Question

Financial ratios are essential to provide an accurate valuation of a firm. Select a publicly traded firm of your choice. Select one ratio each in the areas of (a) performance, (b) activity, (c) financing, and (d) liquidity warnings. Provide an evaluation of the selected firm's strengths and weaknesses. Based on the ratios you selected, how well does your chosen firm perform? Explain.

Answer 1

Answer:

Firm: We consider the McDonald's Corporation and their financial statements are taken from their respective web sites.

a) Performance Ratio:

These proportions uncover execution of a firm in its business for a given time frame. These proportions measure profitability of an organization and furthermore known as - Profitability Ratios: The proportions identified with this are Gross Profit Margin, Operating Profit Margin, ROE and ROA

Operating Profit Margin = Operating Profit/Revenue

=7,145,500/25,413,000

Operating Profit Margin = 0.2811749 or 28.11749%

This proportion discloses to us that McDonald's is winning 28.11749% of benefit, which is a decent rate.   

b) Activity Ratio:

These proportions are utilized to quantify by and large effectiveness of a firm in using its advantages. The proportions relating are Asset Turn over Ratio, Inventory Turn over Ratio, Receivables Turnover Ratio, Payables Turnover Ratio.

Total Asset Turnover = Revenue/Total Assets

= 25,413,000/37,938,700

Total Asset Turnover = 0.6698437

This proportion uncovers that McDonald's is creating $0.6698 of income for even/$1 of advantages.

c) Financing Ratio:

These proportions talk about the aggregate obligation inferred by a firm over its value. These proportions are otherwise called Solvency Ratios and give an understanding of company's capital structure. The proportions are Debt-Equity Ratio, Debt Ratio, Debt-to-resources proportion and Interest inclusion proportion.

Debt Ratio = Total Liabilities/Total Assets

= 30,850,800/37,938,700

Debt Ratio = 0.8131749

This proportion reveals to us that McDonald's has 81.31749% of obligation in its aggregate resources. Such dimension of obligation isn't alluring. In any case, to discover genuine picture, we should more delve in to accounting report and examine what all liabilities depend on.

d) Liquidity Ratios:

These proportions estimates an association's capacity to meet its short term liabilities. The proportions are Current Ratio, Quick Ratio, Cash Ratio.

Current Ratio = Current Assets/Current Liabilities

= 9,643,000/2,950,450

Current Ratio = 3.268315

The present proportion of 3.268315 implies that McDonald's has $3.268315 to pay $1 of obligation, which is a decent figure.