1.1 Background of Study
Public organizations have an assortment of partners, for example, shareholders, bondholders, investors, suppliers, representatives, and administration. All of these partners need to monitor the firm and guarantee that their interests are being provided. They depend on the organization’s financial statements to offer essential data (Brealy et al., 2008).
In this work, McDonald’s Corp’s corporate performance has been assessed regarding the organization’s financial statements. Pro Forma financial statements of McDonald’s for the following two monetary years were created, keeping in mind the end goal of figuring out whether the association’s expected performance is following their objectives and deciding future financing requirements of the organization. This was accompanied by McDonald’s Corp ‘s thorough financial review of financial ratios, its DuPont Return on Equity (ROE) inquiry, and its Economic Value Added (EVA). These inquiries were completed to determine the reliability of the financial plans of the organisation and also to determine whether to bring money into the stock of the organisation or not.
1.2 Overview of McDonald’s Corp
McDonald's Corp is one of the world's largest food service retailers, with its headquarters in Oak Brook, Illinois, with almost 34,000 local restaurants serving 69 million customers every day in more than 118 countries (McDonald's Corp, 2012). The company is listed on the New York Stock Exchange and is connected to the restaurant industry. Mc Donald's founder, Ray Kroc, laid a solid base that continues with success even today (Franchising.com, 2013).
1.3 Business Description
In the process of franchising McDonald's restaurants around the world, McDonald's Corp participates. Under mutual effort understandings, McDonald's Corp, franchisees, or associates managed the restaurants of the corporation. In 2014, there were 19,869 conventional franchised eateries, 6,598 eateries worked by the company, 4,350 approved formative eateries, and 3,663 subsidiary eateries, making McDonald's Corp (McDonald's Corp, 2012) a total of 34,480 restaurant structures.
1.3.1 McDonald’s Brand
McDonald's trademark is one of the world's most renowned and profitable brands and grasps the leading share in the market of branded fast food restaurants segment in each nation in which they work (Franchising.com, 2013).
1.3.2 McDonald’s Products
McDonald's offer a uniform menu in all the areas and stresses on low prices, which incorporates its renowned burgers, cheeseburgers like the BigMac, Chicken sandwiches, Quarter Pounder, Chicken Nuggets, French fries, servings of mixed greens, pastries, sundaes, soda pops and drinks (Orji et al., 2005). Mc Donald’s additionally give a breakfast menu that would incorporate Egg McMuffin, bagel sandwiches, hotcakes, and biscuits.
Regardless of the variety of food items being offered, McDonald’s Corp and its franchisees operate all restaurants to assure consistency in both the standards and the services. The organisation is vigilant when awarding franchises and establishing joint venture agreements and does not pursue the trend of franchising with or collaborating with investor groups or passive investors (Orji et al., 2005).
Pro Forma Financial Statements of McDonald’s Corp
The company’s Pro Forma financial statements (Income Statements and Balance Sheets) for the 2013 and 2014 fiscal years are exposed in Tables 1 and 2. These Pro Forma financial statements were generated by utilizing the Percentage of Sales technique and the following postulations:
10% growth rate in Sales and Cost of Goods Sold (COGS)
The company is operating at full capability, so all resources (including Fixed Assets) grow proportionally with sales
Accruals and Accounts payables rise by the sales
The corporation’s dividend is 60% of the Net Income
Reflecting on Table 1, it can be assessed that the company is anticipated to produce revenue of about $33.36 billion by the end of the fiscal year 2014. The company’s Pro Forma balance sheets (Table 2) reflect that the company will require external financing of about $1.012 billion during the fiscal year 2013 and approximately $1.099 billion in 2014. It is also assumed that the corporation will manage the funding for the two fiscal years using Long-term debt (50%) and Common stocks (50%).
McDonald’s Financial Statement Analysis
Table 3 shows the results of McDonald's analysis of financial statements with respect to the last fiscal year. The, as can be seen from the table, liquidity of the company is satisfactory. The latest McDonald's ratio for the last fiscal year is 1.45. It suggests that McDonald's Corp has enough existing assets to take care of its current liabilities since the value is above 1.0 (the benchmark). Compared to the industry average, the company outperformed the industry average (1.45 as against 1.26 for the industry average). The quick ratio for McDonald's is also above 1.0 (1.41). This shows that the company can comfortably take care of its short-term financial obligations using its most liquid assets. The organisation also outperformed the industry average easily in the last fiscal year (1.41 as against 0.82 for the industry average).
The company's financial statement examination results for the fiscal year 213 and 2014 are presented in Table 3. The assessment shows that the association's liquidity is fulfilling. As the quality is higher than 1.0, which is the benchmark, it prescribes that McDonald's Corp has a sufficient flow of assets to manage its recurring pattern liabilities. Comparing the company with the industry average, i.e., 1.45 is higher than 1.26 for the industry average. This exhibits that the association can easily manage its temporary monetary duties using its assets.
Regarding the profitability and productivity, the organization is sound as it beats the business average in ROE and ROA. The company's ROE of 35.75% recommends that 35.75% of revenues have increased over the shareholders' equity in the last financial year.
Considering the management of the assets, Table 3 reflects that the company is not managing its resources. The organization’s inventory turnover proportion for the last fiscal year is about six times more than that of the industry (137.64 as against 25.22 for the industry average). This high value reflects that McDonald’s inventory is small. This may lead to a possible loss of sales opportunities for the company. The company’s total assets turnover proportion is also lower than that of the industry (0.78 as in opposition to 1.12 for the industry average). This also shows that the company is not managing its assets well.
The company had a lot of debt commitments amid the last monetary year. This is because the organization's debt to equity proportion is 1.31, which is much more than that of the normal business average of 0.99. This proposes that the debt commitments bolster 1.31 times the shareholders' equity. This is bad as the organization's profits will be utilized as a part of settling debt commitments. The organization's yearly aggregate debt obligation is 0.57. The company's annual debt ratio recommends that leasers financed 57% of the organization's aggregate resources. This additionally demonstrates the company's high debt commitments.
The company’s last fiscal year’s price per earnings (P/E) ratio is 17.64. This figure proposes that for every dollar of current earnings, an investor in the company’s common stock pays $17.64 for every share. The company’s stock performance is not in the market as its ratio for P/E is lower than that of the industry average of 23.64. The corporation’s earnings per share in the last fiscal year are $5.36.
McDonald’s ROE DuPont Analysis
The results of the company’s return on equity DuPont analysis are reflected in Table 4. The table shows that a 35.73% return on equity is acceptable for a restaurant company. If the equity multiplier, on the other hand, is excluded from the analysis to analyze the company's earnings if it were free from its debt commitments, it is reflected that the ROE falls to 15.44%. Thus, implying that 15.44% of the return on equity for the last fiscal year was due to sales and profit margins, while 20.29% was owed to the returns earned on the debt at work in the business. This also reflects the company’s high debts commitments. If an investor can come across an organization with a similar return on equity and an elevated proportion due to sales generated internally, the new company would be more appealing than McDonald’s Corp.
McDonald’s Economic Value Added (EVA)
Economic value added included in account measures the net worth included by an organization amid a period. Its idea is like present net worth. NPV computes the total value added over a venture's life in current value terms; EVA discovers net value added in a solitary period. For a period, the positive value of EVA proposes that the administration has expanded the organization's aggregate worth. Then again, negative EVA suggests that the cost of capital utilized is more than the organization's generated profits and, subsequently, a decrease in its value over the period.
The method for calculating EVA is:
Where NOPAT = net operating profit after tax;
TOC = total operating cost;
WACC = weight average cost of capital.
The computation of the company’s economic value added is in Table 5. According to the table, the company’s EVA for the last fiscal year is about $3.922 billion. This positive value shows that the company was competent to include $3.922 billion to its importance in the previous fiscal year.
McDonald’s Capital Structure
An organization's capitalization portrays its arrangement of perpetual or long-term capital, which comprises a mixture of debt obligations and equity. An organization's sensible, corresponding utilization of debt obligations and equity to bolster its resources is an essential indicator of accounting report quality and strength (Investopedia, 2013). A substantial capital structure that indicates a reduced level of debt obligation and a comparing high level of equity is an exceptionally positive indication of budgetary wellness. As per Sadeghian et al. (2012), adopting an obligation approach or a capital structure is a meaningful choice that impacts the organizations' worth.
The outcome of the analysis of the company's financial statement demonstrates that the organization may not be financially fit. This is due to the organization's capital structure comprising a high debt obligation segment. Compared to its equity proportion in the last monetary year (1.31 as against 0.99 for industry standard), its elevated debt obligation proposes that the organization has high debt commitments. Leasers finance the company's aggregate debt proportions, 57% of the organization's aggregate resources. The organization's ROE DuPont investigation additionally uncovers that the corporation’s high productivity regarding ROE in the last monetary year is a consequence of the debt part of the organization's capital structure. If the organization were to be free of debt commitments, its ROE in the last monetary year would have been 15.44%.
Even though the company’s economic value added is positive, its estimation of $3.922 billion may have acknowledged more as the organization's weighted-average cost of capital may have been lessened if the corporation had an ideal capital structure. The organization's Pro Forma financial statements likewise demonstrate that the organization will require financing in the following two financial years. This may stop expanding the company's debt commitments segment of the capital structure if they choose to source the funding from debts.
McDonald's Pro Forma budgetary articulations (Income statement and Balance sheets) for the following two financial years have demonstrated that with a 10% sales growth rate, the company is anticipated to produce incomes of $30.32 billion and $33.36 billion, respectively. The organization's Pro Forma financial statements additionally demonstrate that the company will require external financing in the following two fiscal years. The financial statements analysis indicates that the organization is liquid regarding the current and quick ratios and profitable regarding the returns on equity and assets. On the other hand, the outcomes additionally demonstrate that the organization is not properly managing its resources and has high debt commitments.
The stock of the organisation is not doing great in the business sector as its cost per income (P/E) proportion of 17.64 in the last financial year is below that of the organization's business typical of 23.64.
The company’s return on equity DuPont examination results demonstrates that the organization's high return on equity of 35.73% in the last fiscal year is as an aftereffect of the debts in the company’s capital structure. If the organization were not experiencing debt obligations, its ROE would have been 15.44%. The organization's economic value added of $3.922 billion proposes that McDonald's Corp could include a sum of $3.922 billion to its worth in the last monetary year.
Decision Making Whether to Invest in the Company’s Stock
The strong points of an organization’s balance sheet are assessed by three broad types of investment – quality measurements:
Adequacy of Working capital
Performance of the Assets and
The evaluation of McDonald's Corp 's corporate version reflected that the business performs better only in the capacity of working capital. The growing liquidity of the company in the previous fiscal year shows that in the coming years, the company will easily take care of its current liabilities. This means that McDonald's Corp has enough working capital. sOn the other hand, McDonald's Corp's performance is not satisfactory in assets and financial leverage aspects. The corporation's high inventory turnover percentage in the previous fiscal year, which was approximately five to six times more than that of the industry average, proposes that the business has a low inventory and may face reduced sales opportunities in the future. The corporation’s high debt commitments show that its capital structure consists of high intensity of debt and the resultant low levels of equity, indicating poor financial strength.
It is crucial that investors wishing to invest in a publicly-traded company's common stocks mainly consider the company's price-to-earnings ratio. Usually, a high price to earnings ratio indicates that investors anticipate superior earnings growth opportunities compared to the businesses having a lower cost to earnings proportion. As a business’s price to earnings ratio does not consider many crucial aspects, it is more practical to contrast the corporation’s price to earnings ratio to other corporations in the same business or against that of the corporations’ industry average. By analyzing the corporate performance of the McDonald’s Corporation reflects that the ratio of price to earnings is lower than that of the industry average (17.64 as against 23.64 of the industry average). This specifies that the common stock of McDonald’s Corp is not performing well in the market.
Acknowledging that the corporation is facing sound issues like debt commitments, capital structure, leverage, and dividend policy, I do not think I would be eager to invest in the corporation’s common stock. The corporation possesses an inadequate capital structure owing to its debt, strategies, and failure to manage the assets.
Brealy, R. A., Myers, S. C., and Allen, F. (2008). Principles of Corporate Finance. New York: McGraw-Hill.
Franchising.com (2013). McDonald's Business Overview. Retrieved from: http://www.franchising.com/mcdonalds/overview.html
Investopedia (2013). Complete Guide to Corporate Finance. Retrieved from: http://www.investopedia.com/walkthrough/corporate-finance/5/capital-structure/capital-structure.aspx
McDonald's Corp. (2012). McDonald's 2012 Annual Report. Retrieved from: http://www.aboutmcdonalds.com/content/mcd/investors/annual_reports/_jcr_content/genericpagecontent/everything/file.res/2012%20Annual%20Report%20Final.pdf
Orji, A., Bao, C., Zino, A., and Philippis, E. (2005).Asset Management: McDonald's Corporation Analysis. Retrieved from: http://www.stjohns.edu/media/3/56b4dec8650c44b7adcc81d25da93148.pdf
Sadeghian, N., Latifi, M., Soroush, S., & Aghabagher, Z. (2012). Debt Policy and Corporate Performance: Empirical Evidence from Tehran Stock Exchange Companies. International Journal Of Economics And Finance, 4(11). http://dx.doi.org/10.5539/ijef.v4n11p217
McDonald’s Corporate Performance Evaluation Tables
Table 1 Pro Forma Income statements of McDonald’s Corp
McDonald's Pro Forma Income Statement
Cost of Revenue
Research and Development
Sales, General, and Admin.
Other Operating Items
Add'l income/expense items
Earnings Before Interest and Tax
Earnings Before Tax
Equity Earnings/Loss Unconsolidated Subsidiary
Net Income-Cont. Operations
Net Income Applicable to Common Shareholders
Addition to Retained Earnings
Table 2 Pro Forma Balance sheets of McDonald’s Corp
McDonald's Pro Forma Balance Sheet
Cash and Cash Equivalents
Other Current Assets
Total Current Assets
Deferred Asset Charges
Short-Term Debt / Current Portion of Long-Term Debt
Other Current Liabilities
Total Current Liabilities
Deferred Liability Charges
Stock Holders’ Equity
Total Liabilities & Equity
Table 3 Financial ratios of McDonald’s last fiscal year
(Current Assets)/(Current Liabilities)
(Current Assets - Inventory)/(Current Liabilities)
Return on Equity
(Net Income)/(Shareholders' Equity)
Return on Assets
(Net Income)/(Total Assets)
(Cost of goods sold)/(Inventories)
Total assets turnover
Debt to Equity
(Total liabilities)/(Shareholders' Equity)
(Total liabilities)/(Total Assets)
Price to Earnings (P/E)
(Market Price of Common Stock)/(Earnings per Share)
Earnings per Share
(Net Earnings)/(Outstanding shares)
Table 4 ROE DuPont analysis result of McDonald’s last fiscal year
DuPont Analysis Equations
Net Profit Margin
McDonald's DuPont Results
Table 5 McDonald's last fiscal year EVA calculation.
EVA = NOPAT - (WACC * TOC)
Net Operating Profit After Tax = EBIT * (1 - T)
Average total operating cost = Total Assets - (Total current liabilities - Short term debts)
Earnings before interest and tax
Weight Average Cost of Capital