Financial Formula Breakdown Company:  McDonald’s & Nike

Financial Formula Breakdown
Company:  McDonald’s & Nike
 
Balance Sheet (in millions)
What is the sum of their assets?
Current Assets +Total Long Term Assets- A (located on sheet)
$31,023.9
What is the sum of their liabilities?
(Total Liabilities + shareholder equity) (B) – shareholder equity (C)
$31,023.9 – $2,204.3 = $28,819.6 (E – Total Liabilities)
What is the stockholders’ equity?
$2,204.3 – C (located on sheet)
What is the Owners’ equity? *
Total Assets (A) – Total Liabilities (E):
$31,023.9-$28,819.6 = $2,204.3 (F – Owner’s Equity)
What is the Owners’ assets? Formula: *
Total Liability(E) + Owners Equity (F):
$28,819.6 + $2,204.3 = $31,023.9
 
* In public companies, Owners Equity can also be renamed as Stockholders/Shareholder Equity.
Note:  Total assets should balance out to be the same as the sum of Total Liabilities + Shareholder Equity.
 
2016 Income Statement
What was their 2016 profit? It can also be considered net income, profit or earnings or bottom line profit.
Formula:  Sales Revenue (A) – Expenses (B)
$24,621.9 – $4,686.5 =$19,935.4
 
List 3 of their largest expenses: (C)

  • Food & Paper
  • Payroll & Employee Benefits
  • Occupancy & Other Operating Expenses

Note:

  • Sales Revenue can also be considered as Sales, Subscriptions, Income, or anything at the top section of an Income Statement Sheet. It also reflects the sum of all of that section, so loo for the word “Total” to get this figure.
  • There is a different between top-line and bottom-line profit:
    • The top linerefers to a company’s gross sales or revenues. Therefore, when people comment on a company’s “top-line growth”, they are making reference to an increase in gross sales or revenues.
    • The bottom line refers to a company’s net sales or net revenues, taking out all expenses, including operations and taxes.

2016 Cash Flow Statement
What is their cash flows from operating activities? (A) $6,059,600,000
What is their cash flows from investing? (B)  -$981.600,000
What is their cash flows from financing? (C)  – $11,262,400,000
Liquidity Ratios
Current Ratio: Total Current Assets (A)/Current Liabilities (B) =Current Ratio
$4848.6/$3,468.3 =1.39
This ratio helps to determine its ability to pay off liabilities that will come due within one year.  It’s a rough measure of the company’s cash on hand plus the cash generated from its accounts receivable plus the cash from selling its inventory will be sufficient to pay the liabilities that year.
WHAT IS THE NUMBER SUPPOSED TO MEAN? Anything over 1 means that it has enough assets to cover paying the liability for the year.  Under 1 means it doesn’t.  You want to have the highest number possible, ideally over 2 to ensure you have leftover money.
Quick Ratio: Cash + Receivables (A)/Total Current Liabilities (B)=Quick Ratio
Cash and equivalents:             $3,808
Short term investments:          $2,371
Accounts Receivables, net:     $3,677
Subtotal:                                  $9,856
$9,856/$5474 = 1.8

Note: Receivables reflects all assets that can be liquidated for cash including investments and accounts receivables.  This does not include inventory, or prepaid expenses.
This ratio pulls out inventory from the equation because they may not be able to sell it.
WHAT IS THE NUMBER SUPPOSED TO MEAN? Anything over 1 means that it has enough assets to cover paying the liability for the year.  Under 1 means it doesn’t.  You want to have the highest number possible, ideally over 2 to ensure you have left over money.
Asset Management Ratios
Inventory Ratio: Cost of Goods Sold (A)/Inventory(B)=Inventory Turnover
$19,038/$5,055 – 3.76
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number is reflective of how many times a year the inventory turns over.  So to know the turnover, the calculation is 365 days/3.76 = 97 days.  A high turnover number (not days) shows the company’s products are popular and the inventory stay low 
Asset Turnover Ratio: Sales (A)/Total Assets (B) = Asset Turnover
$34,350/$23,259 = 1.47
Note: Sales Revenue can also be considered as Sales, Subscriptions, Income, or anything at the top section of an Income Statement Sheet.  It also reflects the sum of all of that section, so loo for the word “Total” to get this figure.
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number is reflective of how many times a year the inventory turns over.  So to know the turnover, the calculation is 365 days/3.76 = 97 days.  A high turnover number (not days) shows the company’s products are popular and the inventory stay low. A low number means the opposite.
Profitability Ratios
Gross Margin: Gross Profit (or it’s determined by Sales(B)-Cost of goods sold (COGS) /Sales(B) x 100=Gross Margin
($7,744.5/$24,621.9)/($24,621.9) x 100 = 31.45%
Note: Gross Profit can be a line item or a subtotal of any related costs to produce a product/service.  The COGS subtotal can also be considered Operating Costs and Expenses or related terms.
WHAT IS THE NUMBER SUPPOSED TO MEAN? The numbers shows how much money is left over after paying for the costs of goods.  The higher the gross margin, the more likely a company is to earn higher profits – after paying all their expenses.
Remember some categories are higher than others like:
Retail – 48%
Equipment Manufacturing – 32%
Retail Electronics – $30.76
Source: http://smallbusiness.chron.com/reasonable-profit-margin-17989.html
Remember gross profit is completely different than net profit (also called profit margin), which takes out all costs and expenses.
Profit Margin: Net Income (A)/Sales (B) x 100 =Return on Sales
$4,686.5/$24,621.9 x 100 = 19%
Note: Net Income is normally a line item.
WHAT IS THE NUMBER SUPPOSED TO MEAN? The numbers shows how much profit a company generates from its sales since it takes out all costs and expenses.  The higher the number the better.
While you may have high gross margins, your expenses for your company may be so great, it wipes out that profit considerably.
Using that last example, see the difference:
Retail – gross profit 48%; profit margin 7-12%
Equipment Manufacturing – 32%; profit margin 7%
Retail Electronics – $30.76; profit margin 5-8%
Source: http://smallbusiness.chron.com/reasonable-profit-margin-17989.html
Raise your profit margin by reducing your expenses
Return on Equity: Net Income (A)/Owners’ Equity (B) x 100=ROI
$4,686.5/-$2,204.3 x 100 = -213
Note: Net Income is normally a line item. Owner’s Equity in a public company is normally listed as Shareholder’s Equity.
Also, Return on Equity is also considered Return on Investments.
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number show much profit a company has earned on each $100 invested by stockholders in the business.  The higher the number, the more the company is adding to the value of stockholders investment.
In this example, ROE is negative, which means every $100 is costing them to lose $213 dollars.
For McDonald’s, normally this would be bad, but in 2017, revenues have risen, making it still a strong stock.
EXAMPLE #2 – NIKE Return on Equity: Net Income (A)/Owners’ Equity (B) x 100=ROI
$4,240/$12,407 x 100 = 34.1
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number show much profit a company has earned on each $100 invested by stockholders in the business.  The higher the number, the more the company is adding to the value of stockholders investment.
In this example, ROE is positive, which means the each $100 invested has earned $37.00.
Earnings per Share: Net Income (A)/Total Number of Shares=Earnings Per Share
$4,686.5/818,993,182 = $5.72
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number show much shows how much profit a company has earned for each share of its stock.   The higher the number the better.  Please keep in mind, your calculation may be different than what is listed due to internal factors included in their evaluation.  Also, there is a difference between basic and diluted stock.  Simply, basic is all the shares currently available while diluted takes in all outstanding convertible preferred shares, convertible debt, equity options, mainly employee-based options, and warrants.  Most companies look at basic numbers.
Return on Invested Capital: Net Income/Total Capital x 100 =Return on Invested Capital
Total Capital = (Total Current Liabilities +Shareholder Equity)
$4,686.5/$31,023.9 x100 = 15.1%
WHAT IS THE NUMBER SUPPOSED TO MEAN? The number shows how much extra cash, or profit, a company generates for each dollar that is invest in its business.  It shows how efficiently and effectively a company is being run.  The higher the number the better.
In this example, McDonald’s generates 15% more for every dollar invested in the business.
Sources:
http://corporate.mcdonalds.com/content/dam/AboutMcDonalds/Investors/2016%20Annual%20Report.pdf
https://s1.q4cdn.com/806093406/files/doc_financials/2017/ar/docs/nike-2017-form-10K.pdf
Introduction to Business, Gareth R. Jones – Chapter 14
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