Ratio Analysis of Starbucks vs Mcdonald's

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Running Head: RATIO ANALYSIS

Starbucks Corporation & McDonalds Corporation

McDonald’s Corporation
McDonald’s Corporation operates in the food service industry. The company has its restaurants in more than 100 countries of the world. McDonald’s, the world’s largest food chain is headquartered in U.S. having an employee population of 390000 (About McDonald's..., 2008). Starbucks Corporation

Seattle based, Starbucks Corporation is the leading 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 also operates in the field of marketing of music, books (The Company, 2008). Ratio Analysis

Ratio Analysis (2007)

RatiosStarbucksMcDonalds
Current Ratio0.790.80
Quick Ratio0.300.67
Debt Equity Ratio1.340.92
Proprietary Ratio0.430.52
Solvency Ratio0.570.48
Inventory Turnover Ratio12.13118.77
Gross Profit Ratio (%)23.3434.69
Net Profit Ratio (%)7.1515.67
Return on Proprietors' Funds (%)29.4515.67
Earning Per Share0.912.06

Current Ratio
Current Ratio may be defined as the relationship between current assets and current liabilities. It is also known as working capital ratio or 2: 1 ratio. It is calculated by dividing the current assets by current liabilities. The main components of this ratio are current assets and current liabilities. Current assets of a firm represent those assets which can be, in the ordinary course of business, converted into cash within a period not exceeding 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 Corporation and McDonalds Corporation is .79 and .80 respectively in the year 2007. There is little difference in the current ratio of both the companies. The ratio reflects weak liquidity position of both the companies and it shows that the companies do not have short term solvency. Liquidity position can be improved to some extent and can be made equivalent to industry average. The industry average of current ratio is .90: 1. Quick Ratio

This ratio is also helpful in analyzing short term financial 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 1:1 is considered as an ideal ratio. If the liquid ratio is more than 1:1, the financial position of the firm seems to be sound and good. On the other hand, if the ratio is less than 1:1 the financial position of the firm is unsound. Quick ratio of Starbucks is .30:1 and McDonald’s ratio is .67:1. There is high difference between the quick ratios of both the corporations. McDonald’s liquidity position is much better than Starbucks. Overall, the short term liquidity position of both the firms is quite poor because both the ratios are less than the desired norms. For instance, current ration should be 2:1 whereas, it is 1:1 approximately. Similarly the liquidity ratio is much less than 1 as compared to ideal standard of 1:1. Therefore, the companies will face difficulties in current obligations on maturity. Debt Equity Ratio

This ratio indicates the relative 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 .42:1. Debt equity ratio of McDonalds is .92:1 which is highly satisfactory as normally the ratio of 1:1 is considered reasonable. The Starbucks ratio is 1.34:1 which is very high. A high debt equity ratio has serious implications from the firm’s point of view. A high proportion of debt in the capital structure lead to inflexibility in the operations of the firm as creditors would exercise pressure...
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