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Mc Donald's & Wendy's Financial Statement Comparison

1719 words - 7 pages

McDonald's & Wendy's Financial Statement Comparison

Financial Statement Analysis Project

The two companies that I will be comparing in this project are McDonalds and Wendys. Both of these companies are competitors in the same industry. I am using the information from their 2005 Financial Statements.

Debt-to-Assets Ratio

When comparing the debt-to-assets ratio of McDonalds and Wendys, you have to divide the firms total liabilities by their total assets. Essentially, the debt-to-assets ratio is the primary indicator of the firms debt management. As the ratio increases or decreases, it indicates the firms changing reliance on borrowed resources. The lower the ...view middle of the document...

Current Ratio

To calculate the current ratio, which is one of the most popular liquidity ratios you divide all of firms current assets by all of its current liabilities. McDonalds has $1,819.3 (*everything is in millions for McDonalds) of current assets and $2,248.3 in current liabilities making the firms current ratio .81. In 2005 Wendys has current assets of $266,353 and current liabilities of $296,687 making their current ratio .90. Current ratios are used to represent good liquidity and financial health. Since current ratios vary from industry to industry, the industry average determines if a firms current ratio is up to par, strength or a weakness. In any event if the current ratio is less than the industry average than an analyst or individual interested in investing might wonder why the firm isn't
balancing its current assets and liabilities better. On both McDonalds and Wendys website is says that the industry average for a current ratio is .60. So when comparing both firms, based on the industry average, McDonalds and Wendys are doing well and can both be efficiently liquidated. Liquidity refers to how quickly the firms current assets can be converted to cash. Now as far as being compared to each other by McDonalds having a lower current ratio, that itself doesn't
indicate that McDonalds is in a worse financial situation. Lower liquidity may be offset by a variety of other financial indicators, because McDonalds still ranks higher on its overall financial stability and financial health.

Quick Ratio

To find the quick ratio, which is often called the acid test; only cash & cash equivalents as well as accounts receivable are added and then divided by current liabilities. The purpose of the quick ratio is to indicate the resources that may be available in the short term. Essentially quick ratio is sort of a worse case scenario that might apply if no other resources are available. In 2001 Wendys had a quick ratio of .66 while McDonalds came through with a quick ratio of .76. What does this mean? When comparing McDonalds and Wendys it shows that even though Wendys had the higher current ratio, like I mentioned earlier, this doesn¡¦t mean that McDonalds is in worse financial condition. McDonalds based on its quick ratio shows that without using any other resources are able to pay their current liabilities due within a year better than Wendys. Considering that the industry average in 2005 of quick ratios is .40, Wendys didn't
do badly at all in 2001. Many analysts say that quick ratios shouldn't
be less than .30. If lower than .30 and trends keep declining then many concerns would be addressed about the firm.

P/E Ratio

The price-to-earnings ratio is calculated by taking the stocks market price per to its earnings per share. As an investor ratio its a convenient and widely accessible way to compare alternative investment opportunities. They are usually used to assess...

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