Financial Performance Analysis: McDonald's vs. A&W - Comparing Liquidity, Asset, Profitabi, Assignments of Finance

Download Financial Performance Analysis: McDonald's vs. A&W - Comparing Liquidity, Asset, Profitabi and more Assignments Finance in PDF only on Docsity! 1. Introduction The main target of listed company that we looked for is McDonald. McDonald’s Corporation is an America well known fast food company that established in 1940 which was operated by the two American entrepreneurs Richard James McDonald and Maurice James McDonald in San Bernardino, California, United States. The logo of McDonald is a gold color arch shape with a capital letter ‘m’ which was introduced in 1953. Besides that, McDonald also turned their company into a franchise that are now operate in more than 120 countries around the world. McDonald is a fast food restaurant that provides breakfast, desserts, soft drinks, coffee, wraps and milkshakes. In Malaysia, our first McDonald restaurant was established in 29 April 1982 at Jalan Bukit Bintang, KL which brings in by the founder of Berjaya Corporation Vincent Tan Chee Yioun - a famous entrepreneur in Malaysia. On Dec 1988, McDonald’s Malaysia opened its very first drive-thru service restaurant at Titiwangsa, Jalan Pahang. On Jan 1993, the first McDonald franchised in Malaysia was located at Sibu, Sarawak. Besides that, the delivery service was first introduced on March 1994. On Feb 1995, McDonald’s Malaysia is the first Malaysian Fast Food Restaurant to be recognized by the Islamic Development Department of Malaysia (JAKIM). This recognition ensures that all McDonald restaurant comply with the Halal standards and regulations set by JAKIM. On September 2003, McDonald launched a campaign known as “I’m Lovin’ it” which first appeared in Munich, Germany. The first time the slogan was used was in a commercial showing people all over the world having fun and occasionally eating a hamburger, finishing off with McDonalds’ “M” and the phrase “I’m Lovin’ it”. On April 2007, McDonald’s Malaysia celebrates its 25th Anniversary. As a conclusion, there are total of 282 McDonald outlets operating in Malaysia until year 2020. (McDonald's, 2020) (I'm lovin' it! McDonald's® Malaysia | Halal, 2020) The second listed company that we looked for is A&W Restaurants. A&W Restaurants is an America fast food restaurant that established in 1923 and their first restaurant was founded in Sacramento, California who was introduced by Roy W. Allen and his employee Frank Wright who partnered with Allen in 1922. The ‘A&W’ Restaurants company’s name was taken from their last name Allen and Wright. A&W Restaurants provides food and beverages such as hot dogs, French fries, hamburgers and root beer. Besides that, A&W Restaurants also provides a drive-in restaurant that have carhops, which means a service that the waiter and waitress bring fast food to the customers who waiting on their car. However, in Malaysia, A&W franchise was brought in at year 1963 and the first outlet was operated in Jalan Tuanku Abdul Rahman which was introduced by Mr and Mrs Lie Boff from United States of America. After that, the first drive-in restaurant was established in year 1965 located at Section 52, Petaling Jaya. Few years later, A&W Malaysia was then brought over by the Chief Executive Officer of Eng Food Group and has aggressively expanded to reshape and expand its business. Moreover, there are 49 outlets in Malaysia until year 2020 and the group had decided to expand their outlets until its reach 124 outlets by the year of 2024. Besides that, A&W Malaysia also recognized by the Department of Islamic Development Malaysia (JAKIM) with the halal standard and regulations set by JAKIM. (A\u0026W Restaurants, 2020) (A&W Malaysia History — A&W Malaysia | More Than The Usual, 2020) There are few reasons we choose A&W Restaurants as the benchmark company. Firstly, McDonald's and A&W restaurants both operate fast food restaurants. Other than that, McDonald’s and A&W restaurants are both a historical and well-known company that operated over 80 years around the world. Both companies are selling worldwide and having franchises in many countries with many branches operated in every country. Besides, they are selling almost same kind of food type and the price are almost the same but with their own symbolic differences through quality of food and marketing strategies. Furthermore, they make customers more convenient to order their foods online and provides food delivery services to deliver food for them. Lastly, there might be alternative choices for each other which means consumers can make a choice between McDonald’s product and A&W’s product. Total Assets Profitability ratio is a tool to measure the ability of management to generate profits from the use of firm’s capital and assets. The examples of profitability ratio are gross profit margin, net profit margin, return on total assets and return on equity. Return on total assets is chosen in calculating the net income to total assets. Hence, the higher the return of total assets, the higher the net income earn by each asset. Return on total assets is calculated by profit after tax over total assets. From the year 2018 to year 2019, return on total assets had decrease by 0.054, which is from 0.181 to 0.127.(Yahoo is now a part of Verizon Media, 2020) Therefore, the net profit to each asset of McDonald’s Corporation had decrease. 4) Debt Management Debt management ratio is a set of ratios that measures how effectively a firm manages its debt. It is important as it determines the ability of the company to make its debt payments and survive during tough times. The ratios for debt management include days payable outstanding and debt ratio. ik Return of total assets2019 = Profit After Tax Total Assets = $6,025,400 $47,510,800 = 0.127 Return of total assets2018 = Profit After Tax Total Assets = $5,924,300 $32,811,200 = 0.181 Debt Ratio2018= Total Liabilities =$39070 = 1.19times Total Assets 2018 2019 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 0.18 0.13 McDonald's Corporation Return of total assets Linear (Return of total assets) Year $32811 $47511 Total Assets Debt Ratio2019=Total Liabilities = $55721 =1.17times 2018 2019 1.16 1.16 1.17 1.17 1.18 1.18 1.19 1.19 1.2 1.19 1.17 McDonald's Corporation Debt Ratio Linear ( Debt Ratio) Year 5) Market Value Market value ratios are ratios that relate the firm’s stock price to its earnings and book value per share. Market value is important as it helps investors to determine the worth and value of company before investing in it. A company with high market value is considered to generate high return for the investors. The ratios used to calculate a firm’s market value include price-to-earnings ratio (P/E ratio) and market-to-book ratio (M/B ratio). P/E Ratio2018= Price Per Share Earnings Per Share = $163.03 $6.89 = 23.66 Debt ratio is chosen in measuring McDonald’s Corporation debt management as it measures the percentage of funds provided by creditors. It is calculated by dividing the total debt of the company by its total assets. McDonald’s Corporation has improved its debt management in year 2019 compared to year 2018. This is because McDonald’s debt ratio has decreased from 1.19 times in 2018 to 1.17 times in 2019. (Yahoo is now a part of Verizon Media, 2020) The decrease in debt ratio of McDonald’s Corporation shows that the management is efficient in managing the company’s debt. Lower debt ratio is also more preferred by creditors because there is greater cushion against creditors’ losses in From the data above, we had chosen quick ratio instead of choosing current ratio to calculate the liquidity ratio of the companies. This is because quick ratio is more conservative compared to the current ratio as it has excluded the inventories from the current assets in the calculation as these aspects are more difficult to convert it into cash immediately in a short time period. Quick ratio will only study on those current assets that can be transferred into cash quickly that are able to pay back the debts of the company. Furthermore, it also be able to show the company’s ability in settling a short-term obligation without relying on the sale of inventory as it had been deducted out from the calculation. As the quick ratio increase, there will be more current assets that are able to use it to settle the current liabilities without selling the inventories. The higher of the ratio number, the better a company’s liquidity; the lower the ratio number, the weaker the company financial health and ability to pay debts. From the data above, we can see that at the year of 2019, the quick ratio of A&W is lower than the McDonald’s quick ratio which are 0.734 times and 0.969 times respectively. As we can see that, the McDonald’s corporation has a higher ratio compared to the A&W Inc. which is showing that the McDonald’s corporation has more ability compared to the A&W Inc. in settling the debts in a particular year. This is because McDonald’s corporation is more efficient in converting their current assets into cash to settle their current liabilities and McDonald’s corporation is healthier in their financial condition. McDonald's Corporation A&W Inc. 0 0.2 0.4 0.6 0.8 1 1.2 0.97 0.73 Liquidity Ratio Quick ratio 2019 Linear (Quick ratio 2019) Company's name Ti m es Therefore, it shows that the ability of McDonald’s Corporation in settling short-term obligation is higher and more efficient compared to A&W Inc. McDonald’s Corporation that had been chosen as our benchmark company has a better performance compared to A&W Inc. 2) Asset Management ratio Asset management ratio can be declared as the tool to measure the effectiveness of a company in managing their assets. It can use to measure how well does a company able to utilize its assets to generate revenue in a period. In asset management ratio there are three types of calculation methods that can be used to measure its effectiveness such as inventory turnover ratio, inventory turnover days and day sales of outstanding. The method that we used to calculate the asset management ratio is inventory turnover ratio. This ratio is used to show how many times did the company sold and replaced its assets in each period. By calculating the inventory turnover can allow the company to make the decision on pricing, marketing and purchasing new inventory. (Inventory Turnover, 2020) In the calculation of the inventory turnover ratio, we used the cost of goods sold (COGS) divided to the ending inventory. Inventory Turnover Company McDonald’s Corporation A&W Inc. Cost of Goods Sold (RM) 9,961,200 196,043,000 Inventory (RM) 50,200 7,141,000 Inventory Turnover 198.43 times 27.453 times Inventory Turnover Ratio2019 (McDonald) = Cost of Goods Sold Ending Inventory = $9,961,200 $50,200 = 198.43 times From the data above, we can know that inventory turnover ratio had been chosen to calculate the assets management ratio of both companies which are McDonald’s corporation and A&W Inc. This is because by using the inventory turnover ratio we can clearly know that the number of times for a company to sell and replace its inventory over a period. If the company able to manage its stock well, the stock of the company will be replaced and more often as less stock is generated to achieve a certain amount of sales. A higher amount of ratio implements that the company has insufficient amount of inventory or they have a stronger sale. In other words, if the inventory turnover ratio is lower, it means that the company has excess inventory or it has a lesser sale. Inventory turnover ratio 2019 (A&W) = Cost of goods sold Ending Inventory = $196,043,000 $7,141,000 = 27.453 times McDonald's Corporation A&W Inc. 0 50 100 150 200 250 198.43 27.45 Inventory turnover ratio 2019 Inventory turnover ratio 2019 Linear (Inventory turnover ratio 2019) Company's name Ti m es The debt ratio is the ratio that representing a company's debt to its total assets. It shows the extent to which companies rely on debt to finance assets. The higher the debt ratio, the higher the company's leverage, which also indicate greater financial risk in a company. At the same time, leverage is an important tool for companies to grow, and many businesses find sustainable uses of debt. A low debt ratio means that the company is more stable and opportunity to borrow in the future has no significant risk. (Debt Ratio Definition & Example Debt ratio 2019 (McDonald’s Corporation) = Total liabilities Total assets = $55721 $47511 = 1.17 times Debt ratio 2019 (A&W Inc.) = Total liabilities Total assets = $313,864,000 $182,835,000 = 1.717 times McDonald's Corporation A&W Inc. 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 1.17 1.72 Debt Ratio Return of total assets Linear (Return of total assets) Company's name Ti m es | InvestingAnswers, 2020) A debt ratio greater than 1.0 (100%) indicates that your company has more debt than assets. At the same time, a debt ratio of less than 100% means that the company has more assets than debt. At the year of 2019, the debt ratio of A&W Inc., our selected company is 1.717 times while McDonald’s corporation has the debt ratio of 1.17 times. As we can see that A&W Inc. has a higher ratio compared to McDonald’s Corporation. As a result, it shows that A & W Inc. has taken greater risks than McDonald's. A & W Inc. has difficulty getting loans for any new projects because lenders see them as high-risk assets. Similarly, if a company is liquidated, it may not be able to use its assets to pay all its debts. Therefore, companies must work to improve the debt-to-total assets ratio. For example, a company can issue new shares or other stocks to increase cash flow. With the available cash, it can be used to repay existing debt, thereby reducing the debt burden. Debt reduction will reduce the debt to total assets ratio. 5) Market Value The market value ratio is the ratio that relates a company's stock price to its earnings and book value per share. The ratios are used to determine a company's market capitalization include price-earnings ratio (P/E ratio) and market-to-book ratio (M/B ratio). In this aspect, we have chosen the price-earnings ratio (P / E ratio) to calculate the market value. Price/Earnings (P/E) Company McDonald’s Corporation A&W Inc. Price per share 202.47 38.58 Earnings per share 7.66 1.86 Price/earnings (P/E) ratio 26.43 20.742 P/E Ratio2019 (McDonald’s corporation) = Price Per Share Earnings Per Share = $202.47 $7.66 = 26.43 times P/E ratio 2019 (A&W Inc.) = Price per share Earnings per share = $38.58 $1.86P/E Ratio2019 (A&W Inc.) = Price Per Share Earnings Per Share = $38.58 $1.86 = 20.742 times The price-earnings ratio (P / E ratio) is an assessment of a company's current stock price relative to its earnings per share (EPS). The price-earnings ratio shows current investor demand for company shares. (Price to Earnings Ratio (PE Ratio) Definition, 2020) P/E ratio is also called price multiple or earnings multiple. Investors and analysts use P / E ratios to identify the relative value of a company's stock. It can also be used to compare companies with their own historical records, or to compare entire markets with each other or across markets over time. A higher P/E ratio indicate that the company's stocks are overvalued, or that the investors expect high future growth rates. This shows that the future performance is excellent, the expectations of future growth rates by investors is higher, and indirectly caused them tend to pay a higher price for this. A low P/E ratio means that the company's stocks are undervalued because its stock price is at a relatively low level relative to fundamentals. This pricing error will be a big deal and urge the investors to buy more of the stock before the McDonald's Corporation A&W Inc. 0 5 10 15 20 25 30 26.43 20.74 P/E Ratio Quick ratio 2019 Linear (Quick ratio 2019) Company's name Ti m es product able to sell together popular product and able effectively decrease the risk of obsolete inventory. 2) Increase inventory management MacDonald’s Corporation should improve their inventory management by introduce latest inventory management system likes to computerize all flow of inventory. This will help MacDonald’s Corporation able to monitor their inventory effectively and MacDonald’s Corporation able to make changes based on the demand of relevant inventory. This will able MacDonald’s Corporation to ensure the quality and quantity of inventory in the same time. (Software, 2020) 3) Purchase inventory shrewdly MacDonald’s Corporation should purchase their inventory shrewdly to prevent stock from stock form accumulate. MacDonald’s Corporation should purchase or produce more inventory that able to sell quickly based on the computerized data. This will able MacDonald’s Corporation to maximize their resources. 3) Profitability Ratio From the year 2018 to 2019, return on total assets of MacDonald’s Corporation had decreased by 0.054, which is from 0.181 to 0.127. This is due to increase of total assets. This is not good for MacDonald’s Corporation as the efficiency of MacDonald’s Corporation in utilizing their assets had decreased. In this aspect, our competitor company A&W Inc should be our benchmark company as A&W Inc return on total assets ( 0.242times) is better than McDonald’s Corporation(0.127 times). 1) Disposal of useless assets MacDonald’s Corporation should decompose the assets that unable or not effectively helps the business to generate income. For example, MacDonald’s Corporation should sell off unused warehouse or non- profitable outlets. This able to help MacDonald’s in utilizing their resources. 2) Increase sales method MacDonald’s Corporation should increase sales method to utilize their resources. For example, MacDonald’s Corporation can let the customer to make their order online first instead of making their order at the counter. This able to help MacDonald’s Corporation to decrease their expenses by decrease the number of workers required. Besides, it also able to increase sales indirectly because it brings convenience to the customers especially workers in the urban areas. Through online ordering, customer need not spend time to line up to order their food. 3) Increase Productivity MacDonald’s Corporation should increase their productivity by introducing latest equipment and technology. For example, computerized ordering system and systematic production method able to help MacDonald’s Corporation to increase their productivity in producing goods and services. This able to let MacDonald’s produces more goods with the same resources and lower the production cost per unit. (How Can a Company Increase Its Return on Total Assets?, 2020) 4) Debt Management From the year 2018 to 2019, debt ratio of MacDonald’s Corporation had decreased by 0.02 times, which is from 1.19 times to 1.17 times. This is due to the increase of total assets is more than the increase of total liabilities. This shown that the ability of MacDonald’s Corporation in debt management have improved. In this aspect, our competitor company A&W Inc should not be our benchmark company as A&W Inc debt ratio( 0.717times) is worse than McDonald’s Corporation(0.17 times). 1) Increase sales revenue Macdonald’s Corporation should increase their sales revenue by making promotion or increase price of goods to cover the debt. (How Can a Company Increase Its Return on Total Assets?, 2020) 2) Rent assets MacDonald’s Corporation should rent some assets likes to shop lots instead of buying it as there the money that required to buy some assets is too high and may cause cash flow problem to the business. (How Can a Company Increase Its Return on Total Assets?, 2020) 5) From the year 2018 to 2019, price / earnings ratio of MacDonald’s Corporation has increased by 3.1 times from 23.33 times to 26.43 times. This is due to the increase of share price is higher than the earning per share. This shows that McDonald’s Corporation is becoming more attractive for investors as higher P/E ratio indicates higher returns that McDonald’s Corporation can deliver. In this aspect, our competitor company A&W Inc should not be our benchmark company as A&W Inc price / earnings ratio( 20.742times) is better than McDonald’s Corporation(26.43 times). 1) Promote brand recognition MacDonald’s Corporation should increase brand recognition through create product differentiation and increase brand reputation. These can add value to the company and people are more willing to buy their share as they expect higher future value. 2) Increase dividend MacDonald’s Corporation should increase the amount of dividend given to attract more people to buy their share as people are willing to purchase high price share to receive regular dividend payment, especially when bank interest has high risk form getting financial obligation. (Ratio Analysis: Meaning, Objectives, Advantages, Limitations & Examples, 2020) 1752 Words KIERAN Recommendation McDonalds’ Corporation is the world’s leading fast food restaurant chain with more than 36000 restaurants worldwide, serving more than 69million customers daily in over 100 countries. Although McDonalds’ Corporation is a pioneer in the global fast food industry, McDonalds’ Corporation needs to stay competitive in today’s cutthroat business world so that it would not be eliminated by its competitors. For example, Nokia Corporation used to be the World’s Number 1 Phone Authority. However, due to its lack of innovation and competitiveness, Nokia Corporation was swiped out by its competitor Apple Corporation after Apple Corporation introduced its smartphone, iPhone, into the market. Therefore, in order for McDonalds’ Corporation to remain competitive in the fast food market, I would like to recommend some business strategies. 1. Bulk Purchase McDonalds Corporation can leverage on bulk purchase on its food production materials since it has stores all around the world with a huge market share. As the corporation has high bargaining power, it can negotiate a better deal with its food production materials suppliers to charge lower cost of materials. This will help McDonalds Corporation to reduce its cost of production, at the same time, increasing its purchases from the suppliers if the suppliers continue to give discounted price, which is a win-win strategy for both parties in the long-run. When the cost of production is reduced, the McDonalds’ Corporation can charge lower prices compared to its competitors, which will increase its sales and turnover of its products. 2. Promotion Whenever McDonalds’ Corporation launches its new products, it can leverage on different promotional strategies to promote its products to the targeted market and create customer awareness. McDonalds’ Corporation must be clear on who is its targeted audience when promoting its products before deciding which promotional tool to use. For example, when it launches healthy products like porridge or fruit salads which are targeted to more elderly customers, it should advertise its products more on traditional media like newspapers and radio channels. However, with the rise of internet marketing and social media marketing, McDonald’s Corporation should utilize social media marketing to promote its products and create young customers’ awareness. Other promotional tools that McDonalds Corporation can leverage include organizing corporate-social responsibility activities and events, which will create brand awareness for the corporation. By integrating traditional media marketing tools and digital media marketing tools, it allows McDonald’s Corporation to reach out to different target audience at a wider range. 3. Deliver Quality Products and Services In today’s competitive business world, customers have unlimited choices of products to choose from, be it from your business or your competitors’ businesses. Thus, in order for McDonalds’ Corporation to retain its customers, McDonalds’ Corporation needs to constantly monitor its products and services offered to its customers. McDonalds Corporation needs to deliver quality products and services consistently and continuously to its customers, so that customers will trust and stay loyal to the company. McDonalds Corporation should establish what are the specific experiences that it wants its customers to experience consistently and continuously during their visits, such as being fast, convenient, friendly-service, delicious food, etc., and deliver these experiences to the customers to impress and wow them all the time. Providing products, services and experiences that are inconsistent and low quality are the worse things that McDonalds’ Corporation can ever done to its customers. 4. Innovation& Disruption Businesses today evolve by innovating products and services that can disrupt the industry. A lot of businesses had also changed their business models from Business- to-Consumer Model (B2C) to Consumer-To-Business-To-Consumer Model (C2B2C). C2B2C Model is a business model whereby customers look for the business through an online platform and the business will deliver the products or services to the customers, which is far more disruptive compared to B2C Model whereby businesses like traditional retail shops sell products or services to customers. Successful business organizations that implement C2B2C Model include AliBaba, AirBnB and UBER. McDonalds’ Corporation has also shifted into C2B2C model by creating a McDonalds’ App. By doing so, customers can easily order their food through the app and the food will be delivered to the customers’ doorstep. McDonalds’ Corporation must also constantly be innovative in terms of its products so that it can create a market driven product that can attract customers consistently. “If you do not have a business online, you will be out of business in years to come.” – Bill Gates, CEO of Microsoft. Therefore, if McDonalds’ Corporation is constantly innovative and disruptive in its products and business model, it will strive to be successful in the global fast food industry. 5. Simplify Business Process Since McDonald’s Corporation is a large business corporation with more than 36000 outlets worldwide, the business process might get more complex and complicated as it involves different departments ranging from production to management, different countries and regions around the globe. Therefore, it is necessary for the corporation to consider simplifying the business process in order to have better control of its resources and business operations. Besides, simplifying the process will also allow the employees to serve and add value to customers in a more productive and efficient manner, as what employees desire is the simplicity of doing work without the unnecessary work stress due to complex and complicated work process. Business processes are put in place to speed up business operation and have better control of resources in a more efficient and effective manner, not to complicate things up. Therefore, if McDonalds’ Corporation can create a culture of simplifying business process with transparency, it brings lots of benefits to the corporation which include being transparent to shareholders and investors, produce more productive workers and have better control of its monetary resources. Conclusion In conclusion, McDonalds’ Corporation is still the world’s leading fast food restaurant chain with outlets over 100 countries. Started in 1948 by its founder Ray Kroc in the United States until today being the global fast food market’s leader, McDonalds’ Corporation has gone through a lot of ups and downs to sustain its business. Although McDonalds Corporation is at its success and peak today, but what goes up might come down anytime. This can be seen when Nokia Corporation and Kodak which were once global market leaders in terms of telephone and camera, but were swiped out from the market when smartphones with numerous functions were introduced into the market. Therefore, in order to maintain the sustainability of McDonalds’ Corporation in the competitive global fast food business, numerous business strategies need to be constantly implemented, which include simplifying the business process, bulk purchase to reduce cost, leverage on promotional tools, deliver quality products and services consistently, and being innovative and disruptive in terms of products and business model. However, there are also limitations that keep McDonalds’ Corporation from growing to become more successful, such as economic uncertainties, poor financial performance and bad reputation. Hence, it is extremely crucial for the corporation to keep an eye on the limitations while implementing the business strategies. In short, there are both strengths and weaknesses for McDonalds’ Corporation, what is important for the corporation is to leverage on its strengths and minimize its weaknesses so that it can continue to sustain its business in this cutthroat global business environment. To start a business is easy, but to continue growing the business with sustainability is what separates successful businesses from the rest, which McDonalds’ Corporation is able to do and dominate. (1932 words) WENJIA Recommendation: According to the report above, we can know that there are five aspects that are being considered in determining a company performance which are liquidity ratio, asset management ratio, debt management ratio, profitability ratio and market value ratio. Each of the amount of the ratios can clearly show us the company’s performance for the particular year. In the recommendation below will be financial recommendation based on the data that we counted before and some non-financial recommendations for the McDonald’s Corporation. (80 words) From the report above, we used quick ratio to calculate the liquidity ratio for McDonald’s Corporation for the year of 2018 and 2019. As we know, high liquidity ratio is showing that the company has the ability on repaying the current debts by converting their current assets into cash immediately. Therefore, we can see that our targeted company, McDonald’s Corporation has a higher amount of quick ratio in the year of 2018 which is 1.346 times. (92 words) 1. Get rid of unusable or useless assets in the company In every company there will be some useless or unproductive assets that are just wasting money and occupying space. Therefore, they should sell the assets off as they might have their own value in the market. This way to get rid of the assets is much better compared to the company disposing them as it might become a waste. By getting rid of the unused assets, the company will have more extra cash that enable them to pay back their current liabilities. This is because after selling the assets, the company can have extra cash balances and the company do not have to count out the account’s depreciation and at the same time the ratio amount will be increased relatively. (5 Ways to Improve Your Liquidity Ratios - Invensis Technologies, 2020) (120 words) 2. Control company’s overhead expenses A company should check their company’s expenses on the rental of their outlets, labour’ salaries and wages, professional fees by hiring some professionals in machine apparatus to produce foods or nutritionist, and marketing regularly. As if the company does Quick Ratio2019 = Current Assets – Inventory Current Liabilities = $3,557,900 - $50,200 $3,621,000 = 0.969 times Then, for the profitability ratio, we can see that for 2018, McDonald’s Corporation had achieved 0.181 while 2019 has 0.127 in the return of total assets. The higher the return of total assets means that the company is having a higher net income for each asset. (46 words) 1. Reducing costs In order to generate more profit from the assets, the company is recommended to manage their company’s cost. They can try to obtain best deals with their suppliers such as bulk discount to reduce the cost. Besides, they also can try to cut down whichever unnecessary waste that had been used in their production all the time and reduce the cost for the materials that they are still using it such as reduce the amount of workers that had been employed to cut off the labour costs. (Increase your profitability | Business Gateway, 2020) (87 words) 2. Streamline the process of producing finished goods The company can try to find the most efficient ways to produce their product such as using more machine to produce the food instead of using labour force. This is because labour cost will be much higher than the cost of investing in a machine and the machine can ensure that their working speed is higher than a labour. This is also same as the main objectives of McDonald’s Corporation to be as a fast food restaurant. They can try to find out suppliers in the market that have the more simplified processes to produce food that suitable to use by them to simplify their process of producing goods. (Increase your profitability | Business Gateway, 2020) (108 words) Return of total assets2019 = Profit After Tax Total Assets = $6,025,400 $47,510,800 = 0.127 Return of total assets2018 = Profit After Tax Total Assets = $5,924,300 $32,811,200 = 0.181 In the debt management, the debt ratio in 2018 is 1.19 times while 2019 is 1.17 times. The lower the amount of debt ratio is means that the company is having a better performance in the year. (37 words) 1. Increased Sales and Revenue The company is being recommended to increase their revenue by increase their annual sales, raising price for their products or reducing costs to produce the products. This can help the company to generate more sales that enable them to pay debts. (Strategies Used to Reduce a Company's Debt-To-Capital Ratio, 2020) (41 words) For the market value, the P/E ratio shows in 2018 is 23.66 times while 2019 is 26.43 times. The higher the amount of ratio means that the company had become more attractive to the investors and they willing to pay more to buy their shares. (45 words) P/E Ratio2018= Price Per Share Earnings Per Share = $163.03 $6.89 = 23.66 1. Expand Market An investor will be more consider on buying a share of a company with viability. Therefore, McDonald’s Corporation can try to expand their market by taking part in different field but not just focus on fast food category. They can try to discover out what thing does the investors are interested to attract more potential buyer. (How to increase the market value of your business, 2020) (55 words) Debt Ratio2018= Total Liabilities =$39070 = 1.19times Debt Ratio2019=Total Liabilities = $55721 =1.17times Total Assets Total Assets $32811 $47511 P/E Ratio2019= Price Per Share Earnings Per Share = $202.47 $7.66 = 26.43 Non-financial recommendation: The McDonald’s Corporation can refranchise their restaurants in order to expand more franchise restaurant in different places in different countries. It can ensure that the company is able to take in more profit and franchise will be easily getting customers’ confidence as it has a franchise model that had been there for over years. Besides, the company should prepare more technology action such as having more self-serve kiosk in their outlet as this can avoid the customers for waiting too long while ordering the food. (Team, 2020) (85 words) Conclusion: *498 words Based on the data above, we can see that the overall performance for McDonald’s Corporation is not as good as the previous year although they might do quite good in managing their debt and controlling their market value in 2019. McDonald’s Corporation might need to take effort in increasing their profit of the year, reducing unnecessary expenditure and so on. The company has a long-term goal to achieve 95% of franchises and in 2018 had achieved 92.7% but in 2019, (Team, 2020) the company had only able to increase 840 franchises. (McDonald's: number of restaurants worldwide | Statista, 2020) In order to increase the company’s assets, McDonald’s Corporation is needed to increase their number of franchises as it is also be counted as a non-current asset. By having more assets, the company can gain more profits and allow them to fully utilize their material. In the overall glance through the financial statement of McDonald’s Corporation throughout the years of 2018 and 2019, the company able to obtain more profits compared to the previous year(McDonald's Financial Statements 2005-2020 | MCD, 2020) but there might be some insufficient in holding the amount of assets and inventory that causing the performance in 2019 is lower than 2018. In short, McDonald’s Corporation is a company that has potential to growth in the upcoming years. Limitations: 1. Historical information The information that we used to analysis the company’s performance is based on the past results of their financial condition that had been released by the company. It cannot be used to represents the company’s future performance as it might has some changes being make by the company in the future. (Limitations of Ratio Analysis - Ratios are Popular, Learn About the Problems, 2020) (51 words) can enhance their trade receivables collection because a slow debts collection from trade receivables can lead to a higher probability on reducing the company sales. The report has shown the return of total assets for McDonald Corporation for year 2018 and 2019. The return of total assets is the measure of the ratio of net income to total assets. The return of total assets for year 2018 is 0.181 higher than year 2019 with a total of 0.127. A higher figure would indicate a better return, so the return of total assets for year 2018 is better compare to year 2019. McDonald Corporation is recommended to decrease their company’s total assets of year 2019 because year 2019 has total assets of $47,510,800 higher than year 2018 with total assets of $32,811,200. While a lower return of total assets indicates the assets is less productive, company can solve this problem by always checking warehouse to ensure there are no old assets. (How to Use ROA to Judge a Company's Financial Performance, 2020) Debt ratio measure the percentage of funds provided by creditors. The debt ratios examine how much of the total assets of the business are financed by outsiders. The outsiders financed the total debt figure which includes current liabilities and long-term debt. From the report above, it shows the debt ratio 2018 with 1.19 times while the debt ratio 2019 is 1.17 times. Generally, the lower the ratio, the better the company’s debt management. There is a better debt ratio in year 2019 which are preferred by creditors because there is greater cushion against creditors losses in the event of liquidation. A lower debt ratio indicates that the company have more assets compare to the company’s liabilities. McDonald Corporation have better debt ratio in 2019 basically because they have done some improvements such as issues new shares in the market because this action can increase the company’s cash flow. As the cash flow increase, they have more money to cover their liabilities to reduce their debts. The reduction of debts can decrease the debts to total assets. Another improvement that they have done is the company mainly focus on increasing company’s sales without increase any overhead cost. As a result, the increase in company’s sales can used to reduce the liabilities. (What Is a Good Debt Ratio?, 2020) (935 words) Conclusion & Limitations Based on the cross-sectional performance analysis between McDonald Corporation and A&W Restaurants, there are five aspects that we can used to determine the overall performance of the selected company such as liquidity ratio, asset management ratio, profitability ratio, debt management and market value. From the quick ratio of the two company, the quick ratio of A&W Restaurants is 0.734 times while the quick ratio of McDonald Corporation is 0.969 times. McDonald has better performance compare to A&W Restaurant. McDonald Corporation have higher quick ratio is because they are fast in collecting their debts. A ratio closer to 1.00 indicates the liquidity position of the business is healthy. As the current liabilities of A&W Restaurants is higher, which indicates that their trade receivable is slow at paying debts. In order to improve their company performance, they can make discount to their trade receivable, this action can increase the speed of them to pay their debts, so A&W Restaurants is able to recover their debts immediately. (Quick Ratio - A Short Term Liquidity Metric, Formula, Example, 2020) Secondly, there is another tool to measure the overall performance of the company named as asset management ratio that measures its effectiveness called inventory turnover ratio. From the cross-sectional analysis, the inventory turnover ratio for McDonald Cooperation is 198.43 times and A&W Restaurants is 27.453 times. This indicates inventory turnover 198.43 times in a year for McDonald Cooperation. The inventory turnover ratio of McDonald Cooperation is performing well because from year 2018 to 2019 they have obtained a high ratio, although the ratio is better at year 2018. A small decrease in inventory turnover ratio indicates that the goods are sold at a slower pace or the goods are held for longer period in year 2019. This may be due to some obsolete or slow-moving goods. For example, they can do more advertising on social media, commercial and newspaper to promote their promotions to the public. In other words, they can do more promotional activities to make their goods move faster, so their funds will not be tied up in the form of inventory. (Inventory Turnover Definition & Example, 2020) Thirdly, based on the cross-sectional analysis, the return on total assets for McDonald Corporation is 0.127 times and A&W Restaurants is 0.242 times. Hence, it shows a better result from A&W Restaurant because a higher return on total assets the more profit the company earned. McDonald Corporation should utilize it resources effectively in order to improve the return on total assets. Lastly, the debt ratio for McDonald Corporation is 1.17 times. A lower debt ratio indicates that they are more easily to borrow money from lenders and lenders are more preferred to borrow to them because they can return the money in short period of time. While a high debt ratio can lead to difficulty in borrowing loan because lenders will refuse to borrow money to them due to too much debts that have not been paid by the trade receivables, so the probability they will return money is lower. In conclusion, McDonald Corporation have a better performance based on the ratio analysis. (How to Use ROA to Judge a Company's Financial Performance, 2020) There are few limitations of the report in analyzing the performance of our target company which is McDonald Corporation. Firstly, company may face difficulties when inflation has distorted many firm’s balance sheets. Inflation is a continuous rise in general price, when price rise in the market, demand of goods will decrease, and supply of loanable funds will decrease and causes the cost of goods to increase. This will affect the interest rate, hence there is an inverse relationship between interest rate and stock market. As a result, inflation also affect the balance sheet of the company. (Limitations of Ratio Analysis, 2020) Secondly, seasonal factors can distort a ratio analysis of a company. Seasonal factor is some unexpected issues that occur and can influence the operation of a company such as coronavirus disease, bad food condition and rainy season. For example, coronavirus disease that currently occur around the world has cause many companies to suspend business due to its severity. In Malaysia, government had given command to all the people that they need to pause their activity and government have restrict on travel to other country. As a result, the business performance of McDonald will affect their flow of stocks and caused many inventories been left out. In other words, seasonal factors will affect the company future growth and performance. Thirdly, the limitation of ratio analysis brings a quantitative measurement but not a qualitative measurement. A quantitative measurement means ratio analysis is just a superficial answer and sometimes does not represent the company overall performance because it unable the company to give a relevant situation to solve the problem if there is something lacking and improvement of the company. (Ratio Analysis: Meaning, Objectives, Advantages, Limitations & Examples, 2020) Furthermore, the limitation of ratio analysis is the use of depreciation method. Not every company use the same depreciation method, for instance, some may use the reducing balance method while some use the straight line method. As a result, there is a different on the result of the income statement. (Ratio Analysis: Meaning, Objectives, Advantages, Limitations & Examples, 2020) Lastly, the limitation of ratio analysis is the inventory is based on historical cost concept. This is unfair to the business because the cost of inventories is increasing year by year and the company must follow the historical cost concept, so the company still need to 1.) Reduce Costs and Increase Sales McDonald’s Corporation can increase inventory turnover by reducing costs and increasing sales. Cost management should reduce the cost of goods sold in order to attract the attention of customer, thereby enhancing the cash flow and profitability of company. Furthermore, reduction of supplier delivery times can also increase turnover ratio. During periods of economic weakness, it may be easier to lower purchase prices, as suppliers may be willing to use remaining capacity at lower prices. Driving sales growth also can increase inventory turnover because the company has low inventory levels at the beginning and end. 2.) Purchase Inventory Shrewdly McDonald’s Corporation should use shrewd purchasing to identify inventories that are preferred by customer so that the inventories can turn to sales in a short time. Shrewdly purchasing is done based on data, company can use computerised system to track the balance of inventories in store and determine inventories that need to be replaced. Inventory turnover may be slow if the company purchased too many non-sell items. Thus, the company should analyse customer preferences from time-to-time so that the inventories can turnover regularly. Profitability Ratio – Return of Total Assets From year 2018 to 2019, the profitability ratio of McDonald’s Corporation has slightly decreased from 0.181 times to 0.127 times. Here are some ways to improve the profitability ratio: 1.) Improve Productivity and Lower Costs McDonald's Corporation should replace outdated equipment and technology with newer versions to increase the productivity of employees. This indicate that the company able to generate more outputs with the same human resources. An increase in productivity can lead to a reduction in production costs per unit and an increase in gross profit margin. Moreover, a higher level of production allowed the company to purchases materials in bulk and received discount. All the costs of the business also more spread out by large quantity of output. Hence the company is more profitable and increase its return on assets. 2.) Increase Sales Revenues Increase in the sales revenue is the easiest way to improve the return of total assets of McDonald's Corporation. The company can increase sales revenues through improved customer service or by exploring market segments they have not sold before. The company can conduct more promotions to increase the sales. For example, launching special seasonal menu to attract the desire of customer to purchase. Furthermore, the company should communicate with their customers often in order to give them buying thoughts via email, social media, or in-store display. For instance, the company can send customer exclusive offers or vouchers and acknowledge them the additional service through email. Debt Management – Debt Ratio According to the information, we found that debt ratio in year 2018, 1.19 times is slightly higher than the ratio in year 2019, 1.17 times. The lower the amount of debt ratio, the better performance of company in the year. There are some methods to improve the debt management: 1.) Lease Assets McDonald's Corporation can lease assets instead of buying them where any leased equipment is not counted as a fixed asset. Therefore, the company can increase the production and generate sales without any change in the assets. Inefficient use of assets will cause the return of asset to be low which slow down the production and generate less income. The company have to analyse how the assets are used and how to increase the productivity of each asset. The output should increase without any other expenditure increasing significantly. 2.) Controlling Expenses and Increase Sales McDonald's Corporation should have better control over their expenses and make full use of resources to prevent wasted of budgets. The company can raise the price of products or reducing the costs of production to increase company’s revenue. For example, emphasize on the efficiency of employees, which will increase productivity and maximize profits more effectively. Market Value- Price/Earnings Ratio (P/E) From the P/E ratio formula we can know that the market value of McDonald’s Corporation has increased from 23.66 times to 26.43 times in 2018 and 2019. Here are tips to improve P/E ratio: 1.) Promote Brand Awareness