ACC 280 Financial Analysis Final - Material University of Phoenix
ACC 280 Financial Analysis Final
Financial Analysis
XACC/280
University of Phoenix
Financial Analysis
The financial health of an organization is an essential piece of information used by investors to assess how well the organization is performing and to make informed decisions about whether to purchase stock or remain invested. The annual report of a publicly traded company is available for anyone to review; it discloses the financial health of the company to potential or current investors. Investors use the annual report to determine what the company plans to do in the future, as well as compare the financial information from the previous year(s). Annual reports show if the company’s sales, assets, and liabilities have increased, decreased, or stayed the same. The following is an analysis of McDonald’s Corporation 2010 Annual Financial Report, and will compare the financial health of the company, explain why it is worth investing, and provide analyses to support the investment decision.
McDonald’s was ranked 111 on Fortune 500’s annual ranking of America’s largest corporations in 2010 (Fortune 500, 2011). The restaurant is one of the largest fast-food chains in the world and experienced many financial highs in 2010. Revenues increased 6% and the guest count rose by 4.9%, in addition to the Company returning $5.1 billion to shareholders (McDonald’s Corporation, 2011, p.11). These are just glimpses of what the organization accomplished over the course of a year. In order to provide more information on McDonald’s financial health analyses were performed and the results were evaluated. There are several tools used to analyze financial statements: vertical analysis, horizontal analysis, and ratio analysis. These analyses help evaluate an organization’s profitability, solvency, and liquidity (Weygandt, Kimmel, & Kieso, 2008).
According to Businessdictionary.com (2012), a vertical analysis shows the relationship between items on a financial statement by expressing those amounts as percentages. A vertical analysis performed on McDonald’s Consolidated Statement of Income showed that 67.4% of sales were generated by Company-operated restaurants and 32.6% of sales from franchised restaurants, an increase of .6% from 2009 (McDonald’s Corporation, 2011). The analysis also showed that a majority of the revenue earned was generated through the restaurants owned by the Company, a trend that continued from the previous years; franchised restaurants had a smaller percentage of the total revenue. The vertical analysis of McDonald’s Operating Cost and Expenses showed that 2009 and 2010 were similar as far as percentage of total revenue versus expense. The operating costs and expense decreased by 1% in 2010, which indicates that McDonald’s spent less in operating costs and revenue had increased from the year before. Twenty-two percent of McDonald’s operating costs were in food and paper materials, the largest portion of expense. Payroll and employee benefits were similar to 2009, maintaining 17% of operating cost, a .4% decrease (McDonald’s Corporation, 2011).
According to Weygandt, Kimmel, & Kieso (2008),“horizontal analysis evaluates a series of financial statement data over a period of time [and] its purpose is to determine the increase or decrease that has taken place [over that specific period of time]” (Ch.15, p.699). A horizontal analysis performed on McDonald’s Consolidated Balance Sheet revealed that the Company’s total assets increased 27.9% from 2009, a gain of almost a million dollars. The highest increase in assets for 2010 was 52.6% in prepaid expenses (McDonald’s Corporation, 2008). This increased by over half from the previous year. One important revelation the horizontal analysis showed was there were no decreases in assets in 2010, which indicates the company continues to grow. The horizontal analysis of the 2010 current liabilities showed a decrease in total liabilities of 2.1% from 2009. Although there was almost a 50% increase in accounts payable from the previous year, the most significant decrease was in long-term debt by -54%. McDonald’s Corporation paid off almost half of the maturities of long-term debt, which indicates finances improved from the previous year (McDonald’s Corporation, 2011).
Ratio analysis are performed to show the mathematical relationship between specific items from the financial statement’s data (Weygandt, Kimmel, & Kieso, 2008). There are three forms of ratio analysis: liquidity, profitability, and solvency ratios. The liquidity ratio measures the short-term ability of a company to pay off debts and still have cash leftover (Weygandt, Kimmel & Kieso, 2008). The current ratio measures liquidity and if the company can pay off debt. McDonald’s current ratio for 2010 was 1.49:1, which indicates that for every dollar of current liabilities, McDonald’s has $1.49 of current assets. The current ratio improved from 2009 showing the Company’s liquid assets increased. An acid-test shows immediate liquidity because it computes cash, short-term investments, and receivables against the current liabilities. McDonald’s acid-test ratio for 2010, 1.68:1, showed an increase from the year before and suggests the company could liquefy immediate assets if necessary.
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