Financial Statement Analysis Project.
The two companies that I will be comparing in this project are McDonalds and Wendy's. Both of these companies are competitors in the same industry. Im using the information from their 2001 Financial Statements.
Debt-to-Assets Ratio.
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When comparing the debt-to-assets ratio of McDonalds and Wendy's, you have to divide the firm's total liabilities by their total assets. Essentially, the debt-to-assets ratio is the primary indicator of the firm's debt management. As the ratio increases or decreases, it indicates the firm's changing reliance on borrowed resources. The lower the ratio the more efficient the firm will be able to liquidate its assets if operations were discontinued, and debts needed to be collected. In 2001 Wendy's had $2,076,043 worth in total assets and $846,264 in total liabilities. When divided, Wendy's has the lower ratio of the two competitors at 40%. This means that they would take losses of 40% if operations were shut down, and the cash received from valuable assets would still be sufficient to pay off the entire debt. It also means that 40% of Wendy's assets are made through debt. McDonalds in 2001 had $12,545.3 (in millions) of total liabilities and $22,534.5 (in millions) of total assets. After doing the math, McDonalds ends up with a ratio of 56% which is higher than Wendy's by sixteen percent. This means that there is more default on McDonald's liabilities, which can be a costly event from lender's perspective. McDonalds makes 56% of all its assets through debt. In reality, it's not good to have a debt-to-assets ratio over 50%. It's also not good to have a debt-to-assets ratio that is too low because that shows that you have money that isnt being used to gain future economic profit. So a stable percentage closest to 50% is wanted. When looking at both of the financial statements, even though McDonalds may have a higher debt-to-assets ratio, it doesnt necessarily mean that McDonalds is in a worse situation than Wendy's.
