other that Wendy's needs to improve if the corporation is to narrow the gap in proportion net income with McDonald's.
With respect to short-term liquidity, Wendy's compares well in relation to McDonald's (refer to Appendix B-1). The reason for the Wendy's advantage lies in the corporation's decision to keep such a high proportion of assets in a current status. This strategy is not conducive to the most productive use of the corporation's assets.
In relation to debt ratios, Wendy's is superior to McDonald's (refer to Appendix B-2). In this area, Wendy's also is superior to McDonald's in relation to interest coverage, as the corporation uses borrowing very little in comparison to McDonald's.
Wendy's is inferior to McDonald's (refer to Appendix B-3). McDonald's has a substantially higher inventory turnover and holds less than half as many days in sales than does Wendy's. Thus, McDonald's has proportionately lower inventory carrying costs than does Wendy's, which explain in part the difference between the two corporations in relation to net income. Wendy's has a higher fixed asset turnover than does McDonald's only because the corporation's fixed assets are proportionately so much lower than at McDonald's.
McDonald's is more profitable than is Wendy's regardless of the measure used with the single exception of total capital (refer to Appendix B-4). Wendy's compares well in this measure because the corporation makes little use of long-term debt.
Consistent with McDonald's superior profitability in relation to Wendy's, Wendy's also is well behind McDonald's in relation to market value measures (refer to Appendix B-5). As a company that uses its assets more efficiently, McDonald's is better rewarded by the market than is Wendy's.
The Appendix A series includes common-size financial statements. The Appendix B series includes ratio analyses. The Appendix C series includes an expanded Du Pont chart.
Appendix A-1: C...