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Current Ratio.
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To calculate the current ratio, which is one of the most popular liquidity ratios you divide all of firm's current assets by all of its current liabilities. McDonalds has .
$1,819.3 (*everything is in millions for McDonalds) of current assets and $2,248.3 in current liabilities making the firm's current ratio .81. In 2001 Wendy's has current assets of $266,353 and current liabilities of $296,687 making their current ratio .90. Current ratios are used to represent good liquidity and financial health. Since current ratios vary from industry to industry, the industry average determines if a firm's current ratio is up to par, strength or a weakness. In any event if the current ratio is less than the industry average than an analyst or individual interested in investing might wonder why the firm isnt balancing its current assets and liabilities better. On both McDonald's and Wendy's website is says that the industry average for a current ratio is .60. So when comparing both firms, based on the industry average, McDonalds and Wendy's are doing well and can both be efficiently liquidated. Liquidity refers to how quickly the firm's current assets can be converted to cash. Now as far as being compared to each other by McDonalds having a lower current ratio, that itself doesnt indicate that McDonalds is in a worse financial situation. Lower liquidity may be offset by a variety of other financial indicators, because McDonalds still ranks higher on its overall financial stability and financial health.
Quick Ratio.
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To find the quick ratio, which is often called the acid test; only cash & cash equivalents as well as accounts receivable are added and then divided by current liabilities. The purpose of the quick ratio is to indicate the resources that may be available in the short term. Essentially quick ratio is sort of a "worse case scenario" that might apply if no other resources are available.
