Financial Analysis of McDonalds Company
PART 1, COMPANY OVERVIEW:
a. McDonald’s is an American fast food chain that sells a variety of fast food alternatives, but most notably has earned its reputation and success for the hamburger. It is the largest fast food chain in the world, with globally recognized “golden arches” symbolizing a reliable meal can be had in over 119 countries. McDonald’s has continued to develop their menu to reflect the desire/demands of their customers. The current CEO of McDonald’s is Mr. Don Thompson. b.
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McDonald’s was started in the 1940s as a BBQ restaurant owned and operated by Richard and Maurice McDonald’s in California, U.S.A.
The McDonald’s franchise was not established until 1955, when man by the name of Ray Kroc opened the ninth McDonald’s restaurant in Des Plaines, Illinois. By 1961, McDonald’s filed trademark for the company name and “drive-thru” service. Ray Kroc eventually forced the McDonald’s brothers out of the business and successfully spread the company throughout the world. Today, McDonald’s is an international sign of globalization. c. McDonald’s invests in properties, operates restaurants, and is a franchiser of the McDonald’s chain, in order to make money. McDonald’s operates differently than most franchise companies. Most franchised companies make their money by claiming a percentage of the income made at each chain; however, often times McDonald’s Corporation will purchase the property the franchise is on and charge rent.
d. Arguably, the main thing McDonald’s sells is uniformity and expectations. This is to say, when you order from McDonald’s you know what you will get every single time; no surprises. McDonald’s makes money doing this by selling the food for significantly more than what they purchased it for. McDonald’s also makes money by participating in the strategy discussed above investing in properties and charging franchise owners rent, franchise markups of 40%, operating restaurants, etc. e. McDonald’s has over 33,000 locations in over 119 countries across the globe to include places like Israel, Brazil, Scotland, Russia, the U.S., India, and China. Within each of those countries McDonald’s can be found in a variety of places in a variety of forms; such as, coffee stands in Paris, drive-thru only restaurants in Germany, airport vendors, or even connected to gas stations.
f. In recent years McDonald’s has taken criticism on the unhealthy food choices on their menu, so much to where at some restaurants they have listed the total caloric intake per meal. That said, McDonald’s was the official food sponsor of the 2012 Summer Olympics in London, England, where they built their largest restaurant to date to support the massive crowds.
PART 2, FINANCIAL OVERVIEW:
a. Sales and Income Record:
————- Fiscal Years ————-
Percent Change in Sales Each Year
Percent Change in Net Income Each Year
GRAPH OF SALES & NET INCOME, FY 2007 ‑ 2011
COMMENTS: Aside from 2009, the company has seen growth in both sales and net income every year. The decrease in sales for 2009 could possibly be a result of the economic times, where many of McDonald’s customers may have reduced their spending and become more conservative with their expenses. The growth percentages since 2010 are increasing, which indicates a positive trend in the company moving forward. It would be unrealistic to assume that the company can continue doubling its growth percentages, but a continued growth of 12% to 15% is possible.
b. Expense Distribution:
PIE CHART OF EXPENSES, FY 2011
COMMENTS: As depicted in the chart, the companies’ largest expense is Cost of Goods Sold (COGS). In order to increase their profit margin, McDonald’s must continue to try and find ways to reduce COGS. This is because many of the other expenses are much harder to influence. Selling General and Administrative (SG&A) expenses have most likely already been trimmed to the minimum over the company’s life, taxes are required by the Government, and interest expense makes up only a small portion of expenses. The company may need to do a cost-benefit analysis to determine what may be done to reduce COGS. One idea may to better vertically integrate the company, or to remove menu items which are unpopular and/or seasonal.
c. Assets Distribution:
Year-end FY 2011
Fixed Assets (PP&E)
PIE CHART OF ASSETS, Year-end FY 2011
COMMENTS: As depicted in the chart, the companies’ assets are largely fixed. This comes as no surprise since the company consists of over 33,000 restaurant locations worldwide. The percentage of fixed assets as compared to current assets does mean though that the company is not liquid, which means it cannot quickly convert its assets to cash. The low inventory which actually makes up just 0.4% of the asset distribution is normal due to the fact that the company is a restaurant chain, and much of the product has a quick shelf life.
c. Capital Structure:
Year-end FY 2011
Long-term & Other Liabilities
CAPITAL STRUCTURE PIE CHART, Year-end FY 2011
COMMENTS: As depicted in the chart, the companies’ capital structure is made up largely of common equity and long-term liabilities. The company has been extremely successful, and has gained equity over the years as it became the world’s largest chain of hamburger fast food restaurants. Additionally, in order to continue their growth, the company has expanded its locations, which required long-term debt financing. Because of these characteristics, the percentages of each of these categories are expected. Furthermore, the company has low current liabilities, which is normal for yearly operations in this sector.
PART 3, RATIO ANALYSIS:
Comments On McDonalds Liquidity:
McDonald’s has a good current ratio. It is above 1, which means that it has enough current assets to cover current liabilities. Also, since the number is not too high, we know that the company is utilizing its assets efficiently. The quick ratio is also good because it is above 1, meaning McDonald’s does not rely on their inventory. Comparing the numbers to Wendy’s, McDonald’s has room for improvement.
(2) ASSET MANAGEMENT
Comments On McDonalds Asset Management:
McDonald’s has great Total Asset Turnover when compared with Wendy’s. They are making over $0.75 for every dollar of assets. Also, their Average Collection Period is very good, taking on average 18 days to collect on receivables.
(3) DEBT MANAGEMENT:
Comments On McDonalds Debt Management:
Both companies’ debt ratios are similar, and are not alarming for the industry. However, McDonald’s Times Interest Earned is much higher than Wendy’s. This shows possibly lenders that McDonald’s can easily meet their interest owed (17x).
Comments On McDonalds Profitability:
For the industry, McDonalds has good profitability. Wendy’s seems to be struggling in this area, and it may be best to compare the company against another peer to determine how they are doing.
(5) MARKET VALUE RATIOS:
Comments On McDonalds Market Value Ratios:
McDonald’s market value is good compared to both industry numbers, as well as against Wendy’s market value ratios. McDonald’s ratios prove the company is economically strong. Part 4, Summary and Conclusion
The McDonald’s Company is continuing to grow, both physically and monetarily, as seen in the increase in locations and sales per year. This is a good sign, especially during the current economic times. The company also has standard asset, expense, and capital distribution for companies within the fast food industry. This is good because there are no glaring issues that would inhibit investing in the company. Additionally, the company has great ratios when compared with The Wendy’s Company, as well as the rest of the fast food industry. One can fully understand how well the McDonald’s company is doing in comparison to the industry.
Looking forward, the McDonald’s Company can try to get better by finding efficiencies where possible. One way the company could do this is by reducing its Cost of Goods Sold. Through eliminating some specialty items, this may be possible. Also, the company may want to look at a way to increase their return on assets and equity as any increase, large or small, will always help a company. Again, the company is doing extremely well already, but great companies should always continuously look for efficiencies and improvements in these areas.
Overall, the McDonald’s Company has postured itself to become a large and extremely successful company within the fast food industry. It has grown from a small upstart in the 1940’s, to a symbol of globalization today because of the multiplicity of restaurant locations around the world. I believe The McDonald’s Company is a great investment opportunity as it seems to continually improve, develop, and grow to serve its consumers around the world.