Ask Matt: Is Yum Brands a good stock to buy?

— -- Q: Is Yum Brands a good stock to buy?

Yum is one of the nation's largest restaurant chains, and one that's rapidly expanding to other parts of the globe. The company has such a broad reach due to the fact it relies on a massive network of franchisees, who can set up shop in many parts of the world. Furthermore, the company largely sidesteps the territory of other global food giants, such as McDonald's, given the specialties in tacos, fried chicken and pizza.

But should you take a bite out of Yum for your portfolio? To find out, we'll put the stock through the four tests considered at Ask Matt, including:

•Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Yum's trading history back to 1997, we see the company generated an annual compound rate of return of 15%. That's a solid return if you consider the S&P 500 returned an annualized 4.4% return over the same period, says IFA.com.

But to get that better-than-average return, you had to take greater risk. You accepted risk — standard deviation — of 30 percentage points. So, by investing in Yum Brands, you took on 82% more risk to get a 240% higher return. Yum is one of the very few stocks that have passed this test.

•Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price with the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs.

When we run Yum's stock, we find it's rated "attractive." In other words, the current stock price is well below the value of what the company is expected to generate in cash over its lifetime. NewConstructs charges for its reports but is providing a free Yum report to Ask Matt readers.

•Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. Even if the company can increase earnings 11% a year the next five years, that would put the stock in the "hold" range. This indicates the stock is not a bargain relative to the earnings the company is expected to generate.

•Step 4: Check the company's financial health. Before investing in any company, you want to make sure it's in good financial shape. A quick way to check is to look at where it falls on the USA TODAY Stock Meter, which ranks stocks from conservative (1) to aggressive (5). Yum scores a better-than-average 2.2 here. You can get a Stock Meter score for almost any stock by going to money.usatoday.com and putting the stock's ticker symbol or company name into the Get a Quote box.

The bottom line: Yum Brands passes more of the tests investors look for than most stocks do. The fact the company is able to justify its higher risk with a greater return is particularly unusual for an individual stock. Adding the fact the stock is undervalued on a cash flow basis makes Yum one of the stocks that's definitely worth taking a closer look at.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz