Financial Analysis of the McDonald’s Corporation

MCD, New York Stock Exchange

One McDonalds Corp Plaza
Dept. 332
Oak Brook, IL 60523
630-623-3154

Sheena Harper-Nelson Webster University

COMPANY OVERVIEW:
Brief description of the company
McDonald’s is one of the largest fast food restaurants today. There are over 35,000 restaurants in 117 countries at the end of 2013. Out of those restaurants, 26,338 are franchised or licensed. That is over 80 % of the company. There are only 6,399 restaurants operated by The Company (McDonald’s). McDonald’s is a corporation that involves serving meals fast. McDonald’s is a customer service based company. Base on Wall Street journal, McDonald’s was one the two companies that ended 2008 with a gain (www.aboutmcdonalds.com)
Company history
McDonald’s has been around since 1940. It was founded by Dick and Mac McDonald’s their first store was a Bar-B-Q restaurant in San Bernardino, Ca. They closed the Bar-B-Q for only 3 months to make alterations. The first menu had nine items, hamburger, cheese burger, soft drinks milk, coffee, potato chips and slice of pie. In 1949 the world famous fries replaced the potatoes. McDonald’s opened their 100th store in Fond Du Lac, Wisconsin. In 1962, the McDonald’s in Denver, Colorado was the first to get indoor seats. On McDonald’s 10th anniversary the stock was $22.50 per share. Ronald McDonald’s appeared in his first commercial in 1966. The Big Mac was introduced in 1968. It has been one on McDonald’s best-selling products. The first Ronald McDonald’s house was opened in 1974. Over the years, McDonald’s have made several changes and updates to stay on top of the competitors. In 1983, McDonald’s was in 32 countries and chicken nuggets were introduced to domestic restaurants. Several years later in 1992, a store was open in Warsaw, Poland. This location breaks all grand opening stores sales. McDonald changed their kitchen to a made for you operating platform in1998. This made the kitchen more flexible. Fruit ‘n Yogurt parfait was introduced. Since then it has been a high selling item. Over the last decade, McDonald introduced several new products including wraps, sandwiches, salads, smoothies, and griddles (www.aboutmcdonalds.com).
Organization
The structure of McDonald’s is divisional. The corporation is broken down into several divisions that help the company continue to profit. The President and CEO is Don Thompson. The other leadership position are Chief Operating Officer, President, McDonald’s USA, Corporate executive vice President Worldwide Supply Chain , Development and Franchising, Executive Vice President and Chief Financial Officer, Senior Vice President and Chief Communication Officer, Executive Vice President and Chief Brand Officer, President, McDonald’s Asia, Pacific, Middle East and Africa, Executive Vice President and Chief Human Resources Officer, President, McDonald’s Europe, senior Vice President, Corporate Strategy, Senior Vice President and Chief Digital Officer, Executive Vice President, General Counsel and Secretary, Senior Vice President and Global Chief Information Officer and President, McDonald’s Latin America (www.aboutmcdonalds.com).
Main products and services
McDonalds sells their products all over the world. McDonald’s main products are the hamburgers and fries. Their fries have been the top ranking fries for years (www.aboutmcdonalds.com). McDonald’s is well known for their Big Mac with the special sauce. McDonald’s have changed up their target group to the working class business professional. They have coffee, smoothies, cappuccino and parfaits. They also offer free Wi-Fi, playground area and parties (www.mcdonalds). With these perks, customers can come in with their children and be able to use internet while their children play. McDonald’s has five focus areas which are nutrition & well-being, sustainable supply chain, environmental responsibility, employee experience and community.
Geographic area of operations
McDonald’s has over 35,000 restaurants in 119 countries (www.mcdonalds.com). McDonald’s has approximately 400,000 employees. There are restaurants in Europe, Asia, Africa, and Pacific. In 2011, McDonald’s opened restaurants in Bosnia and Herzegovina, and Trinidad & Tobago (www.aboutmcdonalds.com).
Recent Developments In 2010, McDonald’s introduced the fruit smoothies for all the customers who were on health kicks. With so many people today worrying about their health, this a smart move for McDonalds. McDonalds have remodeled their location to update the look more for adults verse children. The fast food giant continued to reinvent product innovation in the quick-serve industry by rolling out Real Fruit Smoothies, Angus Snack Wraps, and even oatmeal system wide, as well as introducing new drinks like the Caramel Mocha (www.qsrmagazine.com). In 2012, McDonald’s renewed their TOP Sponsorship with the Olympic Games through 2020. McDonald changed their Happy Meal in 2011 to start having apples. This was a way for them to improve nutrition choices. In 2012, over 900 existing stores were remodeled with the majority adding drive-thru capacity to capture additional guest counts. January 23, 2014 McDonald's Corporation today announced results for the fourth quarter and year ended December 31, 2013, reflecting higher revenues and earnings per share for both periods compared with the prior year (www.mcdonalds.com). This year McDonald’s have started offering their small coffee free for weeks at a time.

PART 2, FINANCIAL OVERVIEW:

a. Sales and Income Record: ------------- Fiscal Years ------------- 2008 2009 2010 2011 2012

Sales $16,561 $15,459 $16,233.3 $18,292.8 $18,602.5

Percent change in sales each year -6.65% 5.00% 12.68% 1.69%

Net Income $4,313 $4,551 $4,946.3 $5,503.1 $5,464.8

Percent change in net income each year 5.15% 8.86% 11.25% -0.69%

Except for the 6.65% drop in sales in 2009, McDonald has risen in the last five years. The net income also had growth except for 2009 and 2012. This was a time where McDonalds was upgrading restaurants and changing the menu. This change could have played a part in the decrease in sales.
b. Expense Distribution: FY 2012
Company-operated restaurant expenses
Food and Paper $6,318.20
Payroll & employees benefits $4,710.30
Occupancy & other operating expenses $4,195.20
Franchised restaurants -occupancy expenses $1,527.00
Selling, general, & administrative expenses $2,455.20
Impairment and other charges $8.00
Income Taxes $2,614.20
Interest $516.60

More than half of McDonald expenses come from the Cost of Goods Sold. I have broken down the Cost of Goods to Food and Paper, payroll & employees’ benefits, occupancy & other operating expenses, franchised restaurants -occupancy expenses, selling, general, & administrative expenses, impairment and other charges, income taxes, interest total. The selling, general, & administration are at 11%. This is a 3% increase from 2011. The growth rate in 2012 was based the cost of employees going up. McDonald seems to have control on their expenses.

c. Assets Distribution: Year-end FY 2012
Assets
Cash & equivalents _$2,336.1_
Accounts & notes receivables _$1,375.3
Inventories __$121.7_
Prepaid expenses/other current assets $1,089.0
Property &equipment $38,491.1
Depreciation ($13,813.9)
Other assets _$5,787.2_
Total $35,386.5

McDonald fixed assets are high. This could show that they have the competitive advantage. The inventories percentage is low which means that McDonald’s is selling what they buy. Total assets increased in 2012. The property and equipment percentage is very high which tell me that McDonald’s has a large inventory of equipment for their daily process. McDonald’s has remodeled several stores in the past years to increase revenues.
c. Capital Structure:
Year-end FY 2012
Capital Structure:

Current Liabilities $ 3,403.1
Long-term debt $13,632.5
Long-term & Other Liabilities $ 1,526.2
Preferred Stock (if any) $ 0
Deferred income taxes $ 1,531.1
Common Equity $ 15,293.6

McDonald has over 43% of its assets in common equity. There was no preferred stock. Current liabilities are at a 17%. The long-term debt is at a 39%. McDonald’s will have to rely on sales to help increase capital. Coming up with new marketing approach could show to be profitable. PART 3, RATIO ANALYSIS:

The ratio analysis of McDonalds will be evaluated against Wendy’s. The information used for all the ratio analysis will be from McDonald’s and compared to Burger King. These two companies are top competitors. Some other competitors are Burger King, Chick-fil-a, Sonic, and Dairy Queen. McDonalds remain top on the rates, compared to all other companies. They are different.

(1) LIQUIDITY | | | | | Current Ratio: | | | | | | | FY 2011 | FY 2012 | | | McDonalds | 1.255775483 | 1.446357733 | | | Wendy’s | 2.028240303 | 2.474454616 | | | | | | | Quick Ratio: | | | | | | | FY 2011 | FY 2012 | | | McDonalds | 1.221417987 | 1.410633527 | | | Wendy's | 1.993203319 | 2.426330431 |

McDonald’s current ratio shows that they will be able to pay off their debt. McDonald’s current assets increased over the time frame FY 2011-2012. The current assets were much more than current liabilities. The cash provided by operation was nearly $7.0 billion.
Wendy’s cash decreased from FY 2011 to 2012 by about 1.04%. Wendy’s accounts receivable decreased as well. Wendy’s has borrowed a lot of cash. They have been in financial trouble for a while. Based on the information on the Company’s balance sheet, the cash decreased by $56.3 million during the year ended December 30,202 as compared to the year ended December 31, 2011. This was due to several different factors. There was a $54.0 million negative impact in accrued expenses and other current liabilities for the comparable periods. There were increase in payments and a decrease in charges. A $20.6 million negative impact in accounts payable between FY11 and FY12.

| | (2) ASSET MANAGEMENT | | | | | | | | | | Total Asset Turnover: | | | | | | | FY2011 | FY2012 | | | McDonalds | 0.818614182 | 0.77959 | | | Wendy's | 0.565344267 | 0.58218 | | | | | | | Average Collection Period: | | | | | | FY2011 | FY2012 | | | McDonalds | 18.03915796 | 18.2229 | | | Wendy's | 10.26067942 | 8.91126 |

Comments on McDonalds Asset Management:
McDonald’s turnover was at $.81 for FY 11 and $.77 for FY12, which means that each $1.00 of assets is producing $.81 and $.77 in sales. That shows that their total assets were low and steady. McDonald’s total assets were greater than the sales. In comparison, both companies were able to have turnover on their assets. Wendy’s went from 0.56 in FY 11 to .58 in FY12. McDonald is still turning over there assets at a rapid paste then Wendy’s.
McDonald’s average collection period was 18 days for FY 2011 and 18.22 days for FY 2012. That was not a big difference between the years. Wendy’s average collection period was 10.26 days for FY11 and 8.9 days for FY12. It takes McDonald’s longer to collect than Wendy’s. (3) DEBT MANAGEMENT: | | | | | | | | | | Total Debt to Total Assets: | | | | | | FY2011 | FY2012 | | | McDonalds | 0.56379983 | 5.654498184 | | | Wendy's | 0.052021766 | 0.538516578 | | | | | | | Times Interest Earned: | | | | | | | FY2011 | FY2012 | | | McDonalds | 17.3 | 16.7 | | | Wendy's | 1.20 | 1.2 | The Times interest earned of McDonalds went down from 2011 to 2012.this means that the number of times EBIT would have covered the interest expense in the past 12 months. Wendy’s keep their times interest earned about the same between the 2 years. This is low for any company which means that less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. Wendy’s would not be a good company to lend money at this time. (4) PROFITABILITY: | | | | | | | | | | Net profit Margin: | | | | | | | FY2011 | FY2012 | | | McDonalds | 20.37732356 | 19.82370225 | | | Wendy's | 0.406151624 | 0.377887645 | | | | | | | Return on Assets: | | | | | | | FY2011 | FY2012 | | | McDonalds | 16.68116605 | 15.44317748 | | | Wendy's | 0.229615492 | 0.219999122 | | | | | | | Return on Equity: | | | | | | | FY2011 | FY2012 | | | McDonalds | 38.24199803 | 35.73259403 | | | Wendy's | 0.494722377 | 0.476721614 | | | | | | | Modified Du Pont Equation, FY 2012: | | | | | | | | | | | McDonalds | Wendy's | | Net Profit Margin | | 19.82370 | 0.377887645 | | Total Asset Turnover | | 0.77902590 | 0.582181303 | | Equity Multiplier | | 2.313811006 | 2.166925078 |

Comments on McDonalds Profitability: McDonalds increase in net profit margin was only a 1% from FY 2011 to FY 2012. They increased 4% in constant currencies. Wendy’s had a decrease of a little over 1% in a year. The cash provided by operating activities increased 20.5 million during FY 2011. This shows the large difference in the net profit margin of both companies. Wendy’s has a larger percentage of operating cost. McDonald’s return on assets decreased by 1% from FY 2011 to FY 2012 which was due to net income decreasing by the amount of 38.1 million. This decrease in 2012 for McDonalds in return on assets and Total assets increased $2.4 billion or 7% in 2012. Excluding the effect of changes in foreign currency exchange rates, total assets increased $2.0 billion in 2012. Over 75% of total assets were in major markets at year-end 2012. Net property and equipment increased $1.8 billion in 2012 and represented about 70% of total assets at year end. Excluding the effect of changes in foreign currency exchange rates, net property and equipment increased $1.4 billion primarily due to capital expenditures, partly offset by depreciation (sec.gov/McDonalds (24)).
Operating income is used to compute return on average assets. Wendy’s also had a decrease on the return on assets. The largest operating cost for both companies was the Food and paper. The return on equity was at 38% for FY 2011 and 35% for FY 2012 for McDonald’s. This was a decrease which shows that had a return on investment. In 2012 McDonald’s returned $5.1 billion to shareholders through shares repurchased and dividends paid. Net income is used to calculate return on average common equity. Month-end balances are used to compute both average assets and average common equity (sec.gov/McDonalds (24)).
(5) MARKET VALUE RATIOS: When completing this area the following information was used for both companies. McDonalds stock price was for FY2011 was $100.32 and FY 2012 $95.29. The EPS was $5.27 for FY 2011 and $5.36 for FY2012. The book value was $14.09 FY 2011 and $15.25 for FY2012. Wendy’s stock price was for FY2011 was $5.36 and FY 2012 $4.66. The EPS was $.02 for FY 2011 and $.02 for FY2012. The book value was $5.09 FY 2011 and $4.87 for FY2012. | | | | | | | | | | PE Ratio: | | | | | | | FY2011 | FY2012 | | | McDonalds | 19.0365313 | 17.778 | | | Wendy's | 268 | 235 | | | | | | | Market to Book Ratio: | | | | | | | FY2011 | FY2012 | | | McDonalds | 7.119943222 | 6.24852 | | | Wendy's | 1.053045187 | 0.95688 |

McDonalds PE ratio amount decreased from FY 2011 to FY 2012. There was a 2% increase in FY 2012 and a 15% in 2011. The earnings per share for FY 2012 were $5.36. The earnings per share increased Wendy’s had a 1% increase in the PE ratio. The market value increased for McDonalds by $70 in book value. The market to Book ratio for Wendy’s was a decrease. Wendy’s repurchased in aggregate 83.3 million shares with a purchase price of $402.5 million.
PART IIII, CONCLUSIONS AND RECOMMENDATIONS McDonald’s has kept a steady in in revenue. They have made smart investment that has kept them as the number one Fast Food Company. In 2012, McDonald had a sales growth of 3%, operating income growth of 1%. They had a 5.0% in comparable sales growth and guest counts rose 4.9%, which build on FY 12 increases of 3.8% and 1.4% respectively. There revenues increased by 1% for FY 12. The cash provided by operations increased $40.4 million. I recommend that McDonalds continue on the path that they are on. Their revenue and sales are good. They have gotten rid of a lot the play area for children and now parents don’t want to stay as much. They should have kept something in line for children because they are the main reason most adults end up at the fast food restaurants. As long as they keep things for the whole family then they will continue to be on top.

References
McDonald, www.mcdonalds.com
About McDonald’s, www.aboutmcdonalds.com , 2013 annual report.
The QSRmagazine, http://www.qsrmagazine.com/reports/2011-qsr-50, March 03, 2012. http://www.marketwatch.com/investing/stock/mcd/financials/balance-sheet http://www.sec.gov/Archives/edgar/data/30697/000003069713000003/twc10k2012.htm#sD54E184EB8FD413F411209F7DFC6F6E6