STOCK INVESTMENT REPORT
Prepared by: A. Smith
McDonalds Corporation (NYSE : MCD) is an American industry that is undoubtedly the world's leading fast-food service organization. Since its incorporation in 1955, McDonald's Corporation has spanned its services over 119 countries in 6 continents. About 80% of the restaurants are run by franchisees or through joint ventures with local business-people. The popular chain is well known for its Big Macs, Quarter Pounders, and Chicken McNuggets as well as more recent additions in response to changing customer palates - salads, wraps and smoothies. Helped by these new menu offers and the Mc Café line-up, ...view middle of the document...
Liquidity measures a company's capacity to pay its debts as they come due.
There are two ratios for evaluating liquidity.
- Current Ratio: shows how capable a business is in paying current liabilities
by using current assets only. It’s computed by:
Total Current Assets/Total Current Liabilities
For MCD (2011 Q1): 3824.2/4254.1 = .899
This indicates that MCD had only $.899 in short-term resources to service every $1 of current debt meaning the company was short of carrying an adequate level of liquid assets.
- Net Working Capital: used in order to help measure the cash and operating liquidity position of the business firm. It’s computed by:
Total Current Assets – Total Current Liabilities
For MCD (2011 Q1): 3824.2 – 4254.1 = - 429.9 million
This reinforces what the current ratio indicated i.e. after MCD pays its short-term debt it’ll be $429.9 million short in cash. There’s no operating liquidity cushion!
Cash management and the management of operating liquidity are important for the survival of a business. MCD can make a profit, but if they have a problem with their cash position, it doesn’t bode well.
Activity ratios are mainly of 3 types – accounts receivable turnover, inventory turnover and total asset turnover – and they evaluate how effectively the company manages and employs its assets.
- Accounts Receivable Turnover: shows how fast the business is collecting its receivables. It’s computed by: Total Net Sales/ Accounts Receivable
For MCD (2011 Q1) = 6,111.6/ 1,160.3 = 5.27
This means that MCD was turning its receivables about 5.3 times a year and also that every $1 invested in receivables was generating $5.27 in sales.
- Inventory Turnover: shows how many times the company sells its inventory. Faster turnovers are viewed as a positive trend as they increase cash flow and reduce warehousing and other related costs. This ratio is computed by:Total Net Sales / Inventory
For MCD (2011 Q1) = 6,111.6/111.5 = 54.81
This indicates that MCD is holding inventory for a little over a day for the last quarter. Being a fast-food services industry, one would look for such an inventory holding period.
- Total Assets Turnover: shows how efficiently a company generates sales on every $1 of assets. A volume indicator, this ratio measures the ability of the company's assets to generate sales. It’s computed by: Total Sales / Total Assets
For MCD (2011 Q1): 6,111.6/32,080.2 = .19
This suggests that MCD is generating 19 cents from every $1 invested in assets. It also indicates pricing strategy as companies with high profit margins have low asset turnovers.
Leverage ratios indicate a company's vulnerability to risk. Two ratios – debt-equity and times interest earned – help evaluate leverage.
- Debt-Equity Ratio:...