McDonald’s Financial Analysis Case Study The purpose of this study is to assess a company’s future financial health. This study provides a “hands on” experience to synthesize the finance concepts that we learned throughout the course by applying them to a “real life” individual or organization. On this study I elected to assess McDonald Corporation’s future financial health. McDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a menu at various price points providing value in 119 countries globally.
As of December 31, 2011 out of the 33,510 restaurants in 119 countries around the world 27,075 were franchised or licensed (including 19,527 franchised to conventional franchises, 3,929 licensed to developmental licensees and 3,619 licensed to foreign affiliates primarily in Japan and the Company operated 6,435. McDonald’s menu includes Big Mac, Quarter Pounder with Cheese, hamburgers and cheeseburgers, Filet-O-Fish, Chicken McNuggets, some chicken sandwiches, salads, Snack Wraps, French fries, oatmeal, shakes, sundaes, McFlurry desserts, soft serve cones, pies, soft drinks, McCafe beverages, coffee and other beverages.
McDonald’s, the world famous fast food restaurant has been successful across the years. Over the years, they have ensured there is no change in their services, and product line, but kept the quality high and maintained the standards across their branches. Not only do they offer customers a delicious meal, but also offer something for the children and adults alike- their happy meal! Children look forward to the doll inside, while parents look forward to watching their children enjoy a meal without a complaint. Now we’ll see and find out what was their growth? How much was their annual sales? And any future plans.
Investors and other external users of financial information will often need to measure the performance and financial health of an organization. This is done in order to evaluate the success of the business, in this study we will determine any weaknesses of the business, compare current and past performance, and compare current performance with industry standards. Financially stable organizations are desirable, because a financially stable business is one that successfully ensures its ability to generate income for investors and retain or increase value. Financial summary: McDonald’s has announced for the six months ended 0 June 2012, the company revenues increased 3% to $13. 46B. Net income decreased less than 1% to $2. 61B. Revenues reflect U. S. segment increase of 6% to $4. 34B, APMEA segment increase of 7% to $31. 1B, Company’s store sales(Growth%) U. S. increases of 69% to 6. 3%. Net income reflects U. S. segment income increase of 6% to $1. 84B, APMEA segment income increase of 4% to $742. 7M. Valuation Ratios Price/Earnings (TTM)16. 58 Price/Sales (TTM)3. 24 Price/Book (MRQ)6. 34 Price/Cashflow (TTM)12. 8 Profitability Ratio (%) Gross margin (TTM)39. 54 Operating Margin (TTM31. 45 Net Profit Margin (TTM)20. 03 Financial Strength
Quick Ratio (MRQ)1. 21 Current Ratio (MRQ)1. 24 LT Debt/Equity (MRQ)0. 91 Total Debt/Equity (MRQ)0. 97 Per Share Data Earnings (TTM)5. 32 Sales (TTM)26. 59 Book Value (MRQ)13. 92 Cash Flow (TTM)6. 74 Cash (MRQ)2. 29 Management Effectiveness (%) Return on Equity (TTM)39. 54 Return on Assets (TTM)31. 45 Return on Investment (TTM)20. 03 Dividend Information Dividend Yield (%)3. 17 Dividend per Share (MRQ)0. 70 Payout Ratio (MRQ)52. 66 TTM: Trailing twelve months; MRQ: Most recent quarter; Latest fiscal year: 2011; Most recent quarter: 2; Fiscal year end month: December; All Ratios are calculated for the latest fiscal year end.
Key Ratio and Statistics Financial Strength Financial strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is. The Quick Ratio compares cash and short-term investments (investments that could be converted to cash very quickly) to the financial liabilities they expect to incur within a year’s time. Financial Strength12-Mo Dec 0912-Mo Dec 1012-Mo Dec 11MRQ3-Year Average Quick Ratio0. 961. 221. 051. 211. 08 Current Ratio1. 141. 491. 251. 241. 29 LT Debt/Equity0. 750. 790. 840. 910. 79 Total Debt Equity0. 750. 790. 870. 970. 8
Current Ratio is calculated by dividing the Current Assets of a company by its Current Liabilities. It measures whether or not a company has enough cash or liquid assets to pay its current liability over the next fiscal year. The ratio is regarded as a test of liquidity for a company. This concept is one of the most commonly cited financial ratios, measures the firm’s ability to meet its short-term obligations. A measure of liquidity calculated by dividing the firm’s current assets by its current liabilities (Gitman & Zutter, 2012, p. 71). Current ratio = Total Current Assets ?
Total Current Liabilities From the above the above equation, we will determine the current ratio or liquidity for McDonald’s in 2011 is. McDonald’s Current ratio = 4,403. 00 ? 3,509. 20 McDonald’s Current ratio = 1. 25 Typically, short-term creditors will prefer a high current ratio because it reduces their overall risk. However, investors may prefer a lower current ratio since they are more concerned about growing the business using assets of the company. Acceptable current ratios may vary from one sector to another, but generally accepted benchmark is to have current assets at least as twice as current liabilities (i. . Current Ration of 2 to 1). As with the current ratio, the quick ratio level that a firm should strive to achieve depends largely on the nature of the business in which it operates. The quick ratio provides a better measure of overall liquidity only when a firm’s inventory cannot be easily converted into cash. If inventory is liquid, the current ratio is a preferred measure of overall liquidity (Gitman & Zutter, 2012, p. 72). Quick Ratio = (Cash + Short Term Investments + AR) ? Total Current McDonald’s QR = (2,335. 7 + 1,334. 7) ? 3,509. 2 McDonald’s QR = 1. 05
The Long Term Debt/Equity Ratio looks at the company’s capital base. A ratio of 1. 00 means the company’s long-term debt and equity are equal. The Total Debt/Equity Ratio includes long-term debt and short-term debt. Long Term Debt To Total Equity is equal to the Total Long Term Debt divided by Total Shareholder Equity. While Total Debt to Total Equity is equal to the Total Debt divided by Total Shareholder Equity for the same period. McDonald’s LT Debt/Equity ratio = 12,133. 8 ? 14,390. 2 McDonald’s LT Debt/Equity ratio = 0. 84 Then, McDonald’s Total Debt/Equity Ratio = 12,500. 4 ? 14,390. 2
McDonald’s Total Debt/Equity Ratio = 0. 87 Profitability Is a class of financial metrics that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well. These ratios realize overall profitability, or the bottom line. Profitability12-Mo Dec 0912-Mo Dec 1012-Mo Dec 11TTM3-Year Average Gross Margin (%)38. 6540. 0339. 5739. 5439. 42 Operating Margin (%)30. 831. 0431. 4531. 4530. 9 Net Profit Margin (%)20. 0120. 5520. 0320. 0320. 31 Interest Coverage14. 4616. 5717. 31 16. 11 Gross Margin shows the amount of revenue left over after deducting direct costs of producing the goods or services. Operating Profit and Operating Margin trace the progress revenue down to another important level. From gross profit, we now subtract indirect costs, often referred to as overhead e. g. facilities and salaries associated with headquarters operations. Finally, Profit Margin shows you how much of each revenue dollar is left after all costs, of any kind, are subtracted.
These other costs include such items as interest on corporate debt and income taxes. Gross Margin: This value measures the percent of revenue left after paying all direct production expenses. It is calculated as Revenue minus the Cost of Goods Sold divided by the Revenue and multiplied by 100. McDonald’s Gross Margin = (Gross Profit ? Revenue) x 100 McDonald’s Gross Margin = (10,686. 60 ? 27,006. 00) x 100 McDonald’s Gross Margin = 39. 57 McDonald’s gross margin at end of December 2011 decreases by 1. 16% compare from its previous period ends at December 2010.
Operating Margin: This value measures the percent of revenues remaining after paying all operating expenses. It is calculated as Operating Income divided by the Total Revenue, multiplied by 100. Net Profit Margin: Also known as Return on Sales, this value is the Income After Taxes divided by Total Revenue for the same period and is expressed as a percentage. Interest Coverage: The Operating Income divided by the company’s interest obligations. Management Effectiveness A company’s ability to operate profitably can be measured directly by measuring its return on assets.
ROA (Return On Assets) is the ratio of a company’s net profit to its total assets, expressed as a percentage. Management Effectiveness (%)12-Mo Dec 0912-Mo Dec 1012-Mo Dec 11TTM3-Year Average Return on Assets %15. 5115. 916. 9416. 6216. 12 Return on Equity %33. 234. 5137. 9237. 9335. 21 Return on Investments %17. 1217. 5818. 818. 7617. 83 Return on Assets: This value is the Income After Taxes divided by the Average Total Assets, expressed as a percentage. Return On Equity: Income Available to Common Stockholders divided by the Common Equity and expressed as a percentage.
Return on Investments: Income after taxes divided by the average total long term debt, other long term liabilities and shareholders equity, and expressed as a percentage. Return on Assets (%) = (Income After Taxes ? Average Total Assets) x 100 McDonald’s ROA (%) = (5,503. 10 ? 32,482. 55) x 100 McDonald’s ROA (%) = 16. 94 % ROA measures how well a company’s management uses its assets to generate profits. It is a better measure of operating efficiency than ROE, which only measures how much profit is generated on the shareholders equity but ignores debt funding. This ratio is particularly relevant for banks, which typically have huge assets.
Annual dividend is the total amount ($) of dividends you could expect to receive if you held the stock for a year (assuming no change in the company’s dividend policy). The dividend yield is the indicated annual dividend rate expressed as a percentage of the price of the stock, and could be compared to the coupon yield on a bond. The Payout Ratio tells you what percent of the company’s earnings have been given to shareholders as cash dividends. A low payout ratio indicates that company has chosen to reinvest most of the profits back into the business. Dividend Information12-Mo Dec 0912-Mo Dec 1012-Mo Dec 11TTM3-Year Average Payout Ratio %49. 48. 7147. 4752. 6648. 45 Dividend per share2. 052. 262. 530. 702. 28 Now we will determine what McDonald’s Payout ratio at the end of December 2011 : This ratio is the percentage of the Primary/Basic Earnings Per Share Excluding Extraordinary Items paid to common stockholders in the form of cash dividends. Calculation: McDonald’ Payout Ratio = (Dividend per share ? Primary EPS) x 100 McDonald’ Payout Ratio = (2. 53 ? 5. 33) x100 McDonald’ Payout Ratio = 47. 47 The Dividend Per Share is calculated as Common Stock Cash Dividends divided by the shares outstanding.
On the next concept we will evaluate the firm’s earnings per share. From the table below, the most important Per-Share Data item is Earnings Per Share. That’s because ultimately, the price of your stock is related in some way to the value of the stream of earnings attributable to that share. Per Share Data12-Mo Dec 0912-Mo Dec 1012-Mo Dec 11TTM3-Year Average Earning Per Share4. 114. 585. 275. 320. 12 Sales Per Share20. 5422. 2925. 8526. 590. 08 Book Value13. 0313. 8914. 0913. 920. 05 Cash Flow4. 114. 585. 276. 740. 12 Cash Per Share1. 672. 272. 292. 290. 07 Earnings Per Share = Adjusted Income Avail. o Common Shareholders ? Diluted Weighted Average Shares This section also includes the amount of Cash Per Share the company had at the time of its most recent quarterly or annual report. Most of the time, this number will be far below the stock price. In a healthy industrial company, a Cash Per Share figure that is close the stock price might suggest that investors are underestimating the worth of the company’s ongoing business, thereby creating an interesting investment opportunity to every investor. From the equation of earning per share;
McDonald’s Earning Per Share = 5,503. 10 ? 1,044. 90 McDonald’s Earning Per Share = 5. 27 EPS Excluding Extraordinary Items: This is the adjusted income available to Common divided by the diluted weighted average shares outstanding. Sales (Revenue) Per Share: Total Revenue divided by the Average Diluted Shares Outstanding. Book Value Per Share: This is defined as the Common Shareholder’s Equity divided by the Shares Outstanding. Cash Flow: Cash Flow is defined as the sum of Income After Taxes minus Preferred Dividends and General Partner Distributions plus Depreciation, Depletion and Amortization.
Cash Per Share: This is the Total Cash plus Short Term Investments divided by the Shares Outstanding. McDonalds operates within a competitive food chain and restaurant environment. Evaluating its rivals not only allows the company to recognize its own strengths and weaknesses nevertheless also help to identify opportunities for and risks to the organization from the industry. Let us examine these principals in relative to the core competence of McDonalds, one of the largest food chain companies around the world. Let us first start with the positive aspects and strengths, which describe the performance of this company.
How can we describe the company’s strengths? Strength is a distinctive experience that gives the firm a comparative benefit in the market place. Among other major rivals, McDonalds is the no: 1 fast food chain stores with a 40 million customers visiting it per day. It has over 30,000 branches in 120 countries. It derives 80% of its revenues from eight countries like US, Canada, Australia, UK, France, Brazil, Japan, Germany and France. The ultimate strength was building an image in the minds of the people and hosting them to the fast food culture.
Customer care, delivery speed, and cleanliness are the core strengths on which these stores expanded. They built a corporate symbol and their advertisement promotions were highly effective in establishing the brand image and logo in the minds of the millions. Two foremost competitors generally recognized with McDonalds are the KFC and Burger King. McDonalds marketing strategy is apprehensive with the internal resources, external environment and its basic capabilities along with its shareholders. McDonald’s product value is also its greatest strengths. Customers realize what to expect when they stride into a McDonalds store.
It offers a great accent to human resources by rewarding both the customer and the employees. Next is the improvement aspect where new products line up to catch up with the new fashions and tastes of the people. Its diversity into further new business endeavors can furthermore be measured as its strengths. Liabilities/Earnings: Clearly McDonald’s is great at earning money, but this can be in danger if it faces severe debt or other liabilities. Fortunately, this is not the case for McDonald’s. One year of earnings is nearly double the current liabilities ($3. 5 billion).
Furthermore, just a few years of earnings could easily cover all of McDonald’s liabilities, short-term and long-term ($18. 6 billion). Even without earnings, McDonald’s has more in current assets than in current liabilities, and more in total assets than total liabilities. For these reasons, there is no chance that McDonald’s will run into any financial difficulties. McDonald’s has a proven business model that allows it to never give up earnings; this gives it the financial strength necessary to take on debt with ease. Profit Margin: McDonald’s has a strong foundation in financial strength and business-model tenacity.
Last year, it brought in about $26 billion in revenue. From there, its primary cost was the cost of bringing in this revenue, $16 billion. After that, it only had minor expenses, mainly in taxes. At the end of the day, McDonald’s made $5. 5 billion in profit – a margin of over 20%. For years, it has been the exact same story. This $5. 5 billion profit is then spent on investments and expenditures to allow growth, with the rest going to shareholders via dividends and share buybacks. ? Reference Gitman, L. J. , & Zutter, C. J. (2012). The Role of Managerial Finance.
In Principles of Managerial Finance. Boston, MA: Prentice Hall. Homepagehttp://www. aboutmcdonalds. com Investor Relationshttp://www. aboutmcdonalds. com/mcd/investors. html Press Releaseshttp://www. aboutmcdonalds. com/mcd/newsroom/press_releases. html Financial Informationhttp://www. aboutmcdonalds. com/mcd/investors/sec_filings. html Products/Serviceshttp://www. aboutmcdonalds. com/mcd/franchising. html Executives’http://www. aboutmcdonalds. com/mcd/our_company/leadership. html Corporate History/Profilehttp://www. aboutmcdonalds. com/mcd/our_company. html Yahoo Financehttp://finance. yahoo. com