The above discussed liquidity ratios describe the ability of a company

| March 31, 2017

Question
PART 3, RATIO ANALYSIS:

(1) LIQUIDITY:
Mc Donalds Wendy’s
Liquidity 2011 2012 2011 2012
Current Ratio 1.25 1.45 2.18 2.47
Quick Ratio 1.22 1.41 2.15 2.43

The above discussed liquidity ratios describe the ability of a company’s ability to meet its short-term obligations using its most liquid assets (current assets). Comparison of liquidity ratios indicate a positive solvency for both the companies, with Wendy’s ahead due to a higher cash margin.

(2) ASSET MANAGEMENT
Mc Donalds Wendy’s
Asset Management 2011 2012 2011 2012
Asset Turnover 0.82 0.78 0.57 0.58
Average Collection Period 18.04 18.21 10.26 8.91
Asset Efficiency metrics reveal McDonald’s to be utilizing its assets better to generate sales compared to Wendy’s over the review period. However, collections indicate comparatively inefficient receivable management compared to Wendy’s, possibly due to a higher credit business revenues from franchisees (32%) compared to Wendy’s (12%).

(3) DEBT MANAGEMENT:
Mc Donalds Wendy’s
Debt Management 2011 2012 2011 2012
Debt to Assets 0.38 0.39 0.32 0.34
Times Interest Earned 17.31 16.66 1.20 1.24
An analysis of the Debt-to-Assets ratio indicates a slightly more levered balance sheet in McDonald’s books compared to Wendy’s. This can be explained by a high re-investment rate through cash generated and reliance on debt for funding growth initiatives.
In spite of a higher debt structure, McDonald’s much profitable operations have ensured a higher interest coverage to repay interest costs on debt-financing. However, a higher cost structure of Wendy’s has meant thin operating margins and thus a very low interest coverage .

(4) PROFITABILITY:
Mc Donalds Wendy’s
Profitability 2011 2012 2011 2012
Net Profit Margin 20.38% 19.82% 0.41% 0.28%
Return on Assets 16.68% 15.44% 0.23% 0.16%
Return on Equity 38.24% 35.73% 0.49% 0.36%

As discussed in the previous section, McDonald’s leaner cost structure have ensured significantly higher profitability compared to that of Wendy’s measured by the above three ratios. Wendy’s costs on the other hand have grown at a rate comparable to that of the revenues

Modified Du Pont Equation, FY 2012:

Mc Donalds Wendy’s
Modified Dupont Equation 2011 2012 2011 2012
Net Profit Margin 20.38% 19.82% 0.41% 0.28%
Asset Turnover 0.82 0.78 0.57 0.58
Equity Multiplier 2.29 2.31 2.15 2.17

(5) MARKET VALUE RATIOS:
Mc Donalds Wendy’s
Market Value 2011 2012 2011 2012
Price per Share (As on December 31) $ 100.33 $ 88.21 $ 5.36 $ 4.70
Book Value per Share $ 31.96 $ 35.03 $ 10.53 $ 10.97
Earnings Per Share $ 5.33 $ 5.41 $ 0.02 $ 0.02
PE Ratio 18.82 16.30 221.02 260.18
Market to Book Ratio 3.14 2.52 0.51 0.43
Comparison of Price-Earnings multiples reveal Wendy’s trading at a significant premium compared to that of McDonalds. However, it is to be noted that Wendy’s trading at a discount to the book value indicating that market perceptions of Wendy’s being an undervalued security trading below its book value.

Comments:

1. you need a comment comparing sales growth to income growth; should they be the same? why? why not? industry avg growth rates? [hint: economy of scale]

2.what should be the largest expense for this kind of company? why?what is the largest? industry avg?

3. good point about r/estate; who are their A/R coming from? you and I pay cash or cc! what asset should be pretty small? why? hint: perishable 4. is this level of debt good? bad? why?

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