(x) Ratio Analysis (before profit or loss account)

Ratio analysis is a quantitative management tool that compares different financial

figures to examine and judge the financial performance of a business.

To assess whether financial performance has improved, ratios for the current period

will be compared with historical figures. Ratio analysis will help determine how

efficiently McDonald's is operating. It provides significant information about

accounting regarding the performance of the business.

Ratio Formula 1st January 2020 – 1st January 2021 1st January 2022 –
31st December – 31st December 31st December
2020 2021 2022
Gross 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
×100 % = = =
𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Profit 9752 1958 13,082
Margin ×100 23,222.9
×100 ×100
19,207.8 19,207.8
= 51% =84 % = 68%
Profit 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥
×10 = 9773
×100 =
𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Margin 7163
23,222.9
7163
19,207.8
×100 = 42 % 19,207.8
×100
= 37% = 37%
Return on 7163 9773
×100 7163
Capital 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥 46445
×100 49834 46445
×100
×10
Employed 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
= 15% =20% = 15%
(ROCE) Capital Employed = Noncurrent
liabilities + Equity
Current 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
= 6181
6243
= 4020
7149
= 6181
6243
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Ratio
=1 =2 =1
Acid Test 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝑆𝑡𝑜𝑐𝑘
=6243−7903
= 7149−8248 = 6243−7903
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 6181 4020 6181
Ratio
= -0.268 = -0.273 = -0.268

The higher the GPM the better the financial performance of the organisation. In 2021,

the gross profit margin is healthy, and the firm is profitable as it represents 84% of

sales revenue. This is further evident by the high profit margin of 42%. The high

margins highlight opportunity for growth. However, in 2020, Gross Profit and Net
profit was comparatively less. This highlights that the collaboration with BTS

influenced the effectiveness of McDonald’s brand image and sales. McDonald’s

collaboration with BTS increased the company’s expenditure but boosted sales by

33%. In 2022, there was a decrease in the gross profit margin to 68%, indicating a

potential decline in efficiency compared to 2021. This was because company-operated

margins were negatively impacted for both periods by the restaurant closures in

Russia and Ukraine, as well as by inflationary pressures on labor and commodities.

The quarter and six months also reflected an income tax benefit associated with global

tax audit progression. The consistent profit margin of 37% in 2022 suggests stable and

sustained level of profitability, although not as high as in 2021.

The Return on Capital employed increased by 5%, which refers to the company's

profitability and capital efficiency. McDonald's ROCE decreased from 20% in 2021 to

15% in 2022, indicating a decline in profitability relative to the capital employed.

Moreover, there was a surge in current ratio as well, which is generally considered

positive for a firm. The acid-test ratio is less than 1 which means McDonalds do not

have enough liquid assets to pay their current liabilities and should be treated

cautiously.

Overall Analysis:

In recent years, McDonald's has shown notable progress in improving its

financial performance. The company's profit margin, gross profit margin, and

return on capital employed (ROCE) all saw significant gains in 2021. These
enhancements demonstrated McDonald's capacity to raise its profitability and

operational effectiveness at the time.

In 2020, its collaboration with BTS enhanced sales income for McDonald's, but

it also resulted in higher expenses, which had an adverse effect on profitability.

In 2020 and 2021, McDonald's was able to sustain consistent profitability and

liquidity in spite of this.

Even if a few ratios saw minor drops in 2022 compared to the year before,

McDonald's financial situation was still strong overall. The company's

consistent profitability and liquidity demonstrate strong management

techniques and fortitude in the face of difficulties. Nonetheless, a portion of the

2022 ratio decline was ascribed to the adverse effects on company-operated

margins of the restaurant closures in Russia and Ukraine, in addition to

inflationary pressures on labor and commodities. An income tax gain related to

the advancement of the worldwide tax audit was also reflected in the quarter

and six months.

In the future, McDonald's should prioritize maintaining and even increasing its

profitability through effective cost control and process optimization. To

maximize shareholder value and promote sustainable growth, it will be

essential to improve ratios like ROCE and gross profit margin.

Moreover, McDonald's financial position would be further strengthened and the

firm would be better equipped to handle future market possibilities and

uncertainties if the acid test ratio was addressed in order to enhance liquidity

management.