Using the above Mcdonalds financial information, discuss the meaning of the calc
ID: 2654233 • Letter: U
Question
Using the above Mcdonalds financial information, discuss the meaning of the calculated ratios in a general sense and specifically what they mean for the main organization. Also evaluate your calcualted ratios in light of some comparitive standard such as the industry averages or specific competitors (note: I completed the competitive numbers... now just have to analyze).
Discuss: A. Which ratios you would find most useful in making day-to-day management decisions, and why?
B. Which of the ratios you would find most useful in making strategic deicision, and why?
Financial Ratios Competitive Comparison Liquidity (Balance Sheet) Calculations Starbucks Yum! 2010 2009 2008 2010 2010 Current Ratio 1.49 1.14 1.39 1.55 0.94 Quick or Acid Test 1.22 0.96 1.18 0.98 0.69 Inventory to net working capital 0.08 0.25 0.11 0.56 -1.4 Activity (Balance Sheet) 2010 2009 2008 Inventory turnover 219.06 214.17 210.96 8.21 42.96 Fixed asset turnover 1.09 1.06 1.16 4.43 2.96 Total Asset Turnover 0.75 0.75 0.83 1.68 1.36 Leverage (Balance Sheet) 2010 2009 2008 Debt to Assets Ratio 0.36 0.35 0.36 0.08 0.35 Long-term debt to equity ratio 0.79 0.75 0.76 0.15 2.28 Debt to equity 1.18 1.15 1.13 0.74 3.98 Times-interest earned ratio 16.53 14.71 12.78 44.94 9.17 Profitability (Income Statement) 2010 2009 2008 Gross profit Margin 0.40 0.39 0.37 0.58 0.16 Operating profit margin 0.31 0.31 0.28 0.13 0.15 Net Profit margin 0.21 0.20 0.18 0.08 0.1 Return on total assets 0.15 0.15 0.15 0.15 0.14 Return on equity 0.34 0.32 0.32 0.26 0.73Explanation / Answer
Liquidity Ratios
Current ratio = current assets / current liabilities
Quick ratio = (cash + marketable securities + net receivables) / current liabilities
Liquidity ratios analyze the ability of a company to pay off its current liabilities.In other words, these ratios show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations.
Since, both the ratios are greater than 1, it means company has good liquidity & it can run its day to day business without any problem.
Inventory Working Capital Ratio = Inventory / Working capital
It is defined as a method to show what portion of a company’s inventories is financed from its available cash, is essential to businesses which hold inventory and survive on cash supplies. In general, the lower the ratio, the higher the liquidity of a company is.
Since, it is less than 1, it means that a company has high liquidity of current asset.
Overall, In contrast to its comparison specially with YUM, company has better liquidity ratios that will help it to meet its daily liablities in much more comfortable manner.
Activity Ratios
Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales.
Inventory Turnover Ratio = Total annual sales or cost of goods sold / Inventory cost
This ratio measures the number of times a company's investment in inventory is turned over during a given year. The higher the turnover ratio, the better, since a company with a high turnover requires a smaller investment in inventory.
Total Asset Turnover Ratio= Net sales / Average total assets
The amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets.The higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets.
Fixed Asset Turnover Ratio = Sales / Fixed Assets
The fixed (or capital) assets turnover ratio measures how intensively a firm's fixed assets such as land, buildings, and equipment are used to generate sales. A low fixed assets turnover implies that a firm has too much investment in fixed assets relative to sales; it is basically a measure of productivity.
The company has best Inventory turnover ratios among it peers that implies it is able to convert its inventory into sales much more quickly & less amount is blocked in inventory.
However, the Assets turnover ratios is less than its peers that means company is not able to utilise its fixed assets to its bestest possible manner. However, one reason for this might be since company is primarily in service sector & its business is more relied on services rather than on fixed assets.
Leverage Ratios
Debt to Assets Ratio = Total Debt / Total Assets
It defines the total amount of debt relative to its assets.The higher the ratio, the higher the degree of leverage, and consequently, financial risk.
Long-term debt to equity ratio = Long Term Debt / Equity
It defines the total amount of long term debt relative to its The greater a company's leverage, the higher the ratio. Generally, companies with higher ratios are thought to be more risky because they have more liabilities and less equity.
Debt to Equity Ratio = Debt ( Short +Long) / Equity
The debt/equity ratio measures how much of the company is financed by its debtholders compared with its owners.Companies with lower debt/equity ratios are less risky than those with higher such ratios.
Times-interest earned ratio = Income befoe Intrest & Tax / Intrest Expense
The times interest ratio is stated in numbers as opposed to a percentage. The ratio indicates how many times a company could pay the interest with its before tax income.
The Company has very good leverage ratios as comparison to YUM, however it is below when compare to Starbucks. This might be because company offers different kind of snacks products as comparison to Starbucks which are more specialised in beverages & require less investment.
Profitability Ratios
Gross profit Margin = Gross Profit / Net Sales
Gross margin tells you about the profitability of your goods and services. It tells you how much it costs you to produce the product. Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory. It only makes sense that higher ratios are more favorable.
Operating profit margin = Operating profit / Net Sales
The operating profit margin ratio is a key indicator for investors and creditors to see how businesses are supporting their operations. A higher operating margin is more favorable compared with a lower ratio because this shows that the company is making enough money from its ongoing operations to pay for its variable costs as well as its fixed costs.
Net Profit margin = Net Profit ( Total revenue-Total exp) / Net Revenue
The net profit margin formula looks at how much of a company's revenues are kept as net income. The net profit margin is generally expressed as a percentage
Return on total assets = Net Income / Ave total Assets
It shows how efficiently a company can covert the money used to purchase assets into net income or profits.
Return on equity = Net Income / shareholder's Equity
Here, prefernce dividend is deducted to arrive on Net Income but not the dividend on equity. Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company
The Company has better profitability ratios as comparison to its peer YUM, However it is slightly below than Starbucks. That shows it consistently making good profits against there peers at a better margin rate.
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