Ratio Analysis of Starbucks vs Mcdonald’s

Running Head RATIO ANALYSIS Starbucks breadbasket & McDonalds poto dimensionn McDonalds Corpo dimensionn McDonalds Corpo balancen operates in the nourishment service industry. The society has its restaurants in much than 100 countries of the world. McDonalds, the worlds largest food chain is headquartered in U. S. having an employee population of 390000 (Ab bring out McDonalds , 2008). Starbucks Corpo symmetryn Seattle based, Starbucks Corpo dimensionn is the jumper cable coffeehouse chain in the world. The company has its operations in more than 44 countries. The main products offered by Starbucks various kinds of drinks, snacks, coffee beans.The company besides operates in the field of marketing of music, books (The Company, 2008). residueality analytic thinking ratio Analysis (2007) RatiosStarbucksMcDonalds legitimate Ratio0. 790. 80 Quick Ratio0. 300. 67 Debt Equity Ratio1. 340. 92 trademarked Ratio0. 430. 52 Solvency Ratio0. 570. 48 Inventory disturbance Ratio12. 1 3118. 77 hoggish bread Ratio (%)23. 3434. 69 electronic network Profit Ratio (%)7. 1515. 67 way out on Proprietors Funds (%)29. 4515. 67 Earning Per Shargon0. 912. 06 Current Ratio Current Ratio may be defined as the kindred mingled with menstruum assets and current liabilities.It is similarly known as working jacket ratio or 2 1 ratio. It is reckon by dividing the current assets by current liabilities. The main components of this ratio are current assets and current liabilities. Current assets of a stanch represent those assets which can be, in the ordinary rail of line of reasoning, converted into cash deep down a period not transcend one year. Current liabilities mean those obligations which are to be paid within a period of one year of current assets or by creation of current liabilities (Van Horne, Wachowicz & Bhaduri, 2005).Current ratio of the Starbucks stomach and McDonalds Corporation is . 79 and . 80 respectively in the year 2007. There is little divagatio n in the current ratio of both the companies. The ratio reflects weak runniness position of both the companies and it shows that the companies do not have short termination solvency. Liquidity position can be improved to some goal and can be made equivalent to industry number. The industry average of current ratio is . 90 1. Quick Ratio This ratio is excessively helpful in analyzing short term monetary position of a business.Quick ratio is the measure of the instant debt paying ability of the business enterprise, hence it is called quick ratio (Van Horne, Wachowicz & Bhaduri, 2005). A quick ratio of 11 is considered as an ideal ratio. If the liquid ratio is more than 11, the financial position of the firm seems to be sound and good. On the early(a) hand, if the ratio is slight than 11 the financial position of the firm is unsound. Quick ratio of Starbucks is . 301 and McDonalds ratio is . 671. There is tall difference amidst the quick ratios of both the corporations.McDona lds liquidness position is much better than Starbucks. boilersuit, the short term liquidity position of both the firms is quite an poor because both the ratios are less than the desired norms. For instance, current ration should be 21 whereas, it is 11 approximately. Similarly the liquidity ratio is much less than 1 as compared to ideal standard of 11. Therefore, the companies will face difficulties in current obligations on maturity. Debt Equity Ratio This ratio indicates the congenator proportion of debt and equity in financing the assets of a firm.Debt Equity ratio reflects the relative claims of creditors and shareholders against the assets of a firm. The industry average of ratio is . 421. Debt equity ratio of McDonalds is . 921 which is luxuriouslyly satisfactory as normally the ratio of 11 is considered reasonable. The Starbucks ratio is 1. 341 which is very postgraduate. A high debt equity ratio has serious implications from the firms maculation of view. A high proport ion of debt in the capital structure precede to inflexibility in the operations of the firm as creditors would exercise impel and interfere in management. proprietorship Ratio Proprietary ratio establishes relationship between proprietors or shareholders funds and tally assets of the business. This ratio highlights the general financial strength of the firm. It is of great importance to creditors since it enables them to find out the proportion of shareholders funds in the total assets employ in the business. The ratio of Starbucks is . 431 and for the McDonalds it is . 521. though, ratios are quite similar but McDonalds again has a better position than Starbucks Corporation. Solvency RatioThis ratio measures the long term solvency of the business. It reveals the relationship between total assets and total external liabilities. This ratio measures the proportion of total assets provided by creditors of the firm i. e. what set out of assets being financed from loans (Van Horne, Wachowicz & Bhaduri, 2005). The total assets of Starbucks and McDonalds are more than total liabilities which indicates that the company is solvent. So, the higher the ratio, the grater is the amount of creditors that is being used to generate dinero foeman the possessors of the firm.The difference in both the companies ratio is small but however Starbucks has better performance than McDonalds in terms of solvency. Inventory Turnover Ratio The ratio indicates the number of time entry is replaced during the year. It measures the relationship between the terms of goods sold and the inventory aim. The inventory turnover ratio measures how quick inventory is sold (Van Horne, Wachowicz & Bhaduri, 2005). The inventory turnover ratio of Starbucks is 12 times while McDonalds ratio is 118 times. McDonalds has an efficient inventory management.Whereas Starbucks has minuscule inventory turnover ratio and it is unsatisfactory. In general, a high inventory turnover ratio is better than a low ratio. A high ratio implies good inventory management. A very low level of inventory has serious implications. It adversely affects the ability to meet customer study as it may mot cope up with its customer requirements. Gross Profit Ratio The ratio expresses the relationship of gross earn on sales to net sales in terms of percentage (Van Horne, Wachowicz & Bhaduri, 2005). Goss remuneration is the result of the relationship between prices, sales volume and costs.Gross profit marge of Starbucks Corporation is 23% whereas the ratio for McDonalds is 35%. McDonalds ratio is high as compared to Starbucks which is a sign of good management. It implies that the cost of production of the firm is relatively low. The McDonalds has reasonable gross valuation reserve which ensures commensurate coverage for operating expenses of the firm and ample return to the owners of the business, which is reflected in the net profit margin. Net profit Ratio This measures the relationship betwe en net profits and sales of a firm.The net profit margin is indicative of managements ability to operate the business with sufficient success not only to recover revenues of the period, the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also leave a margin of reasonable compensation to the owners for providing their capital at risk (Van Horne, Wachowicz & Bhaduri, 2005). Net profit ratio of McDonalds and Starbucks is 15. 67% & and 7. 15% respectively. McDonalds is generating adequate returns for its owners.On the other hand, Starbucks net profit margin shows inadequate returns to its owners. Overall efficiency and profitability of McDonalds is higher than Starbucks. Return on Proprietary Funds The ratio expresses the percentage relationship between net profit and proprietors funds or shareholders enthronement (Van Horne, Wachowicz & Bhaduri, 2005). It is used to specify the earning power of shareholders investment. R eturn on proprietors funds for McDonalds is 15. 7% and for Starbucks it is 29. 5%. Starbucks has better performance and higher return than the McDonalds. Earning Per ShareThe rate of dividend on shares depends upon the amount of profits darned by the firm. Whatever profit remains, afterwards meeting all expenses and paying preference share dividend, belongs to equity shareholders (Van Horne, Wachowicz & Bhaduri, 2005). These are the profits earned on equity share capital. The earning per share is calculated by dividing the profit available to equity shareholders by the number of shares issued. This is a popular ratio as it measures the profitability of a firm from owners standpoint. McDonalds EPS is higher than Starbucks which shows that the market price of the firm would be greater.It will also help the company to raise additional capital without any difficulty. This ratio plays an important in comparison of two companies from investment point of view. Investment Decision I would like to invest in McDonalds Corporation as the overall performance and productivity is high for the firm. The liquidity analysis performed through current ratio and quick ratio reveals that the McDonalds is better in terms of liquidity position. The company also has satisfactory position in terms of long term solvency. Though solvency ratio of Starbucks is higher but overall McDonalds has good financial position.Firm is able to quickly convert various assets into cash. McDonalds has high profit margins which is necessary for the higher returns to the shareholders. It shows that the resources are effectively utilized at the firm. EPS is very high which is necessary for the investment. Thus, investment in McDonalds Corporation is beneficial and it would give higher returns. References About McDonalds (2008). Retrieved November 19, 2008, from http//www. mcdonalds. com/corp/about. html McDonalds Corp Financial Statement. (2008). MSN Money. Retrieved November 19, 2008, from http//moneyce ntral. sn. com/investor/invsub/results/statemnt. aspx? token=USMCD&lstStatement=Balance&stmtView=Ann Starbucks Corp Financial Statement. (2008). MSN Money. Retrieved November 19, 2008, from http//moneycentral. msn. com/investor/invsub/results/statemnt. aspx? Symbol=SBUX&lstStatement=Balance&stmtView=Ann The Company. (2008). Retrieved November 19, 2008, from http//www. starbucks. com/aboutus/overview. asp Van Horne, J. C. Wachowicz, J. M. & Bhaduri, S. N. (2005). Fundamentals of Financial Management (12th Ed. ). (pp. 130-133). unify Kingdom Pearson Education.