Selection, Calculation and Interpretation of the Ratios

Selection,Calculation and Interpretation of the Ratios

  1. Liquidity Ratio: These ratios demonstrate how capable a company is in meeting its short-term obligations (Fridson &amp Alvarez, 2014). That’s why they’ve been chosen for this analysis. There are 2 types of liquidity ratios. They are-

  1. Current Ratio: Current Assets / Current Liabilities

  2. Quick Ratio: (current assets – inventories) / current liabilities

  1. Efficiency Ratio: The efficiency ratios were chosen because they show the management how efficient the company is in utilizing its liabilities and assets internally (Velez-Pareja, n.d.). Different efficiency ratios are calculated by using the following formulas-

  1. Inventory Turnover: Sales / Inventory

  2. Total Asset Turnover: Sales / Total Assets

  1. Leverage Ratios: According to Fridson &amp Alvarez, (2014), leverage ratios show how much of a company’s capital and assets come in the form of loans (debt), and evaluates the capability of a business of meeting its financial obligations. Different leverage ratios are calculated by using the following formulas-

  1. Total Debt to Assets: Total Debts / Total Assets

  2. Long-term Debt to Total Assets Ratio: Total Long-term Debts / Total Assets

  3. Total Debt to Equity: Total Debts / Total Equity

  1. Profitability Ratios: Velez-Pareja (n.d.) mentioned that, profitability ratios indicate a company’s ability to generate profits in a fiscal year, taking all the operating expenses and other expenses into consideration. As a result, these ratios have been chosen for this analysis. Different profitability ratios are calculated in the following ways-

  1. Net Profit Margin: Net Income / Sales

  2. Return on Assets: Net Income / Total Assets

  3. Return on Equity: Net Income / Total Equity

  1. Market Value Ratios: These ratios tell us whether the shares of a company are underpriced or overpriced (Fridson &amp Alvarez, 2014). Since Burger King is not a publicly traded company anymore (last day of NYSE trading was December 14, 2014), so calculating different kinds of market value ratios wasn’t possible in this case. Only the Price/Earning (P/E) ratio was calculated for both the companies.

The formula to calculate P/E ratio is: Market Value per Share /Earnings per Share.

References

Annual Reports :: AboutMcDonalds.com.(2016).&nbspAboutmcdonalds.com.Retrieved 23 July 2016, fromhttp://www.aboutmcdonalds.com/content/mcd/investors/financial-information/annual-report.html

Burger King Annual Reports.(2016).&nbspInvestor.rbi.com.Retrieved 23 July 2016, fromhttp://investor.rbi.com/en/investor-information/annual-reports.aspx

Fridson, M. &amp Alvarez, F. (2014).&nbspFinancialstatement analysis&nbsp(3rd ed.).New York: John Wiley &amp Sons.

Long Term Debt To Total Assets RatioDefinition. (2011).&nbspInvestopedia.Retrieved 23 July 2016, fromhttp://www.investopedia.com/terms/l/long-term-debt-to-total-assets-ratio.asp

McDonald`s Corporation (MCD) Stock Chart.(2016).&nbspNASDAQ.com.Retrieved 25 July 2016, fromhttp://www.nasdaq.com/symbol/mcd/stock-chart?intraday=off&amptimeframe=2y&ampsplits=off&ampearnings=off&ampmovingaverage=None&amplowerstudy=volume&ampcomparison=off&ampindex=&ampdrilldown=off

Profit Margin Definition.(2013).&nbspInvestopedia.Retrieved 23 July 2016, fromhttp://www.investopedia.com/terms/p/profitmargin.asp

Return On Equity (ROE) Definition.(2013).&nbspInvestopedia.Retrieved 23 July 2016, fromhttp://www.investopedia.com/terms/r/returnonequity.asp

Total Debt To Total Assets Definition.(2012).&nbspInvestopedia.Retrieved 23 July 2016, fromhttp://www.investopedia.com/terms/t/totaldebttototalassets.asp

Velez-Pareja, I. Looking Forward FinancialRatio and Value Analysis (Valor de la firma y razones financieraspara el análisis financiero).&nbspSSRNElectronic Journal.http://dx.doi.org/10.2139/ssrn.999103