Understanding Investment Ratios Free Essay Example

Given the opportunity to invest $400 per month ($4,800 per year) in a company, I decided to invest in the McDonald Corporation, by splitting my money between stocks and bonds. This report will provide information on McDonald’s stocks and bonds along with different ratios, including the current ratio, accounts receivable ratio, profit margin, asset turnover, EPS (earnings per share), and Debt to assets ratio. I will explain the consequences of withdrawing the money before the retirement age.

In the chart below is the calculation for each ratio

Name of Ratio Money Amount (millions)

Current Ratio $5,327.20 / $2,890.60 = 1.84

Accounts Receivable Ratio Ave AR = $1,725.15, Sales = $22,820.4

$1,725.15 / $22,820.4 / 365 = 13.23

Profit Margin Net operating income = $9,552.70; Total Revenue = $22,820.40

So, profit margin = $9,552.70 / $22,820.40 = 0.4186 = 42%

Asset Turnover Average total assets ($33,803.7 + $31,029.9) / 2 = $32,413.8 Asset turnover = $5,192.30 / $32,413.80 = .16 = 16%

EPS (Earning Per Share) ($5,192.30 – 0) / 807.4 shares = $6.43/share

Debt to Asset Ratio Total liabilities = $2,890.6 + $29,536.4 + $2,370.9 + $1,154.4 + $1,119.4 = $37,071.70

$37,071.70 / #33,803.70 = 1.096 = 1.1 = 110% (Over 100% b/c has negative retained earnings)

The major differences between stocks and bonds are ownership versus creditorship risk versus reward.

When someone buys stock shares, he or she becomes a partial owner of the corporation and may or may not have voting rights.

When someone buys a bond, he or she becomes a creditor of the corporation.

There are two main types of shares: common stock and preferred stock. Common Stock is well known; when people talk about stocks, in general, they are most likely referring to this type. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect members of the board of directors who oversee the major decisions made by management.

The cost of this voting right is a higher risk of losing the investment. If the company goes bankrupt or liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid. Preferred stock is also partial ownership in the company but usually excludes voting rights. With this stock, investors are usually guaranteed a fixed dividend and if the company liquidates, preferred shareholders are paid off after debt holders but before common stockholders. Preferred stock may be callable, meaning the company has the option to purchase the shares from the shareholders at any time for any reason.

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time at a specified rate of return. There are many different types of bonds. U.S. Treasury Bonds are the most important and secure bonds issued by the U.S. Treasury Department. They’re used to set the rate for all long-term, fixed-rate bonds. The Treasury sells them at auction to fund the operations of the federal government. Saving Bonds are also issued by the treasury department; these are small-denomination and meant to be purchased by individual investors. Municipal Bonds are issued by various cities. These are tax-free but have a slightly higher risk than bonds issued by the federal government because cities occasionally default.

Corporate bonds are issued by all different types of companies. The purpose of raising capital. They are called fixed income securities because they pay a specified amount of interest on a regular basis. For example, you purchase a 5% bond which mean a bond with a 5% coupon rate from a company Amazon. The bond has a face value of $ 1,000. This mean you will receive $ 50 dollars in interest payment per year.

After gathering information on stocks and bonds and researching the McDonald’s Corporation, I used the ratios to determine whether the company was relatively safe investment likely to generate a decent return.

My decision is to balance the risk/ reward ratio by splitting the differences in half between bonds and stock. $200 per month ($2,400 per year) in stocks and $200 per month ($2,400 per year) in bonds.

The consequences of withdrawing the money before retirement age depending on the nature of the account and the reason for the withdrawal. Under the federal tax code, you make an early withdrawal if you sell your shares and access funds before age 59 1/2. In this instance, you typically pay a 10% penalty. You can avoid the penalty if you use the cash to cover certain educational costs (like college loans), to buy a home, or if you become disabled.