RATIO ANALYSIS

Financial Ratio Analysis



Financial Ratio Analysis

Introduction

This assignment is based on McDonald's and Burger King's financial ratio analysis. Both the company's annual reports of more than a year are compared in terms of different financial ratios that are; Gearing, Profitability, Liquidity, Efficiency and Investment ratios. The main purpose is to measure and evaluate the performance of these two companies that belong to the same business that is the fast food industry. They are two of the greatest sellers of fast food that dominates the overall fast food sector.

Ratio Analysis

Ratio analysis is a tool utilized by people to perform an analysis of the information that is given in the company's financial statements. I have picked up 4 different years financial statements of the two fast foods (2007, 2008, 2009 & 2010).

Gearing

This ratio compares the owner's equity or capital to the funds borrowed. It measures financial leverage of the firm. It evaluates the level to which the company's activities are funded by the owner's money in opposition to the creditor's money (Van Horne, 1980).

Debt to Equity

This is a gearing ratio that measures the firm's ability to borrow and repay money. If this ratio is higher it means the firm's growth and assets are financed more through debt rather than equity.

While talking about McDonalds, the ratio in the year 2007 is 61% and at the lowest as compared to the other two years that are 2008, 2009 & 2010. This increase in the year 2008, 2009, & 2010 is mainly due to increase in the company's debt and fall in the shareholders equity. It has been observed that retained earnings of McDonalds increased from previous year because more dividend payments were made to the shareholders however; the net income reported was less for the same year (Annual Report, 2009). The ratio increased by almost 24% in the year 2008 to 76% from 61% in 2007. The main reason was an increase in the company's total debt of almost 9.86%. In 2008, the company borrowed Japanese Yen amounting 40 billion. This gave an increase in the company's debt. The total value of shareholders pressed on to lessening by 12.42% because of dropped in total income by 92.43% as McDonalds incurred a loss in the foreign currency transaction of $1223 million Furthermore, an increase in the common stock in treasury by 21.04% additionally donated to the diminishing in shareholder's value. The debt to equity ratio dropped somewhat to 75% however the total debt increased by 3.53% with net issuances of $ 219 million. Rise in the value of shareholders by 4.87% was because of addition on foreign money transaction of $714 million and expanded in net income by 12.64% as higher net earnings was accounted for in 2009 (Annual Report, 2009). The little increase in retained earnings every year was because of association's choice to proclaim higher dividend payment for every share in every year. The common stock in treasury pressed on to build by ...