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The industry I am interested in is Restaurants, and the three companies I am selecting for this discussion are McDonald’s, Dominos and Papa John’s. There are two ways to calculate ratios that measure the ability to pay current liabilities. According to Braun & Tietz (2018), “the most widely used is the current ratio, which is current assets divided by current liabilities.” (p. 849). McDonald’s current assets are $4,053.2 / $2,973.5 of current liabilities = 1.36 of current ratio (McDonald’s, 2018, p. 34). For Dominos the current ratio 1.49 and for Papa John’s is 1.04. According Hovey (1998), “in general, the bigger the multiple the better.” (par. 13) therefore Dominos with a current ratio of 1.49 has the greatest of the three to pay-off their short-term obligation with their short-term assets.

The acid-test ratio or also called quick ratio tells whether the company have the cash flow to buy inventory. Braun & Tietz (2018), stated that “to obtain the acid-test ratio, we add cash, short term investments and net current receivables and divide this sum by current liabilities” (p. 850). McDonald’s cash and equivalents for 2018 is $866, they do not have short term investments and their net current receivables is $2,441.5 (McDonald’s, 2018, p. 34). The total of this is $3,307.5 divided by the current liabilities of $2,973.5 the acid-test ratio is 1.11. Domino’s acid test ratio is 0.57 and Papa John’s acid test ratio is 0.57 as well.

To calculate the ability to pay long-term debts, the first ratio will be Debt Ratio which can be calculated by dividing total liabilities by the total assets (Braun & Tietz, 2018, p. 852). McDonald’s total liabilities is $32,811.2 / 34,048.8 of total assets = 1.04 debt ratio. (McDonald’s, 2018, p. 34). Domino’s debt ratio is 4.4 and Papa John’s debt ratio is 1.52. The other ratio is Times-Interest-Earned Ratio which can be obtained by dividing income from operations by interest expense (Braun & Tietz, 2018, p. 853). Papa John’s Operating income is $30,380 / $25,306 of interest expenses, the times-interest-earned ratio is 1.20 (Papa John, 2018, p. 64). McDonald’s times-interest-earned ratio is 9 and Domino’s is 8.92. McDonald’s seems to be the strongest amount the three with a 9-ratio indicating they could pay nine times the interest owed (Braun & Tietz, 2018, p. 853).

I consider the profitability ratio the most important one, and the one who would dictate which company of the three is in better financial position. The best method will be the gross profit percentage which tells the percentage of each sales dollar that is gross profit, the formula is gross profit by net sales. Domino’s gross profit can be obtained by subtracting the cost of goods which is $ 2,130.2 with the sales revenue of $ 3,432.9, giving a positive $1,302.7, this divided by 362, the gross profit ratio is 3.60% (Domino’s, 2018, p. 24). McDonald’s gross profit ratio is 4.9% and Papa John’s is 0.70%. Another ratio measure profitability is the operating income percentage which can be obtained by dividing operating income by net sales (Braun & Tietz, 2018, p. 854). McDonald’s reported an operating income of $8,823, divided by the net sales $21,025, the operating income percentage is 41.96% (McDonald’s, 2018, p. 20). Domino’s operating income percentage is 38% and Papa John’s is 1.93%. I believe overall McDonald’s stands in a better financial position than Domino’s and Papa John’s, having a debt ratio of 1.04 and the ability to pay 9 times their long-term debts.