Question

P14-15 (similar to) 3 Question Help Company analysis. Given the financial data in the popup window for Disney (DIS) and McDonald's (MCD), compare these two companies using the following financial ratios debt ratio, current ratio total asset turnover financial leverage profit margin, and return on equity which company would you invest in, either as a bondholder or as a stockholder?

Answer 1

1) DEBT RATIO : TOTAL DEBT/ TOTAL ASSETS

General motors : 62,496/166234=0.375

Ford motor : 19572/201976 = 0.097

Ford motor has better debt ratio as it is less.

2) Current ratio : Current assets/ current liabilities

General motors : 81492/62496=1.304

Ford motor : 131569/19572 = 6.722

Ford is better as it has higher current ratio.

3) Total asset turnover = Revenue/Average total assets

General motors: 155985/166234=0.938

Ford motor : 146813/201976 = 0.727

General motor is better because it generates ,more revenue per unit of asset

4) Financial leverage = Average total assets/average total equity

General motors: 166234/42553 = 3.907

Ford motor : 201976/26355 = 7.667

Ford uses more financial leverage i.e it means most of its assets are funded by borrowed money i.e bonds/loans/credit etc. It can lead to more profits as well as more losses. From a conservative investors viewpoint General motors is better due to less leverage.

5) Profit margin : net income/ revenue

General motors : 5254/155385 = 0.0338 = 3.38%

Ford motor : 7151/146813 = 0.0487 = 4.87%

Ford is better.

6) Return on equity : net income/ average total equity

General motors : 5254/42553=0.1234= 12.34%

Ford motor : 7151/26355 = 0.2713 =27.13%

Surely, Ford motor is better as per ROE.

From a bondholder's point of view I should be risk averse and looking at the debt ratio, current ratio and asset turnover ratio we can conclude General motors  is in a better situation to fulfill its payment obligations to bondholders in case of default as it has more assets and it generates more cash per unit of asset.

From a stockholder's point of view I am a risk taker I would prefer Ford motor as it uses high leverage due to which it gives higher return on equity and even it has a higher profit margin.