BBHM Managing Business Financial Performance

Financial Ratio Analysis

Financial Ratio Analysis

International College of Hotel Management Student Name : Tan Wee Jian, David Chan,

Azry Rasyeqa Binti Mohd Rafflee ID Number Subject Subject Code Due Date Lecture : : : : : 000865887, 000864839, 000865888 BBHM Managing Business Financial Performance BBHM 301 26th March 2012 Donald Peter

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

Table of Contents
1.0. 2.0. 2.1. 2.2. 3.0. 3.1. 3.2. 3.3. 3.4. 4.0. 4.1. 4.2. 5.0. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. Financial Ratio Analysis ...................................................................................... 1 Liquidity ratios ..................................................................................................... 2 Current Ratio .................................................................................................... 2 Quick (Acid Test) Ratio ................................................................................... 2 Activity Ratio ....................................................................................................... 3 Inventory Turnover ........................................................................................... 3 Average Collection Period................................................................................ 3 Average Payment Period .................................................................................. 3 Total Asset Turnover ........................................................................................ 4 Debt Ratio ............................................................................................................ 5 Times Interest Earned Ratio ............................................................................. 5 Earnings per Share ............................................................................................ 5 Analyzing Profitability ......................................................................................... 6 Gross Profit Margin .......................................................................................... 6 Operating Profit Margin ................................................................................... 6 Net Profit Margin.............................................................................................. 6 Return on Total Assets (ROA) ......................................................................... 6 Return on Equity (ROE) ................................................................................... 7 Earnings per Share ............................................................................................ 7 DuPont System of Analysis .............................................................................. 7

Conclusion ...................................................................................................................... 8 Reference ........................................................................................................................ 9 Appendix

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

1.0.

Financial Ratio Analysis

All information obtained from financial statements is vital and from the statement,

the organization will do an analysis to determine financial ratios as each stakeholder requires the information for monitoring and knowledge of companys growth. It is an amalgamation of financial and operating data from an organization to provide basic information. It consists of 15 categories financial ratios found in the company the authors choose which McDonalds is.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

2.0.

Liquidity ratios

It is measured for short term obligations in assets which could be converted to cash whenever necessary. Liquidity simply means to have cash in hand at all times, hence when it is needed necessarily there is always cash prepared. (Pamela.P, 2012) 2.1. Current Ratio

From Appendix E 1, the ratio improves from year 2009 to 2011 which proven that McDonalds is not facing any financial difficulties and it has the ability to settle all financial obligations. With this result, their profitability is secure as their target market is high which makes their return of profit is high. 2.2. Quick (Acid Test) Ratio

From Appendix E 2, inventory of the food items which is high in liquidity because their inventory items perishability is high as the demand of fast food has grown all over the world each year.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

3.0.

Activity Ratio
3.1. Inventory Turnover

Inventory Turnover is a ratio of cost of goods sold to inventory that indicates how many times inventory is created and sold during the period (Drake, 2012) According to the turnover rate (Appendix E3) of McDonald shows that over the three years it has an increasing from 131 times to 139 times turnover that is 8 times on the year 2011. Based on research, McDonalds opens more stores by using cash on hand and increasing the advertising budget and buying back shares to push on their sales, thus the inventory turnover rate is increasing in stability (Kennon, 2012). 3.2. Average Collection Period

Average Collection Period (Accounts Receivable Turnover) is the ratio of net credit sales to accounts receivable that indicates how many times in the daily period credit sales have been created and collected (Gitman, Juchau & Flanagan, 2011). McDonalds has an increasing higher turnover on account receivable over the three years based on the calculation (Appendix E4). The author assumed that McDonalds does not indicate a not strong management on credit collection department thus caused the lengthened period of the credit collection. 3.3. Average Payment Period

Average Payment Period is the average age of accounts payable that indicates how many times in the daily period payments relate to the credit term extension of the firm (Gitman, Juchau & Flanagan, 2011). Based on the equation (Appendix-E5), McDonalds has an frustrating figure on the ratio for credit terms, from ratio of 16.64 increased to 23.86 and yet dropped to 21.50 on the year 2011, this could be assumed that the firms has been paying attention and building a good relation with the suppliers so that the frustration of credit term is flexible and under control based on the financial circumstances of the firm.

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BBHM Managing Business Financial Performance 3.4. Total Asset Turnover

Financial Ratio Analysis

The Total Asset Turnover indicates the efficiency with the uses all its assets to generate sales. With the figure shows in the calculation for TAT (Appendix-E6), the frustration of the turnover is basically has a poor productivity as on the year 2009, the asset turnover was 6.66 times but on the year 2011 was a gap of 0.53 times, this proves that the amount of assets that McDonalds previously held was not been maximized to be productivity to work out an increasing return of equity.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

4.0.

Debt Ratio

The debt ratio is also called the debt (or liabilities)-to-assets ratio. This measures a companys use of leverage: It notifies you the percentage of liabilities compared to financial assets. The more liabilities compared to assets a company has, the more leveraged it is and the riskier it is considered to be. In Appendix equation no.7, the debt ratio had increased over the three years from 53.6% to 56.4% in McDonald. This doesnt mean the business at risk as McDonald is a large and well-established fast-food company, and theyre able to take more risks/debts without losing any investors. 4.1. Times Interest Earned Ratio

This calculation is formulated by taking McDonalds earnings before interest and taxes (EBIT) and dividing total interest. This will show and indicates how many times McDonald can cover its interest charges on a pre-tax basis. Referring to Appendix equation no.8, the percentage had slightly increased over the three years, but theres possibility that McDonald is facing financial problems and unable to settle outstanding interests. 4.2. Earnings per Share

EPS is calculated over a number of years indicates whether the earning power of the company has improved or deteriorated. By calculating EPS, it can determine a companys profitability. From 2009 till 2011, in Appendix equation no.14, the EPS of McDonald has steadily increased. An increase in EPS is an important measure because it reveals the amount of profit that McDonald is generating for the shareholders. This will attract more investors as they always look for companies with steadily increasing earnings per share. The higher the earnings per share with all else equal, the higher each share should be worth.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

5.0.

Analyzing Profitability

The main purpose for McDonalds to have this information is too evaluating the earnings gained from investment made and the earnings they made in the market as well as generating financial return in terms of gaining back the assets invested in. (Spire Frame, 2012) 5.1. Gross Profit Margin

From Appendix E 9, McDonalds gross profit margin are quite high and it increase every year which concludes they made good profit and even after paid for their goods the profit is up to 39 to 40% which is essential and excellent for the company. 5.2. Operating Profit Margin

It measures profit earn in sales before minus interest and taxes as shown in Appendix E 10 the margin shows positive figures which is good for the organization as it proves that their return rate is high and each cents spend on the company is worth it. They get to earn their profit margin back in short period of time and it increases yearly. 5.3. Net Profit Margin

Is net profit gained after minus expenses and taxes, from Appendix E 11 shows increases from 20 % to 21% in year 2009 to 2010 however it decreases to 20% again in 2011 shows inconsistency for net profit gain. The impact on this situation will be common as consumers preferences changes from time to time. 5.4. Return on Total Assets (ROA)

Simply means return on investment which measures the effectiveness in generating profits which is shown in Appendix E 12. For both years 2009 and 2010 was the same rate but increases in 2011as economy downturn effects consumers from eating out however once it is back on track they came back and demand for more.

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BBHM Managing Business Financial Performance 5.5. Return on Equity (ROE)

Financial Ratio Analysis

Measuring rate of return earned on shareholders investment for the organization as shown in Appendix E 13 it is calculated and result was positive. Each year, it increases positively and the shareholders return earn is high and it definitely makes them feel worth investing on McDonalds as the market segmentation is high and demand is there hence each future year will be forecast high gaining as well. 5.6. Earnings per Share

EPS is calculated over a number of years indicates whether the earning power of the company has improved or deteriorated. By calculating EPS, it can determine a companys profitability. From 2009 till 2011, in Appendix equation no.14, the EPS of McDonald has steadily increased. An increase in EPS is an important measure because it reveals the amount of profit that McDonald is generating for the shareholders. This will attract more investors as they always look for companies with steadily increasing earnings per share. The higher the earnings per share with all else equal, the higher each share should be worth. 5.7. DuPont System of Analysis

The DuPont analysis system helps business owners to gain information about its efficiency and how effective they are in utilising assets to generate revenue. To gain higher return on assets requires business to boost its operating profit margin through more efficient use of company assets, or to increase gross revenues through higher sales. In McDonalds case, base on Appendix equation no.15, we can determine that the company isnt really fully utilizing the assets as it declines from 1.34 in 2009 to 1.16 in 2010, but increased back to 1.26 in 2011.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

Conclusion
This assignment is all about the financial ratio analysis of McDonalds Company and making assumptions and seeks for facts regarding what are the causes based on the figure of the ratio. The financial ratio can be obtained from McDonald annual financial report, then calculate the ratio that includes from current ratio to quick ratio, debt ratio, and DuPont analysis. Overall, McDonalds Company is doing well due to high sales volume. Although McDonalds Company is well-established and stable, maybe the management can look into financial control and reduce their expenses not only just focusing on marketing side.

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

Reference
Zacks.com (2012), MCDONALDS CORP (NYSE) - Annual Income Statement, viewed 20th Macrh 2012, <http://www.zacks.com/research/report.php?type=ais&t=MCD> Zacks.com (2012), MCDONALDS CORP (NYSE) - Annual Balance Sheet, viewed 20th Macrh 2012, <http://www.zacks.com/research/report.php?type=abs&t=mcd> Joshua Kennon (2012), McDonald's vs. Wendy's - A Case Study In Inventory on the Balance Sheet, viewed 20th March 2012, <http://beginnersinvest.about.com/od/analyzingabalancesheet/a/mcdonalds-vswendys.htm> Lawrence J. Gitman, Roger Juchau & Jack Flanagan (2011), Principle of Managerial Finance 6th Edition, Financial statements and analysis Activity Ratios, pg 55 - 57, Pearson. Pamela Peterson Drake, 2012, Financial Ratio Analysis, viewed 20th March 2012, < http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf> Spire Frame, 2012, Measuring Profitability, viewed 20th March 2012, <http://www.spireframe.com/articles/> Time Interest Earned Ratio, viewed 21st March 2012, <http://timesinterestearnedratio.info/> Lister, J 2012, How The DuPoint System of Analysis Breaks Down Return on Assets Earnings Per Share (EPS), viewed 21st March 2012, <http://investing-school.com/definition/earnings-per-share-eps/> Analysing Debt Ratios 2012, viewed 21st March 2012, <http://www.aaii.com/computerized-investing/article/fundamental-focus-analyzing-debtratios.mobile> Kennon J 2012, About.com Guide, Return On Equity (ROE)
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BBHM Managing Business Financial Performance

Financial Ratio Analysis

Appendix
McDonalds Annual Balance Sheet
Fiscal Year End for MCDONALDS CORP falls in the month of December. All items in Millions except Per Share data.

12/31/11 Cash & Equivalents Receivables Notes Receivable Inventories Other Current Assets Total Current Assets Net Property & Equipment Investments & Advances Other Non-Current Assets Deferred Charges Intangibles Deposits & Other Assets Total Assets Notes Payable Accounts Payable Current Portion Long-Term Debt Current Portion Capital Leases Accrued Expenses Income Taxes Payable Other Current Liabilities Total Current Liabilities Mortgages 2,335.70 1,334.70 0 116.80 615.80 4,403 22,834.50 1,427 0 0 2,653.20 1,672.20 32,989.90 0 961.30 366.60 0 1,581 600.30 0 3,509.20 0

12/31/10 2,387 1,179.10 0 109.90 692.50 4,368.50 22,060.60 1,335.30 0 0 2,586.10 1,624.70 31,975.20 0 943.90 8.30 0 1,585.60 386.90 0 2,924.70 0

12/31/09 1,796 1,060.40 0 106.20 453.70 3,416.30 21,531.50 1,212.70 0 0 2,425.20 1,639.20 30,224.90 0 636 18.10 0 1,854.80 479.80 0 2,988.70 0

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BBHM Managing Business Financial Performance

Deferred Taxes/Income Convertible Debt Long-Term Debt Non-Current Capital Leases Other Non-Current Liabilities Minority Interest (Liabilities) Total Liabilities Preferred Stock Common Stock (Par) Capital Surplus Retained Earnings Other Equity Treasury Stock Total Shareholder's Equity Total Liabilities & Shareholder's Equity Total Common Equity Shares Outstanding Book Value Per Share 1,344.10 0 12,133.80 0 1,612.60 0 18,599.70 0 16.60 5,487.30 36,707.50 449.70 28,270.90 14,390.20 32,989.90 14,390.20 1,023.20 14.06 1,332.40 0 11,497 0 1,586.90 0 17,341 0 16.60 5,196.40 33,811.70 752.90 25,143.40 14,634.20 31,975.20 14,634.20 1,056.50 13.85

Financial Ratio Analysis

1,278.90 0 10,560.30 0 1,363.10 0 16,191 0 16.60 4,853.90 31,270.80 747.40 22,854.80 14,033.90 30,224.90 14,033.90 1,079.10 13.01

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BBHM Managing Business Financial Performance

Annual Income Statement
Fiscal Year End for MCDONALDS CORP falls in the month of december. All items in Millions except EPS data. 12/31/11 Sales Cost Of Goods Gross Profit Selling & Adminstrative & Depr. & Amort Expenses

Financial Ratio Analysis

12/31/10

12/31/09

27,006 16,319.40 10,686.60 2,156.90

24,074.60 14,437.30 9,637.30 2,164.20

22,744.70 13,952.90 8,791.80 1,950.80

Income After Depreciation & Amortization

Non-Operating Income Interest Expense

8,529.70 -24.70 492.80 8,012.20 2,509.10 0 0 0 5,503.10 0 5,503.10 9,944.70 1,415 8,529.70 1,044.90 5.27 5.27

7,473.10 -21.90 450.90 7,000.30 2,054 0 0 0 4,946.30 0 4,946.30 8,749.30 1,276.20 7,473.10 1,080.30 4.59 4.58

6,841 119.20 473.20 6,487 1,936 0 0 0 4,551 0 4,551 8,057.20 1,216.20 6,841 1,107.40 3.98 4.11

Pretax Income
Income Taxes Minority Interest Investment Gains/Losses Other Income/Charges

Income From Cont. Operations

Extras & Discontinued Operations

Net Income
Income Before Depreciation & Amortization Depreciation & Amortization (Cash Flow)

Income After Depreciation & Amortization

Average Shares Diluted EPS Before Non-Recurring Items

Diluted Net EPS

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BBHM Managing Business Financial Performance Equations E1. Current Ratio =

Financial Ratio Analysis * All items in Millions

2009

2010

2011

E2. Quick Acid Test 2009

= 2010 2011

E3. Inventory Turnover

2009

2010

2011

E4. Average Collection Period

2009

2010

2011

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

E5. Average Payment Period

2009

2010

2011

E6. Total Asset Turnover = 2009 2010 2011

E7. Debt Ratio 2009

= 2010 2011

E8. Times Interest Earned Ratio = 2009 2010 2011

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

E9. Gross Profit Margin = 2009 2010 2011

E10.

Operating Profit Margin 2009

= 2010 2011

E11.

Net Profit Margin 2009

= 2010 2011

E12.

Return on Total Assets 2009

= 2010 2011

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BBHM Managing Business Financial Performance

Financial Ratio Analysis

E13.

Return on Equity

2009

2010

2011

E14.

Earnings for Share 2009

= 2010 2011

E15.

DuPont System of Analysis = 2009 2010 2011

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