solution - FMA - RATIO ANALYSIS OF MCDONALD'S AND BURGER...

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RATIO RATIO ANALYSIS ANALYSIS OF OF MCDONALD’S MCDONALD’S AND AND BURGER KING BURGER KING 1
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Introduction: We have picked up two companies from the fast food industry. The companies are McDonald’s (NYSE ticker: MCD) and Burger King (NYSE ticker: BKC) which are two of the biggest companies in the industry. Both the companies have strong global presence and strong financial as well. The shares of the two companies are actively traded in the stock exchange. For that purposes, we have picked up the balance sheets of the of the two companies for the three years and then calculated the financial ratios for the three years and the comparison is as follows: Performance Ratios: Liabilities to Assets Total Liabilities / Total Assets Liabilities are claims on your company's assets by your creditors (the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year) – what percentage of your assets are owned by creditors? Debt to Assets Total Debt / Total Assets Percentage of your overall debt compared to your assets. A ratio below 1 means the majority of assets are financed through equity, above 1 means they are financed more by debt. You can interpret a high ratio as a “highly debt-leveraged firm.” Debt to Capitalization Total Debt / (Long-Term Debt + Preferred Stock + Common Stock) A variation of the debt-to-equity ratio, this value computes the proportion of your company's long-term debt compared to your available capital. Investors use this ratio identify to amount of your leverage and compare it to others to help analyze your company's risk exposure. Generally, companies who finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios. Return On Assets (ROA) Net income / Total Assets This is a very useful indicator of how profitable your company is relative to your total assets. This is calculated as your net income after taxes (from your income statement) divided by your total assets (from your balance sheet). Assets are used to generate profits; the return on total assets is therefore a measure of how effectively you are employing the invested capital (assets) of your business for generating profits. ROA is displayed as a percentage. Sometimes ROA is referred to as “Return on Investment.” Assets Turnover Net Sales / Net Assets This ratio measures your productive use of your fixed assets—the amount of sales generated for every dollar’s worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Asset turnover measures your company’s efficiency at using its assets in generating sales or revenue; the higher the number the better. It also indicates pricing strategy: 2
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companies with low profit margins tend to have high asset turnover; those with high profit margins have low asset turnover. Largely depreciated fixed assets or a labor-intensive operation may distort this ratio. Return on Equity (ROE)
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This note was uploaded on 05/13/2010 for the course MECH 17657 taught by Professor Ravikant during the Spring '10 term at Indian Institute of Technology, Delhi.

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solution - FMA - RATIO ANALYSIS OF MCDONALD'S AND BURGER...

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