• Formally answer (with paragraphs) the question(s) posed by your classmate.
• Use the Essentials of Finance (2nd ed.) textbook or a credible source to support your answer. "(Hickman et al., 2024)"
• Review the industry Ratio Analysis Summary PDF for your classmate's industry.
• Discuss your classmate's evaluation of the three companies in that industry group.
  • Do you agree with their analysis? Why or why not?
  • Would you choose the same company they chose? Why or why not?
• Compare the ratio performance of your classmate's industry group to the industry group you evaluated.
  • Which industry would you choose to invest in? Why?
  • What areas of concern do you have about each industry?

Classmates evaluation:

My three businesses were Chipotle, McDonald's, and Starbucks with the goal of analyzing them through the lens of industry ratios shows a stark difference in their performance, risk, and potential return.

When looking at each company's profitability McDonald's was the clear leader with a net profit margin of 31.7% with a robust 5-year average across all profit margins. Their profit margins were driven by a high gross margin of 56.8% and the operating margin of 45.2%, which is a strong indicator for a scalable cost-effective model. In contrast to McDonald's, Chipotle had the lowest gross margin with 31.7% but a very competitive net profit margin of 13.6%. This suggests their operational control is performing very well. When comparing only net profit margins Starbucks is the lowest with only 9.7%, which indicates a potential margin pressure.

When looking at the company's management effectiveness Chipotle is the clear winner with a Return of Equity (ROE) of 45.7% and a Return on Assets (ROA) of 17.8%. This shows a superior return on shareholder capital and use of company assets. Both Starbucks and McDonald's posted NM, standing for not meaningful for their ROE. This could be correlated to the equity from the share buybacks. However, both companies' ROI are reasonably hovering around 16-17%.

Looking at the efficiency of all three companies, Chipotle outperformed the other with receivables turnover (87.2) and the inventory turnover (175.2). This suggests a operation that is lean and agile to meet a high volume of customer demands. No surprise, McDonald's had the highest inventory turnover of 206.0, but their lower asset turnover than Chipotle. Starbucks trails in all metrics in this election with the average net trade cycle of 13 day standing out among all three signifying a slow cash conversion.

Chipotle again was the clear winner in the financial strength carrying no long-term debt and holding best current and quick ratios (1.5). Starbucks again is lagging and appearing to be over leveraged with LTD/Total Capital at 176.8%. McDonald's also is heavy debt however, they have a stronger interest and dividends coverage which indicates better debt serviceability.

The valuation of the three companies in comparison Starbucks looks undervalued with the lowest P/E of 26.5 and a P/S of 2.6. At the other end was Chipotle with a P/E of 42.4 and indicated high investor forecasting expectations. McDonald's P/S is high at 8.3 and reflecting its market value.

Which one would I invest in? Chipotle stands out as the clear winner. Its balance of high profitability, high efficiency, and zero debt. All strong indicators suggest lower risk and stronger future cash flow. Chipotle's biggest strength is its financial growth. The only real weakness is the P/E of 42.4%. Other financial strength is the most important ratio category because high debt can be hidden behind short profitability. Due to Chipotle having zero debt it only makes sense that the best choice to invest in

My evaluation:

Examining the financial ratios of Microsoft Corporation (MSFT), Oracle Corporation (ORCL), and Salesforce, Inc. (CRM) allows for a comparative assessment of their valuation, profitability, management effectiveness, and efficiency. According to the data from Mergent (2025), the following analysis will assist in determining the company with the most promising investment potential and financial performance:

Microsoft Corporation (MSFT)

• Profitability
  • Gross Margin: 69.4%
  • Operating Margin: 44.6%
  • Net Profit Margin: 35.4%
    • Demonstrates robust profitability from operations and bottom-line earnings, as evidenced by its superior operating and net profit margins.
• Management Effectiveness
  • ROE: 34.3%
  • ROA: 18.5%
  • ROI: 24.0%
    • The returns on equity, assets, and investments are solid and well-balanced.
• Efficiency
  • Receivables Turnover: 5.8
  • Asset Turnover: 0.5
  • Average Net Trade Cycle (Days): -9.0
    • A negative trade cycle is beneficial because it generates cash before payments are made to suppliers.
• Financial Strength
  • Current Ratio: 1.35
  • Long-Term Debt/Equity: 24.2
  • Interest Coverage: 361.1
    • Low leverage and exceptional liquidity; substantial interest coverage.
• Valuation
  • P/E (TTM): 29.0
  • P/S: 10.2
  • P/B: 8.8
    • A lower P/E in comparison to CRM, a higher P/S, and a middle-range P/B. Partially premium valuation, but it is indicative of quality.

Oracle Corporation (ORCL)

• Profitability
  • Gross Margin: 71.1%
  • Operating Margin: 30.9%
  • Net Profit Margin: 21.8%
    • Has a higher gross margin than Microsoft but falls behind in operating and net margins.
• Management Effectiveness
  • ROE: 108.8%
  • ROA: 8.2%
  • ROI: 10.0%
    • The ROE is exceptionally high, likely due to the high leverage.
• Efficiency
  • Receivables Turnover: 7.3
  • Asset Turnover: 0.4
  • Average Net Trade Cycle (Days): 4.0
    • Good receivables turnover, but moderate asset turnover and trade cycle.
• Financial Strength
  • Current Ratio: 1.02
  • Long-Term Debt/Equity: 526.7
  • Interest Coverage: 4.9
    • The company is highly leveraged, indicating a higher financial risk.
• Valuation
  • P/E (TTM): 30.1
  • P/S: 6.4
  • P/B: 21.5
    • The company has the highest P/B ratio (expensive compared to book value), a P/E ratio comparable to MSFT, and a lower P/S.

Salesforce, Inc. (CRM)

• Profitability
  • Gross Margin: 77.2%
  • Operating Margin: 17.5%
  • Net Profit Margin: 16.4%
    • The gross margin is strong; however, the operating and net margins are much weaker, which suggests that there are higher operating expenses.
• Management Effectiveness
  • ROE: 10.3%
  • ROA: 6.1%
  • ROI: 8.4%
    • Lower across all metrics, suggesting less efficient management of resources.
• Efficiency
  • Receivables Turnover: 2.8
  • Asset Turnover: 0.4
  • Average Net Trade Cycle (Days): 131.0
    • The performance is subpar due to a high trade cycle and low efficiency.
• Financial Strength
  • Current Ratio: 1.06
  • Long-Term Debt/Equity: 13.8
  • Interest Coverage: Missing Data
    • Lowest debt, strong dividend coverage, but limited data for quick/interest coverage.
• Valuation
  • P/E (TTM): 37.8
  • P/S: 6.1
  • P/B: 3.8
    • Expensive on P/E, but the cheapest on P/B. The market may expect future growth, but current profitability is low.

Future Risk and Future Cash Flows

Microsoft's robust financial health, superior profitability, and efficiency indicate slightly growing cash flows (reduced risk and stable). Oracle's high leverage poses a greater risk, as any downturn could jeopardize its financial stability, despite its high ROE. Salesforce has substantial growth potential (high gross margins, lower P/B); however, its operating margins and efficiency are inadequate, which raises concerns regarding its near-term cash flows. Profitability and financial strength are essential; regardless of the growth potential, high risk (leverage) or low margins are risk indicators. The strongest area is operating profitability (net margins and operating margin). The weakest area is the P/S ratio, which is slightly higher than the average in the group (valuation).

Investment Decision

Microsoft (MSFT) is, without a doubt, the optimal investment option. The organization maintains the highest level of profitability. Microsoft's management efficacy is sturdy and sustainable, as it is not contingent upon debt. It also possesses exceptional liquidity and financial fortitude. Working capital requirements are minimized through the maintenance of consistently high efficiency ratios. The valuation is justifiable in light of its excellence. A significant number of small businesses fail to succeed due to a lack of adequate cash flow to pay their expenses on time (Hickman et al., 2024). Therefore, I will not support a company that is unable to effectively manage its finances.