The former deducts the inventory figure from the current assets value.
In the years under consideration, both the current ratio and the quick ratio of McDonald's decreased (see table 1). In that regard, the company's ability to settle its debts in the short run seems to have been impaired within the period under consideration. It is however important to note that with a current ratio and quick ratio of more than 1, McDonald's can still comfortably settle its short-term debts or obligations were they to suddenly become due.
Asset Utilization Analysis
In seeking to analyze how effective McDonald's is in the utilization of its assets, I will take into consideration two main ratios including accounts receivable turnover ratio and the inventory turnover ratio. The accounts receivable ratio according to Baker and Powell (2009) "measures how many times a firm's accounts receivable are generated and collected during the year." As the authors further point out, a high receivables turnover ratio should be seen as an indicator of efficient management of accounts receivables. During the period under consideration, McDonald's accounts receivables turnover ratio fell from 20.42 to 20.23. The change in this case is largely negligible. For this ratio to be useful, it should be compared to the industry average.
The inventory turnover ratio on the other hand is an indicator of the number of times an entity sells and replaces inventory over a specified period. Therefore, as Baker and Powell (2009) point out, a high ratio in this case would be a sign that a firm's inventory is being managed efficiently. In the case of McDonald's, the inventory turnover ratio rose from 127.37 in 2010 to 143.97 in 2011. This could be an indicator of strong sales.
Conclusion
From the ratio analysis, McDonald's financial performance could be said...
It is also important to note that the company's net income increased from $4,946,300 thousand in 2010 to $5,503,100 thousand in 2011. This represents an 11.26% increase in profitability. The company is likely to continue performing well going forward.
References
Baker, H.K. & Powell, G. (2009). Understanding Financial Management: A Practical Guide. Malden, MA: Blackwell Publishing.
Brigham, E.F. & Houston, J.F. (2009). Fundamentals of Financial Management (12th ed.). Mason, OH: Cengage Learning.
Mowen, M.M., Hansen, D.R. & Heitger, D.L. (2011). Cornerstones of Managerial Accounting (4th ed.). Mason, OH: Cengage Learning.
Table 1: McDonald's Corporation's Financial Ratios
Profitability Ratios
Formula
Results
2011
2010
Return on Equity
Net Income/Shareholder's Equity
0.38
0.34
Net Profit margin
Net Income/Sales
0.20
0.21
Return on Assets
Net Income/Total Assets
0.17
0.15
Liquidity Ratios
Formula
Results
2011
2010
Current Ratio
Current Assets/Current liabilities
1.25
1.49
Quick Ratio
(Current Assets - Inventory) / Current Liabilities
1.22
1.46
Asset Utilization Ratios
Formula
Results
2011
2010
Accounts Receivable Turnover ratio
Annual Credit Sales/Accounts Receivable
20.23
20.42
Inventory Turnover Ratio
C.O.G.S/Average Inventory
