Introduction
As the newly appointed treasurer to the McDonald's Corp, I have decided to first understand the company's performance for the last two years where I will be required to conduct ratio analysis. McDonald is am American fast food that was founded in 1940 in California USA. Over the years, the company has increased market in major cities in the world with an increase in revenue generation. By 2017 the firm had more than 37,241 outlets which have helped to ensure market penetration and product diversification (Rosenberg, 2019) . The main products under the company include soft drinks, French fries, hamburgers, cheeseburgers, fish, and fruits among others in the market. From Form 10-k, I have been able to access 2016 and 2017 financial statements that are vital for analysis purpose in the region (Rosenberg, 2019) . The management has tried to maximize revenue generation while still minimizing the administrative and other expenses to ensure a better return on investment.
Ratio Analysis
McDonald Corp performance for the past two years will be conducted through ratio analysis which will provide more information in the market. The most recent data to be used will be from 2016 and 2017 which will be obtained from McDonald Corp Form 10-K.
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Profitability Ratios
Profitability ratios are used to measure the ability of how a company can generate its earnings to cater for all the expenses incurred within the company. Whenever the profitability ratios have a higher value than the competitors' ratio, indicate the firm is performing well in the market.
Gross Profit Margin
Gross profit margin is a ratio which provides typically more information concerning the profitability of an organization where it will indicate the percentage of profit compared to net sales.
Gross profit margin = gross profit/net sales * 100%
2016
7744.5/24621.9*100%= 31.45%
2017
9552.7/22820.4*100%= 41.8 %
There has been an increase in profitability ration from 31.34% in 2016 to 41.8% in 2017 which therefore indicate there has been an increasing in sales and higher production level in the market ( United States Securities and Exchange Commission, 2017) . In such a case, the management was also able to maintain a lower rate of expenses which helped to generate a higher level of profit. The increase in profitability ratio is a positive indicator of better financial performance where the investors can also acquire a higher return on investment.
Net Profit Margin
Net profit margin ratio normally shows and explains the firm’s profit after tax compared to net sales in the region. It can be calculated as follows:
Net income after tax/sales* 100%
2016
4686.5/24621.9*100%= 19.03%
2017
5192.3/22820.4*100%= 22.75%
There has also been an increase in net profit margin which has been attributed by a reduction in taxes level and other operating expenses. The higher the profit margin, the more and stable the company is said to be considered which also provide a higher profitability rate.
As a finance manager, I will mainly depend on net profit margin to understand the level at which the company can generate more profit from the sales record. As part of the profitability ratio, it will provide financial performance and profitability index in the long run ( United States Securities and Exchange Commission, 2017).
Return on Assets
Return on assets ratio usually measures how best an organization can use its assets to generate enough profits.
Return on assets= Net income after taxes/ total assets
2016
4686.5/31023.9= 0.15
2017
5192.3/33803.7=0.16
From the above calculation, it is therefore evident that the company has been able to maximize its assets to generate enough revenue and profit in the market.
Return on Equity
It measures the rate at which McDonald can use its equity to acquire enough return on investment. As a finance manager, return on equity will be applied to understand how the available shareholders' equity is applied to generate necessary resources and revenue for the company ( United States Securities and Exchange Commission, 2017).
= net income after taxes/ total equity
2016
4686.5/(2204.3)= -2.12
2017
5192.3/ -3268= - 1.5
Despite the return on equity being is negative, there has been a reduction in the negative figure which means that McDonald can use available equity to generate revenue in the region.
Resource Management Ratio
Age of Inventory
Age of inventory is the total number of days it will take for a company to sell all the inventory within the market. It is a financial analysis technique that generally helps to determine the efficiency of the sales level. The faster and quick the company can sell its inventory, the more profitable the company will be in the market. The formula is as follows.
The age of inventory will be a critical financial ratio that will try to understand the number of days in which the company takes to convert available stock into cash. Whenever a company exists for an extended period in the market, it always comes up with new and innovative ways that will go a long way in assisting in the sales generation. Therefore, it is imperative to adhere to shareholders' goal of wealth maximization.
The average cost of inventory/cost of goods sold* 365
2016
58.9/16877.5*365= 1.27
2017
58.8/13267.7*365= 1.6
The company takes a shorter time to sell its inventory which means that there is better efficiency and sales level in the region.
Age of Accounts Payable
Age of accounts payable normally helps to indicate the total number of days it takes for all the accounts payable to pay back to the company in the market. McDonald Company usually prepares accounts payable report which tries to reveal the total number of days taken to recover the funds at the hands of the creditors. It will, therefore, help to explain the rate at which McDonald can pay off all the suppliers in the region.
Accounts payable days= total supplier purchases/ Average accounts payable
2016
2300/ 756= 3.04
2017
2100/924=2.27
From the calculations above, there has been a reduction in the number of accounts payable. The decrease in accounts turnover means the company is taking less time to pay off all its suppliers within that period. It, therefore, means the company is in a stable financial situation in the market.
Accounts payable days is very instrumental to me as a finance manager; it will provide more directions and information concerning various financial management goals. It will be crucial to maintaining a lower level of accounts payable days to avoid any financial distress and liquidity issues (Penman, 2015) . The suppliers when paid their dues on time will always provide the necessary products that will help to increase production hence sales level.
Liquidity Ratio
Liquidity ratios are financial ratios which are used to measure and determine the company's ability to pay off the current debt within a short time in the region.
Current Ratio
It is a financial ratio which tries to compare current assets to current liabilities hence financial strength.
Current assets/current liability
2016
4848.6/3468.3= 1.4
2017
5327.2/2890.6= 1.84
From the above calculation, there has been increased which means that the company has strong ability to use its current assets to cater to the current liabilities in the region. Therefore it is possible to use the available resources to pay all the financial obligation.
As a finance manager, the current ratio will be significant during financial planning and making financial management goals in the market (Laitinen, 2018) . I will, therefore, be able to analyze the level of all the current assets in the organization against the current liabilities to understand the right form of financial management. For a company to have healthy and robust financial management, the current assets should be more than current liabilities to finance and support the level of business operations in the market.
Leverage Ratio
The leverage ratio is a ratio which tries to measure the long term solvency of McDonald in regards to how much the company capitals will be generated using debt. The ratio, therefore, attempts to measure the ability of an organization to meet its financial obligation in the market. The leverage ratio is essential as it helps the company have the ability to determine how much it can borrow to increase the profitability of the company. Leverage ratios will be used and applied by the finance manager to avoid any liquidity or solvency issues since the primary goal of the management is to ensure a higher level of profit has been attained in the market.
Debt to Equity Ratio
The ratio indicates total debt that is used in the company in comparison to the available equity.
Total debt/ total equity
2016
25878.5/ 31023.9= 0.83
2017
29536.4/33803.7= 0.87
There has been a lower debt to equity ratio which indicates that the firm has not been aggressive in financing its growth with available debt. It is therefore imperative to maintain a lower rate of expenses and interest to avoid any solvency or bankruptcy issues.
Therefore, as a finance manager, the ratio will be helpful to understand the level of company debt against the available assets (Penman, 2015) . A proper means of borrowing will, therefore, be created to ensure that the right form of financing has been acquired in the long run. Various investment decision will be performed for the welfare of the company.
Debt to Assets Ratio
It is a ratio which tries to indicate McDonald’s financial leverage where it tells the percentage of a firm’s total assets that will be mainly financed by available creditors. Therefore, it should be controlled to avoid liquidity issues.
Total debt/total assets
2016
25878.5/31023.9= 0.83
2017
29536.4/33803.7= 0.87
Therefore, the company has a good ability to use the available assets to finance its debt in the organization.
As a finance manager, I will be able to use total debt to total assets ratio to make various investment and management roles in the organization. I will, therefore, try to understand the level of debt to incur using the available assets. In the long run, using the same ratio, it will be to provide better ways in which the available assets will be used to generate more revenue in the region.
Interest Coverage
Interest coverage is a debt and profitability ratio which is used to evaluate and determine how well the company can pay interest for all the outstanding financial obligation. The ratio is calculated by:
Earnings before interest and taxes/ interest payment ( United States Securities and Exchange Commission, 2017).
2016
6866/884.8= 7.7
2017
8573.5/921.3= 9.31
In general, the interest coverage ratio tries to measure the number of times in which a company can pay all its current interest using the available earnings in any financial year. Therefore, it measures the margin of safety for McDonald for paying the interest in any given time. From the calculations, it is clear that McDonald can meet its interest obligations hence fundamental to the shareholders (Penman, 2015) . A lower interest rate coverage ratio, the more McDonald debt will incur in the long run. Whenever the debt coverage ratio is below 1.5, it means the firm has the ability to meet all the interest expenses in the market. In addition, interest coverage ratio which is below one normally indicate that the firm will have challenges generating enough revenue to cater for the interest expenses.
As a finance manager, the ratio is very as it will help me in achieving McDonald's financial management goals in the long run. In such a case, I will be able to use available revenue to understand the level and amount of loan to take from a financial institution to avoid higher interest coverage ratio (Penman, 2015) . I will, therefore, have the task to apply the ratio to make the necessary investment decision especially when it involved financing decision. I will always advise the management to seek a better and cheaper source of financing which will not result in a substantial financial obligation.
Conclusion
As McDonald's finance manager, I will mainly make use of the ratio analysis above to make various financial management goals in the market. McDonald has been able to prepare accurate and correct financial statements which will provide more insight information concerning financial performance. From a closer look at the ratios, they all reveal different information which is required in the financial stability of the company. Profitability ratios will be used to determine the level of profit earned such as net and gross profit. It is important as it will reveal the necessary information required to offer the right direction for the company.
Resource management ratio such as age on inventory, the age of accounts payable and receivable helps to shed more light and information about the efficiency and performance of McDonald. To ensure proper debt management, liquidity ratio will be considered also in the region such as the current ratio which tries to measure the level of current assets and current liabilities in the market. Finally, the interest coverage ratio should mainly focus on ensuring that the level of debt incurred is controlled to avoid huge financial interest payments.
References
Laitinen, E. K. (2018). Financial Reporting: Long-Term Change of Financial Ratios. American Journal of Industrial and Business Management , 8 (09), 1893.
Penman, S. H. (2015). Financial Ratios and Equity Valuation. Wiley Encyclopedia of Management , 1-7.
Rosenberg, M. (2019). Number of McDonald's Restaurants Worldwide. ThoughtCo. Retrieved on 13 February 2019, from https://www.thoughtco.com/number-of-mcdonalds-restaurants-worldwide-1435174
United States Securities and Exchange Commission (2017). Form 10-K: McDonald’s Corporation. Retrieved on 13 February 2019, from http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MCD_2017.pdf
