Perform a Financial Ratio Analysis for McDonald’s
Financial ratio analysis is one of the best techniques for identifying and evaluating internal strengths and weaknesses. Potential investors and current shareholders look closely at firms’ financial ratios, making detailed comparisons to industry averages and to previous periods of time. Financial ratio analyses provide vital input information for developing an IFE Matrix.
Note along the bottom row of the strategic planning template at www.strategyclub.com there is an icon Financial Ratios and also an icon Projected Financial Ratios. The template will thus calculate these ratios and give you the percentage change from 1 year to the next. However, as you know, ratios are calculated based on financial statements, so it is important in preparing a comprehensive strategic plan using the template to convert your company’s existing financial statements into the template format. This is well worth the effort and is explained near the end of this chapter.
Instructions
•
o Step 1: Using the resources listed in Table 4-8, find as many of McDonald’s financial ratios as possible. Record your sources. Report your research to your classmates and your professor.
•
o Step 2: Given the Template Considerations for Financial Ratios provided near the end of this chapter, try to convert McDonald’s actual (most recent) financial statements into the template format, and get the template to then calculate associated financial ratios and changes year-over-year.
Exercise 4B: Develop an IFE Matrix for McDonald’s
Purpose
This exercise will give you experience in developing an IFE Matrix. Identifying and prioritizing factors to include in an IFE Matrix fosters communication among functional and divisional managers. Preparing an IFE Matrix allows managers to articulate their concerns and thoughts regarding the business condition of the firm. This results in an improved collective understanding of the business.
Instructions
•
o Step 1: Get familiar with the template at the www.strategyclub.com website. You can click on IFE Matrix and use the template to save immense time in completing this exercise. Be mindful, however, that the template does not itself access the internet to find key strengths and weaknesses. You need to do that and then enter that information into the template. The template is widely used by companies (and students) in preparing an IFE Matrix.
o Step 2: Join with two other individuals to form a three-person team. Develop a team IFE Matrix for McDonald’s. Use information from Exercise 1B from Chapter 1.
o Step 3: Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major differences.
o Step 4: What strategies do you think would allow McDonald's to capitalize on its major strengths? What strategies would allow McDonald's to improve on its major weaknesses?
Sample Solution
Step 1: Find McDonald's financial ratios
| Ratio | Value | Source |
|---|---|---|
| Current ratio | 1.35 | Macrotrends |
| Quick ratio | 1.12 | Macrotrends |
| Total debt to equity ratio | 0.43 | Macrotrends |
| Return on equity | 19.0% | Macrotrends |
| Return on assets | 8.7% | Macrotrends |
| Net profit margin | 10.3% | Macrotrends |
| Gross profit margin | 62.0% | Macrotrends |
| Operating margin | 21.4% | Macrotrends |
Step 2: Convert McDonald's financial statements into the template format
To convert McDonald's financial statements into the template format, you will need to:
- Create a spreadsheet with the following columns:
- Account
- Current year
- Prior year
- Enter the following information into the spreadsheet:
- Account:Â Enter the name of each account from McDonald's financial statements.
- Current year:Â Enter the value of each account from McDonald's current year financial statements.
- Prior year:Â Enter the value of each account from McDonald's prior year financial statements.
Full Answer Section
- Calculate the following ratios using the spreadsheet:
- Current ratio: Current assets / Current liabilities
- Quick ratio: (Cash + Marketable securities + Accounts receivable) / Current liabilities
- Total debt to equity ratio:Â Total debt / Total equity
- Return on equity:Â Net income / Total equity
- Return on assets:Â Net income / Total assets
- Net profit margin:Â Net income / Revenue
- Gross profit margin:Â (Revenue - Cost of goods sold) / Revenue
- Operating margin:Â (Revenue - Cost of goods sold - Operating expenses) / Revenue
| Internal factors | Weight | Rating | Weighted score |
| Strengths | |||
| Strong brand recognition | 0.20 | 5 | 1.00 |
| Global reach | 0.15 | 5 | 0.75 |
| Efficient supply chain | 0.15 | 4 | 0.60 |
| Loyal customer base | 0.10 | 5 | 0.50 |
| Financial strength | 0.10 | 4 | 0.40 |
| Weaknesses | |||
| High reliance on franchising | 0.15 | 3 | 0.45 |
| Rising costs of food and labor | 0.15 | 4 | 0.60 |
| Competition from other fast food restaurants | 0.10 | 4 | 0.40 |
| Negative publicity related to unhealthy food | 0.10 | 3 | 0.30 |
| Slow growth in mature markets | 0.10 | 3 | 0.30 |
- Expand into new markets
- Develop new products and services
- Invest in marketing and advertising to maintain brand recognition
- Continue to improve supply chain efficiency
- Reward customer loyalty
- Reduce reliance on franchising
- Find ways to reduce costs of food and labor
- Differentiate McDonald's from other fast food restaurants
- Address negative publicity related to unhealthy food
- Focus on growth in emerging markets