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Financial Accounting: MCD and WEN

Ratio Computations for Profitability and Risk Analysis
by

Rita Medina-Fagerholm

on 20 June 2013

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Transcript of Financial Accounting: MCD and WEN

Financial Accounting:
VS
Ratio Analysis
R.O.A.:Rate of Return on Assets
ROA ANALYSIS
R.O.C.E.:
R.O.C.E. ANALYSIS
CURRENT RATIO ANALYSIS
CURRENT RATIOS
QUICK RATIOS
QUICK RATIO ANALYSIS
LIABILITIES TO ASSETS RATIO
Overall Liquidity Risk
RECOMMENDATIONS FOR
RECOMMENDATIONS FOR
Overall Profitability
Thank You for Dining With Us!
References
Financial Statements Attached
Rate of Return on Common Shareholder's Equity
Wendy’s, founded in 1969, is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving food.

Wendy's International, Inc. is a subsidiary of The Wendy's Company.
World's #3 hamburger chain in locations (behind McDonald's & Burger King)
More than 6,575 stores in the US and about 20 other countries.
About 1,400 are owned by the company, others are franchised.
105 Wendy’s restaurants in partnership with Tim Hortons, Inc, a quick-service restaurant chain in Canada.
44,000 Employees
The major players in the FAST FOOD MARKET, which generates around $120B in annual revenues, are:
Domino's, Inc.
Burger King Corporation
Wendy's International, Inc.
Jack in the Box, Inc.
Yum! Brands, Inc.
Doctor's Associates, Inc.
McDonald's Corporation.

The fast food industry is fragmented with the seven major competitors only account for 45% of total revenues
Wendy’s Co. ( NYSE:WEN)
June 13, 2013 Revenue: $2.51 B
$5.98USD Net Income: $5.57 M
+0.05 (0.84%) 2012 Sales Growth: 3.0%
McDonald's Corporation (NYSE:MCD)
June 13, 2013 Revenue:$27.57 B
$98.88USD Net Income: $5.46 B
+0.64 (0.65%) 2012 Sales Growth: 2.1%
McDonald’s Corporation, founded in 1955, franchises and operates McDonald’s restaurants in the global restaurant industry with a menu at various price points providing value.

34,480 restaurants in 119 countries
6,598 are operated by the Company
27,882 are franchised or licensed (including 3,663 licensed to foreign affiliates-primarily Japan)
440,000 Employees
(Net Income + Interest Expense) / Average Total Assets during period
Wendy’s
2010= -0.94
[-4,325,000 +(–118,400)] / 4,732,653
2011= 2.28
[9,875,000 +(–114,100)] / 4,289,129
2012= 1.62
[7,083,000 +(–98,600)] / 4,303,199
McDonald’s
2010= 0.14
[4,946,300,000 + (–451,000,000)] / 31,975,199,200
2011= 0.15
[5,503,100,000 + (–493,000,000)] / 32,989,898,400
2012= 0.14
[5,464,800,000 + (–517,000,000)] / 35,386,500,000
McDonald’s
2010= 0.34
(4,946,300,000 - 0) / 14,634,200,000
2011= 0.38
(5,503,100,000 - 0) / 14,390,200,000
2012= 0.36
(5,464,800,000 - 0) / 15,293,600,000
(Net Income – Pref Stock Div) / Avg Common Stockholder’s Equity during period
*“There were 100,000 shares authorized and no shares issued of preferred stock throughout 2012, 2011 and 2010.”
Wendy’s
2010= 1.79
754,788,000 / 421,486,000
2011= 2.03
746,936,000 / 368,268,000
2012= 2.47
709,827,000 / 286,862,000
McDonald’s
2010= 1.49
4,368,500,000 / 2,924,700,000
2011= 1.25
4,403,000,000 /3,509,200,000
2012= 1.47
4,922,100,100 / 3,403,100,000
Current Assets / Current Liabilities
Wendy’s
2010= 1.42
(512,508,000 + 84,258,000) / 421,486,000
2011= 1.48
(475,231,000 + 68,349,000) / 368,268,000
2012= 1.79
(453,361,000 + 61,164,000) / 286,862,000
McDonald’s
2010= 1.22
(2,387,000,000 + 1,179,100,000) / 2,924,700,000
2011= 1.05
(2,335,700,000 + 1,334,700,000) /3,509,200,000
2012= 1.09
(2,336,100,100 + 1,375,300,000) / 3,403,100,000
Highly liquid assets (Cash + Receivables) / Current Liabilities
Wendy’s
2010= 0.54
2,569,480,000 / 4,732,654,000
2011= 0.54
2,304,599,000 / 4,300,668,000
2012= 0.54
2,317,344,000 / 4,303,199,200
McDonald’s
2010= 0.54
17,341,000,000 / 31,975,199,200
2011= 0.56
18,599,699,200 / 32,989,898,400
2012= 0.57
20,092,900,400 / 35,386,500,000
Liabilities / Assets
Lorrie Federico Nader, Steven Toto and Rita Medina
What is profitability?
The likelihood that a specific level of net income will be achieved.
Because MCD has such larger revenues, net income and volume of sales, one might see MCD as the better bet.

Looking at the ROAs, WEN is trying to turn things around.

But is it enough with dramatically smaller ROCEs to attract future investors and ensure solid financial backing?
Big Difference from Current Ratio for WEN!
Highly Liquid Assets Change Things Up!
And WEN takes the lead!!!
http://quote.morningstar.com/stock-filing/Annual-Report/2012/12/30/t.aspx?t=XNAS:WEN&ft=10-K&d=7b6039c5436c881e30cda0706c735781

http://quote.morningstar.com/stock-filing/Annual-Report/2012/12/31/t.aspx?t=XNYS:MCD&ft=10-K&d=aa98bb6ce93b56156a6ebbd4d961c9a1

http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=WEN

Stickney, C. P., Weil, R. L., Schipper, K., Francis, J. (2010) Financial accounting: An introduction to concepts, methods, and uses (13 e.). Canada: South-western Cengage Learning.
In 2012, MCD growth Revenues advanced 7% to $6.6 billion and total franchised sales grew 8% to $2.1 billion for the quarter

Fluctuations to Net Income have been closely matched by fluctuations in Avg Common Stockholder's Equity

Investors would need to be weary of WEN's stockholder's equity. It is almost at zero. WEN not as efficient and therefore results in less profits, less to invest and less to their stockholder.

BUT Both ROCEs remained fairly flat over the past three years.
Growth in recent years is expected to continue, reputation of being consistent.

Global business is helping to grow, but concerns of revenues domestically. Make sure local business plan is still in focus.

Chipotle expected to grow sales 22% to $2.8 billion. Will this help domestic sales?

Combined with a current dividend yield of 2.9%, still appeals to investors.

By tying up as little capital as possible in inventory, MCD can use the cash to open more stores, increase advertising budget, or buy back shares. Eases strain on cash flow, allowing more flexibility .
An indicator of how profitable a company is relative to its total assets.
How efficient is management at using its assets to generate earnings.
WEN is showing stronger in terms of paying off their short-term debt quickly and easily.

With WEN's current liabilities decreasing and a shift in their highly liquid assets, they have a lower liquidity risk than MCD.

Long term, both are managing their total debt well in relation to their total assets. Although WEN's 2010 Net Income might make creditors nervous, they've had a good showing in the last two years.

MCD's liabilities and assets have both increased over time, but at almost the same rate resulting in a slight increase.

Risk adverse investors may not appreciate that MCD's liabilities have gone up each year.
What do the Creditors think?
MCD remains steady
WEN shows improvements, but may be unpredicatable
Ooh!
Ratios are so close!
Analysts project WEN will be lucky to log 4% growth and total sales of $2.5 billion.

Look to invest in higher profit yielding items like coffee drinks and smoothies.

Focus on appeal to youth and families more. Playgrounds?

Global expansion is key to increase overall revenues.

Strategic location planning: Beach Kiosk Game with MCD!
MCD has increased buying over WEN which results in better economies of scale

WEN has also increased capital expenditure suggesting WEN is still in growth mode and maybe so since their merger.

WEN's dramatic increase in Net Income in 2011 might look promising to investors, but 2012 implies an unpredictable ROA

MCD, which remains steady, promises steady profitability
Measures performance in using and financing assets to generate earnings. Incorporates operating, investing, and financing decisions.
1.5 or greater can meet near-term operating needs sufficiently and WEN looks more promising here

Over 3 yrs, MCD's C.R. has been overall flat. WEN's ratio has increased an increasing rate.

The main driver is WEN's Current Liabilities decreasing each year. As the denominators decreased, the overall ratio has increased.

Investors appreciate the large jump in this ratio over the past three years because if necessary, all liabilities could be paid off with extra cash/receivables to spare
Indicates ability to meet short-term obligations.
Includes only highly liquid assets, should be about one-half of the Current Ratio.
RED FLAG
Wendy’s
2010 = -0.002
(-4,325,000 - 0) / 2,163,174,100
2011= 0.005
(9,875,000 - 0) / 1,996,069,000
2012= 0.004
(7,083,000 - 0) / 1,985,855,000
WEN is the clear leader here as their Q.R. increases at an increasing rate.

WEN most likely has better results because much of MCD's cash is tied up in noncurrent assets such as buildings for all global locations. If something went wrong, MCD might struggle to pay off debts since it would take time to liquidate fixed assets.

WEN's assets have changed over time. An investor is looking for the Q.R. to be about half of the C.R. and WEN is showing better here.

Both are quickly turning inventory into cash with quick turnover, but WEN might be focusing more on this than MCD.
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