35.84 and the industry
8

average, 25.11. This means that potential investors are more confident in the future performances
of other companies in the industry compared to Tim Hortons Inc.
Return on Assets
Return on Assets (ROA) measures the success of a companies ability to use its assets to generate
a profit (Investopedia, 2014h). A high ROA indicates a profitable return with little investment. In
2013, Tim Hortons ROA was 19.29% which is considerably higher compared to its main
competitors, Starbucks and McDonalds (see Appendix F). In addition, Tim Hortons ROA has
been increasing over the past five years with a surge in 2010 after selling part of its donut
manufacturing company, Maidstone (White, 2010). This has allowed the company to focus on
profit optimization in its food retail services. The increase in ROA can also be attributed to the
companys current share buyback, as assets have decreased (Investopedia, 2014h). The same is
true for Return on Equity.
Return on Equity
Return on Equity (ROE) is a profitability measure used to evaluate the amount of earnings
received for every dollar invested by common shareholders (Investopedia, 2014i). Similar to Tim
Hortons ROA, its ROE has also been rising over the past five years with the exception of a spike
in 2010 as mentioned in ROA (see Appendix G). Its ROE is also consistently higher than its ROA,
which is a good indicator of its leverage, which can increase profitability for a company as there
is more flexibility in a companys operational activities (see Appendix G). McDonalds ROE is
also good; however, its ROE has been declining over the past three years, whereas Tim Hortons
has been increasing for the past five consecutive years, although the rise is limited to the same
conditions that affect the ROA.
9

Current Ratio
Current Ratio compares a companys ability to meet its short-term liabilities with its current
assets to assess a companys liquidity capacity (Investopedia, 2014b). Tim Hortons is limited in
this aspect as its current ratio has been declining over the past five years and was 1.0 in 2013 (see
Appendix H). Tim Hortons plan to buy back $1 million of its outstanding shares, which again, is
a likely factor contributing to the low current ratio as the company is financing the share
repurchase with debt (Tim Hortons Inc., 2013). The low ratio is also emphasized when compared
to its Cash Flow which shows limited cash reserves that would be needed in order to pay off debt.
Conclusion
The analysis and reviews conducted on Tim Hortons and its competitors have provided a clearer
picture of Tim Hortons financial standing in the relative quick service-restaurant industry. Tim
Hortons strengths and weaknesses are highlighted, aiding in determining its potential as a long-
term investment for shareholders and potential shareholders alike.
Comparisons of the company over time show positive returns on its assets and equity at first
glance. However, because of Tim Hortons sale of its donut production operations and its share
repurchase program, it is very likely that the figures have been distorted. Moreover, the
companys operating cash flow, an important initial indicator of a companys financial health, is
not sufficient enough to cover Tim Hortons investing and financing activities.
At this time, there is a prevalent risk in investing in Tim Hortons. Its dividend and share
repurchase program is mostly financed by debt. This may be unsustainable if the company enters
a free cash flow deficit because the company would not be able to pay out dividends. Looking at
its cash-flow-to-debt ratio, Tim Hortons is currently not receiving enough cash from operations to
fund their debt. This poses a serious risk, especially as share prices rise, because the repurchasing
process will become more expensive. As a result, a large amount of debt will be accumulated,
10

making it very risky for investors if the company is not able to pay back the debt after the
repurchase program. Furthermore, its goal to expand its store in the next few years does not seem
attainable due to its high debt.
From the current performance of its shares, it is evident that shareholders are wary of investing in
Tim Hortons (Mcdermid, 2013). Its relatively low price-to-earnings ratio shows that investors do
not expect their performance to increase significantly in the near future.
To summarize, there is risk involved in investing in Tim Hortons. They have accumulated a large
amount of debt due to its share repurchase program. However, management will be able to
exercise more control over the company, giving them more financial flexibility. By investing in
Tim Hortons, high returns are not as likely. However, a better return for shareholders is possible
only if Tim Hortons is able to generate higher cash flows in the future, which in turn, will help
cover its large debt.







11

References
Investopedia. (2014a). Cash-flow to debt ratio. Retrieved from
http://www.investopedia.com/terms/c/cash-flowtodebt-ratio.asp
Investopedia. (2014b). Current ratio definition. Retrieved from
http://www.investopedia.com/terms/c/currentratio.asp
Investopedia. (2014c). Debt-to-equity ratio. Retrieved from
http://www.investopedia.com/terms/d/debtequityratio.asp
Investopedia. (2014d). Dividend yield. Retrieved from
http://www.investopedia.com/terms/d/dividendyield.asp
Investopedia. (2014e). Impact of share repurchases. Retrieved from
http://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp
Investopedia. (2014f). Price-to-earnings ratio. Retrieved from
http://www.investopedia.com/terms/p/price-earningsratio.asp
Investopedia. (2014g). Receivable turnover ratio. Retrieved from
http://www.investopedia.com/terms/r/receivableturnoverratio.asp
Investopedia. (2014h). Return on assets. Retrieved from
http://www.investopedia.com/terms/r/returnonassets.asp
Investopedia. (2014i). Return on equity. Retrieved from
http://www.investopedia.com/terms/r/returnonequity.asp
Mcdermid, B. (2013 November 27). Tim Hortons sets debt offering to fund share buyback.
Reuters. Retrieved from http://www.reuters.com
Peterson, K. (2014 April 28). Starbucks growth strategy? Open more Starbucks. CBS Money
Watch. Retrieved from http://www.cbsnews.com
ThomsonOne. (2014a). Mcdonalds Corporation. Retrieved from http://www.thomsonone.com
ThomsonOne. (2014b). Starbucks Corporation. Retrieved from http://www.thomsonone.com
12

ThomsonOne. (2014c). Tim Hortons Inc. Retrieved from http://www.thomsonone.com
Tim Hortons. (2014, February 25). Tim Hortons plans 800 more restaurants. CBC News.
Retrieved from http://www.cbc.ca
Tim Hortons Inc. (2014a). Corporate Profile. Tim Hortons. Retrieved from
http://www.timhortons.com.
Tim Hortons Inc. (2014b June 10). Tim Hortons Camp Day raises $11.8 million. Tim Hortons.
Retrieved from http://www.timhortons.com
Tim Hortons Inc. (2014c May 22). Tim Hortons launches mobile payments. Tim Hortons.
Retrieved from http://www.timhortons.com
Tim Hortons Inc. (2013). 2013 Annual Report on Form 10-K. Retrieved from
http://files.shareholder.com/downloads/ABEA-
333FKS/3319688106x0x744056/69f45dc9-7832-4c8a-b180-
33863567b623/Tim_Hortons_2013_AR_full.pdf
White, S., Stevenson, C., Harris, A. (2010 September 7). Tim Hortons extra-large trouble trouble.
Mcleans. Retrieved from http://www.mcleans.ca.






13

Appendices
Appendix A: Calculation of Total Debt-to-Equity Ratio

2013 2012
Tim Hortons 142.1 48.5
SBUX 30.1 10.8
MCD 88.3 89.1
Industry Average 86.83 49.47
Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.
Appendix B: Calculation of Cash Flow-to-Debt Ratio

2013 2012
Tim Hortons .59 1.05
SBUX 2.24 3.48
MCD .50 .51
Industry Average 1.11 1.68
Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.
14


Appendix C: Calculation of Receivables Turnover Ratio

Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.

Appendix D: Calculation of Dividend Yield

2013 2012
Tim Hortons 1.67% 1.7%
SBUX 1.15% 30.5%
MCD 3.22% 3.25%
Industry Average 2.01% 11.82%
Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.


2013 2012
Tim Hortons 16.5 15.1
SBUX 28.4 30.5
MCD 20.9 20.3
Industry Average 21.93 21.97
15

Appendix E: Calculation of Price-to-Earnings Ratio

2013 2012
Tim Hortons 22 18.7
SBUX 35.84 28.3
MCD 17.5 16.5
Industry Average 25.33 21.17
Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.


Appendix F: Calculation of Return on Assets

2013 2012 2011 2010 2009
Tim
Hortons
19.29% 19.13% 17.36% 28.07% 15.49%
SBUX .28% 18.34% 18.92% 16.62% 7.57%
MCD 16.46% 17.12% 18.26% 17.16% 16.84%
Industry
Average
12.01% 18.20%

Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.



16

Appendix G: Calculation of Return on Equity

2013 2012 2011 2010 2009
Tim
Hortons
43.56% 34.44% 29.57% 47.88% 25.67%
SBUX .17% 29.15% 30.91% 28.14% 14.12%
MCD 35.69% 36.82% 37.92% 34.51% 33.20%
Industry
Average
26.47% 33.47%

Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.

Appendix H Calculation of Current Ratio

2013 2012 2011 2010 2009
Tim
Hortons
1.0 1.3 1.3 2.2 1.5
SBUX 1.0 1.9 1.8 1.5 1.3
MCD 1.6 1.4 1.8 1.5 1.3
Industry
Average
1.2 1.53

Note: Reprinted from Tim Hortons Inc.: Ratios, ThomsonOne, retrieved from http://www.thomsonone.com
Copyright 2014 by Thomson Reuters.


17

Appendix I Cash-flow statement for Tim Hortons Inc.

Note: Reprinted from Downloadable Financial Documents, Tim Hortons Inc., retrieved from
http://annualreport.timhortons.com/.com Copyright 2014 by Thomson Reuters.