Description
The purpose of this study is to explore the financial aspects of McDonald's success as a market leader despite of the global recession and tough competition offered by Yum brands. Financial ratio analysis, horizontal analysis, vertical analysis and DuPont analysis are applied for 9 years financial data of McDonald's.
International Journal of Accounting and Financial Reporting
ISSN 2162-3082
2014, Vol. 4, No. 1
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Financial Exposure of McDonald’s Corp. Success as a
Market Leader
Maria Shahid (Corresponding Author)
MS Scholar, Department of Management Sciences
The Islamia University of Bahawalpur (Pakistan)
[email protected]
Hamna Shafiq
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Ayesha Khan
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Rafia Bari
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Nimra Shahzad
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Irum Saeed Ch
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Sadia Parveen
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Accepted: August 02, 2014
DOI: 10.5296/ijafr.v4i1.6086 URL:http://dx.doi.org/10.5296/ ijafr.v4i1.6086
International Journal of Accounting and Financial Reporting
ISSN 2162-3082
2014, Vol. 4, No. 1
www.macrothink.org/ijafr 339
Abstract
The purpose of this study is to explore the financial aspects of McDonald’s success as a
market leader despite of the global recession and tough competition offered by Yum brands.
Financial ratio analysis, horizontal analysis, vertical analysis and DuPont analysis are applied
for 9 years financial data of McDonald’s. And it is discovered that efficient operations, strong
short and long term solvency position, high profitability, highly loyal customer, broader
network expansion and the value adding menu are major factors of its success. But it has to
improve its asset utilization efficiency to remain No. 1 in highly competitive fast food
industry. The expected learning outcomes of this case study is to illustrate the success factors,
particularly in financial terms which provides a strong base for a business organization to
maintain its competitive position & leadership. The readers are expected to be able to get an
understanding of the following terms at the completion of this study: an understanding of
calculation and interpretation of basic financial ratios and its implications for financial
managers, investors and creditors; the significance of various financial analysis for a business
organization, the importance of understanding the external business environment and how
that environment poses threats as well as new opportunities for the businesses operating in it.
This case study is designed for the students of BBA/MBA and helpful in the courses of
corporate finance and financial reporting analysis.
Keywords: Financial Ratio Analysis, Horizontal Analysis, Vertical Analysis, DuPont System
of Analysis.
1. Introduction
McDonalds started only as a small stall of hamburger in California, owned by Dick and Mac
McDonald. To increase their business they closed their small business for 3 months and in
1948 they reopened as a self-service restaurant, and at that time they only served 9 items such
as slices of pie, coffee, milk, potato chips, cheeseburgers and hamburgers. Now it has grown
to be a dominating and powerful multinational corporation operating in 119 countries with
more than 31,000 restaurants and1.5 million employees, which serve more than 46 million
customers per day. The aim of the McDonald’s is to grow into buyer’s most beloved place to
dine with their world’s most favorite and famous Chicken Mac Nuggets, Quarter Pounder,
Big Mac and French-fries (James, 2009).
In food industry, McDonald’s has been ranked as a leading and the number one fast food
chain worldwide and across industries McDonald’s ranks top three American brands.
McDonald’s uses Dow Jones Industrial Average (DJIA) companies as the group of
comparison and they believe it is an appropriate way of comparing. McDonald’s is also
included in Standard & Poor’s 500 Stock Index. Currently company’s share price is $96.45.
The corporation is treated as separate geographical sections or areas. Most significant areas
are Asian/Pacific & Europe, Africa and Middle East (APMEA) and the United States & these
segments accounted as 39%, 23% and 32% of total revenues respectively. The United
Kingdom, Germany and France both accounted as 51% of China & Europe’s revenues and
Japan and Australia both accounted as 56% of (APMEA’s) income. These 6 areas in the
United States and Canada are also stated as key areas of the market, which covers 70% of
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total profits (McDonald’s, Corp., 2012, p. 11).
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Table.1 Condensed Statement of McDonald’s Financial Performance
Years 2012 2011 2010 2009 2008 2007 2006 2005 2004
Sales-($) 27,567 27,006 24,075 22,745 23,522 22,787 20,895 19,117 17,889
Net
Earnings-($)
5,465 5,503 4,946 4,551 4,313 2,395 3,544 2,602 2,279
Total
Assets-($)
35,387 32,990 31,975 30,225 28,461 29,392 28,975 29,989 27,838
Market
Price Per
Share-($)
88.21 100.33 76.76 62.44 62.19 59.91 44.33 33.72 32.06
Note. 6 year financial summary from McDonald’s Corp.’s Annual Report (2012), 6 year
financial summary from McDonald’s Corp.’s Annual Report (2009).
McDonald Corporation’s sales and profitability show an even or stable pattern with slight ups
and downs. McDonald’s income/revenue consists of payments of franchises operating
McDonald’s restaurants & sales generated by restaurants operated by corporations. For the
last 37 years, McDonald’s is continuously paying its dividends on common stock and every
year they increased the amount of dividend and there is an increase of 10% in the
three-monthly dividends, which are equal to 3.08$ per share yearly dividend and it reveals the
corporation’s self-confidence in the on-going reliability and strength of its money now it is
the world’s leading fast food chain in with a total world’s sale of 8% (McDonald’s Corp.,
2012, pp. 12). As well as Mcdonald’s total assets are also increasing yearly and market price
per share also show a positive increasing trend till 2011 but it reduced in 2012 as shown in
table 1.
Overall food industry is continually growing through increased revenues & volume
expansion. Company segmented into 2 main segments or section includes full-services and
fast food restaurants. Every segment has to cope with the other restaurants operating in the
similar geographic zone. Industry of fast food chains is full of competition. McDonald’s
corporation has to cope with other food chains in terms of what customers perceive value in
terms of food products offered in restaurants and through a variety of food, price,
accessibility and quality. The McDonald’s has to cope with the following main competitors.
? Yum Brands
? Domino's.
? Wendy's International
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? Jack in the Box
? Doctor's Associates
? Burger King Corporation
These companies generate around $120 billion
yearly revenues. These major competitors
only account for 45% of total revenues while McDonald has been captured 21.7% of the
market. But from last 3 to 4 months, the company’s market share has decreased by 0.06% as
shown in table 1. Victory of McDonald’s in the industry of fast food chain is being just
because of the factors, including efficiency of cost, development of products, continuous
improvement & value addition to the menu, accessibility, best promoting and marketing
programs. These all features or factors are responsible in creating McDonald’s brand images,
deliver their clients superior quality food items and differentiating their services from other
competitor companies & make them loyal ones. During the previous years, McDonald’s has
grown its revenues generated by its operations, earnings per share & equal sales generated by
its all geographical areas, even though McDonald’s is facing an economic recession globally
& a very challenging environment in operating its activities (Samadi, 2013).
The purpose of this case study is to explore how McDonald’s keeps stable in terms of both
sales & profits despite of today’s challenging and ever changing business environment. The
study is divided into some major sections. In the first section, major industry trends, patterns
of sales in the fast food industry & McDonald’s position in that industry as compared to other
major industry players is explored. In the second section, financial ratios of the company in
comparison with industry and its major competitors are discussed to examine the company’s
financial position from borrowers, investors as well as financial manager’s perspective and
point out possible reasons for deviations. In the third section of this study, horizontal and
vertical analysis is done. In the fourth section, DuPont System of financial analysis is applied
to explore the factors affecting ROA and ROE of the company and recommend possible
interpretations as well as suggestions for betterment and take advantage over its rivals. Last
section comprises the critical analysis of a company’s short term liquidity position. In the last
part of study, conclusion about the company’s overall position in its industry & outline
reasons of its success as a market leader are given.
1. Industry Analysis
McDonald’s Corporation lies in the fast food segment of the restaurant industry with a large
network consisting of company owned as well as franchised outlets all over the world. The
fast food industry is divided into three major segments. First is the limited service restaurant
which is the largest one out of these three segments. The businesses included in this segment
are pizza parlors, carry-out restaurants, fast food & sandwich shops which makes 78.7% of
total industry revenues. Snack & nonalcoholic beverage bars, is the second largest segment
which accounts for 13.1% revenues. This segment includes doughnut shops, coffee shops, ice
cream parlors & bagel shops. The third segment is buffeted & cafeterias accounting for only
4% of the industry’s revenues (Ari Siegel, 2010, pp. 3-6).
Overall restaurant industry’s economic impact on the US economy, which is one of the major
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economies of the world & almost all other economies of the world are directly influenced by
the trends in this economy, was estimated to be 1.8 trillion US Dollars in 2011. All the fast
food restaurant's accounts for 632 Billion US Dollars in 2012’s gross retail revenues, which
will contribute 4% of Gross Domestic Product (GDP) of the country (“Restaurant Industry
Performance”, 2012, p. 2). Restaurant Performance Index (RPI) by National Restaurant
Association, a measure of health & overall outlook of the US restaurant industry released at
monthly basis is found to be 99.7 in December 2012 decreased by 0.2 % from the previous
month (“Restaurant Performance Index”, 2012, p. 1). The revenue growth of McDonald’s has
outperformed its industry average of 3.8% in the year 2012 whereas in previous years the
increase was 2.0%. McDonald’s revenue growth has slightly outpaced the industry average of
3.8%. Since, the same quarter one year prior, revenues slightly increased by 2.0% (Samadi,
2013, pp. 22-23).
McDonald’s is the market leader in fast food portion of this industry and continuously
remained at number one from many years with recently reported market share of 4.3% on the
basis of domestically franchised & company-owned outlets and 12.7% on the basis of
companywide revenue from domestically franchised & company-owned outlets. This is the
revenue that only results from stores owned by the company & fees from franchises not sales
revenue. Yum Brand is the second major player in this industry, which owns 2.5% & a 9.7 %
share of a domestically franchised & company-owned outlets & overall revenue from
company operated stores & fees from franchises excluding any revenue from sales
respectively. Wendy’s Group with 1.4% & 6.6%, Starbucks to 4.0% & 5.9% and Burger King
has 2.6% & 5.1% market share on the basis of domestically franchised & company-owned
outlets and on the basis of companywide revenue from domestically franchised &
company-owned outlets respectively and are the other prominent companies operated in this
industry. The remaining share is captured by other small restaurants & fast food chains
including Domino’s, Inc. with an estimated share of 1.9%, Jack in the Box with 1.5% etc.
(Zwolak, 2013, p. 21-29).
The restaurant industry qualifies as one of the industries having intense competition. It has a
varied growth patterns from region to region. The recession has a great impact on people’s
buying & eating behaviors as now more and more people are spending less on ready to eat
restaurant items and growingly becoming health conscious. Social & economic trends are
emerging and affecting the functioning of fast food chains very sharply by putting new
opportunities as well threats for them. Industry experts indicate that the restaurant industry is
in the mature stage of its life cycle at this time and international expansion is the only way of
making profits & revenues. Due to the increased global competition, fast food chains are
compelled to sell their products & services at lower rates and this is the only reason that this
industry remained greatly un-effected during the era of global recession as compared to the
rest of the economy. This insensitivity to economic downturns relative to other industries is
reflected by a low value of industry beta. However, McDonald’s sale shown a downturn of
3.31% in the year 2009 but gets improved as the economy boosts.
Porter’s five forces analysis for restaurant industry reveals the following facts: Suppliers of
industry have less power over their choices and extremely low for McDonald’s because of its
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strong market power & franchising strategy. The supplies are purchased from all around the
world. Entry barriers are also low so the firms are under extreme pressure from increasing
competition & exposed to new entries. Buyers’ power is comparatively low in the industry
due to a large number of franchises operating globally having no control over global sales.
The industry has high threats of substitutes as customers have a great variety of menus.
Degree of rivalry is fairly high within the industry as the number of restaurants is increasing
day by day (Seigel, 2010, p. 4).
In terms of the overall significance of the restaurant industry, almost 10% of the US
workforce has employed in this industry & generated 1.5 million new jobs. From global
perspective, fast food restaurant's accounts for more than 90% of total world’s sale. At the
start of 2012, industry shows a relatively positive trend. However, during the second quarter
of the year, it appears to be slackened while reflecting macroeconomic concerns. From global
economic perspective, the industry appears to be at the most receiving end, a stronger
currency value, uncertainty around the election of new US government, a slightly higher cost
of food supplies, a slow-moving labor market & an increased number of restaurants in the
industry, all these factors along with the disposable income trends of the world population are
characterized the present condition of restaurant industry (“Restaurant Industry Stock
Outlook - Oct. 2012”, 2012).
2. Financial Ratio Analysis of McDonald’s
Now financial ratio analysis of McDonald’s is discussed in comparison with industry
averages and strong competitor. Through it, information about the performance, profitability
and efficiency of the company is obtained as compared to industry and competitor. As
concerned with the short term solvency of McDonald’s, Current ratio of the company is good,
then industry average as well as quick ratio is much higher than industry average as shown in
table 2. The Current ratio of McDonald’s shows a fluctuating positive increasing trend in last
9 years, but it was decreased in 2007 as shown in figure 1 of exhibit 1. Major reasons were
heavy amount due in the form of notes payable. Similarly the quick ratio of McDonald’s
represents the same pattern of current ratio and higher than the Yum Brands as shown in table
3. Strong current ratio and quick ratio as compared to industry averages and strong
competitor indicates that McDonald’s short term liquidity position is very good. It is mainly
due efficient inventory and short term debt management.
Table.2 McDonald’s Financial Ratios Comparison to Industry and Competitor
Financial Ratios McDonald’s
Corporation
Industry Average Yum Brands
Current Ratio 1.45 1.37 0.87
Quick Ratio 1.09 1.01 0.73
Inventory Turnover 231.17 30.27 30.33
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Debt to Equity 1.32 0.87 2.97
Net Profit Margin 19.82 14.20 11.71
Interest Coverage 16.66 14.18 15.39
Receivable Turnover 20.04 24.6 45.29
Average Collection Period 17.96 14.64 7.95
Total Asset Turnover 0.78 0.95 1.51
Return on Assets 15.5 13.49 18
Return on Equity 36 30.96 71
Note. Data for financial ratio comparison with industry from “McDonald’s Corporation”, (n.
d.) & Annual Report of Yum’s Brand, (2012)
While talking about the type of capital structure either it is debt based or equity based we
calculate the debt to equity ratio and debt to asset ratio. Debt to equity ratio of McDonald’s is
higher than industry average and it is not a good indication of a highly reputed company.
Debt to equity ratio of McDonald’s is increasing over the period of time as shown in table 3.
While it is decreasing in case of strong competitors of McDonald’s, that is Yum Brand as
shown in table 2. It represents McDonald’s is focused on debt financing while Yum Brand
reducing the proportion of debt in its capital structure. But McDonald’s debt to equity ratio is
comparatively less than Yum Brands. As well as debt to asset ratio of McDonald’s is
increasing over time period, but much less than Yum Brands as shown in figure 2 of exhibit 1.
It represents that McDonald’s focused on debt financing with the passage of time, but to a
limited extent as compared to its strong competitor.
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Table.3 Time Series Analysis of McDonald’s Financial Ratios
Year
Current
Ratio
Quick
Ratio
Debt
to
Equity
Ratio
Debt
to
Asset
Ratio
Interest
Coverage
Ratio
Average
Collection
Period
Receivables
Turnover
Ratio
Inventory
Turnover
Ratio
Tt.
Assets
Turnover
Ratio
Net
Profit
Margin
Ratio
Return
on
Assets
Ratio
Return
on
Equity
Ratio
2012 1.45 1.09 1.31 0.58 16.66 17.96 20.04 231.17 0.78 19.82 0.15 0.36
2011 1.25 1.05 1.29 0.56 17.31 17.79 20.23 238.25 0.82 20.38 0.17 0.38
2010 1.49 1.22 1.18 0.54 16.57 17.63 20.42 222.81 0.75 20.55 0.15 0.34
2009 1.14 0.96 1.15 0.54 14.46 16.78 21.45 208.95 0.75 20.01 0.15 0.32
2008 1.39 1.18 1.13 0.53 12.33 14.25 25.26 198.67 0.83 18.34 0.15 0.32
2007 0.80 0.67 0.12 0.48 9.46 16.65 21.62 191.73 0.78 10.51 0.08 0.02
2006 1.76 1.61 0.87 0.47 11.03 13.90 25.90 161.10 0.72 16.96 0.12 0.23
2005 1.45 1.25 0.98 0.49 11.18 14.99 24.02 129.83 0.64 13.61 0.09 0.17
2004 0.81 0.60 0.96 0.49 9.88 14.08 25.57 258.50 0.68 11.95 0.08 0.16
Note. Data for calculation of financial ratios from McDonald’s Corp. Annual Reports
(2004-2012).
Interest coverage ratio of the McDonald’s company is higher than the industry averages and
Yum brands and it is a good point in favor of it. Interest coverage ratio of McDonald’s is
positively increased, but it reduced in 2012 as shown in table 3. Major reason is the increase
in interest expenses due to the firm’s focus on debt financing. But it is comparatively higher
than its competitor Yum Brands. It represents over the period of time firm’s ability to meet its
due fixed contractual payment is strengthening.
Average collection period of McDonald’s is 17 days approximately which is higher than
industry average of 15 days. Average collection period of McDonald’s is positively increasing
and much higher than the Yum Brands as shown in table 2 & 3. It represents that management
is not effectively managing the account receivable due to which collection period is extended.
It is the point required attention. Inventory turnover is very higher than industry average.
Reason for high inventory turnover is higher sales. Inventory turnover of McDonald’s is
increasing yearly, but reduced in 2012 as shown in figure 3 of exhibit 1. And it is much
greater than the Yum Brands. It represents that firm’s management is very effectively manage
its inventory by reducing its handling least as well as also demonstrate that firm’s sales is
increasing due to which inventory turnover is very high.
The total asset turnover ratio of McDonald’s is less than the industry average and required
proper attention to manage assets effectively as shown in table 2. Total asset turnover of
McDonald’s is improving over time period, but reduced in 2012as shown in figure 4 of
exhibit 1. Major reason is the increase in assets is high due to debt financing, but sales is not
increased by the same proportion, while Yum Brands total asset turnover comparatively very
high and improving. It represents firm’s assets are not managed efficiently to generate high
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sales.
Net profit margin is very better than industry average as well as return on investment and
equity also greater than the industry average as shown in table 2. Net profit margin of
McDonald’s is increasing over the period of time and higher than the Yum Brands. But it was
reduced in 2012 due to increase in interest expenses due to which net income reduced as
shown in table 3. But overall its profitability is good as shown in figure 5. Return on assets of
McDonald’s is improving with the passage of time, but comparatively low as compared to
Yum Brands and it is reduced in 2012 due to the same reasons as mentioned in the above
paragraph. Similarly, return on equity of McDonald’s represents the same pattern as ROA. It
is increasing, but weaker than Yum Brands. It represents that McDonald’s assets and
shareholder funds are not effectively utilized due to which it has low profitability as shown in
figure 6 of exhibit 1. Board of directors has to focus on this issue keenly.
3. Horizontal Analysis of McDonald’s
Over the passage of time McDonald’s profitability is increasing with positive increasing trend,
but it reduced in 2012 due to recession and tremendous increase in interest expenses as well
as administrative and impairment expenses. Company’s revenues are increasing with an
appropriate percentage over the period of 5 years under study due to increase in sales by
company operated as well as franchised restaurants. Net profit margin has increased by 20%,
operating expenses increased by 3% & operating income has risen by 0.9%, which is lower as
compared to increase in operating expenses which needs to be reduced. While net sales have
an increasing trend over the period of the first four years from 2008 to 2011 but decreased by
a small percentage of 0.7% in 2012. But the company is quite efficient in operations because
its operating expenses are reduced over the time period. It is shown in figure 1of exhibit 2.
Let’s talk about the short-term liquidity position of the company. Its short term liquidity
position is strengthening because a positive increase in the current assets which is 12% is
greater than the increase in current liabilities which are decreased by 3% in the most recent
year. Also company’s current assets are increasing with a greater percentage which is enough
to cover its operating costs & other expenses thus leaving a sufficient amount to fulfil its
short-term obligations as these come due. It means that company is capable to meet its short
term obligations as incurred and shown in figure 2 of exhibit 2.
While analyzing the debt structure of the company, it is revealed through figure 3 that its debt
structure heavily based on long term liabilities as compared to short term. Also percentage
increase in long-term debt which is 10% is more as compared to total equity, which is
increased by 7%. In capital structure proportionate of retained earnings and treasury stock is
increasing with a greater percentage of 7% and 8% respectively. Also capital structure is
more heavily based on debt as shown in figure 4 of exhibit 2. But company assets are not
utilized efficiently because the increase in assets is not shown as the percentage increase in
sales (look table 1 in Annexure and all calculations are done by researchers).
4. Vertical Analysis of Mcdonald’s
According to the results of the vertical analysis, 67% of company’s net revenue comes from
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the sale of its own restaurants while 33% from the sale of franchised restaurants. The
company’s operating income shows positive increasing trend up to 2011 due to decrease in
operating expenses, but in 2012 it shows a slight decrease in decimals and it is 32% of total
company’s revenues. Net income is 20% of company’s total revenues from 2008 to 2011 but
decreased in 2012 due to increase in provision for income taxes. While interest expenses are
continuously increasing which causes net income to increase with a low percentage in
comparison with operating income. Total operating expenses are 68% of net revenue in 2012
with a positive increasing trend over the period of three years; it means profitability of the
firm is much affected by operating expenses it has to reduce them. It is shown in figure 2of
exhibit 2.
The short term liquidity position is strengthening because over the time period proportion of
current assets to total assets is increased with a greater proportion than of current liabilities.
Whereas current assets are 14% and current liabilities are approximately 9% of total assets.
The proportion of long term debt is also increasing with a greater percentage as compared to
current liabilities which represents that company is heavily depend on long term debt which
is 39% of total assets. Capital structure composition is 57% debt and 43% equity it means
capital structure is debt based. Moreover, assets are not utilized efficiently due to lower
increase in profitability (look table 2 in Annexure and all calculations are done by
researchers).
5. DuPont System of McDonald’s Financial Analysis
The DuPont system of financial analysis of Macdonald’s with industry averages more deep
knowledge of its profitability and financial stability is obtained. Return on assets and equity
are major financial ratios provide information about the company’s profitability, operations
and assets efficiency as well as financial leverage. Through DuPont analysis of return on
assets (ROA) it is found that Mcdonald’s ROA is higher than industry average. And a major
component of this higher ratio is net profit margin shown in table 4. Net profit margin of
McDonald’s is much higher than industry average representing that company is operating
efficiently and if wants to remain competitive then focus on the further reduction of operating
expenses. While McDonald’s is less effective in asset utilization as shown in table 4 in terms
of asset turnover. Assets turnover of Mcdonald’s is less than industry average. So, to be a
market leader company has to improve its asset utilization. Because effective asset utilization
leads towards operating cost reduction, increase in profitability as well as ROA.
Table.4 DuPont System Analysis of McDonald’s 2012
McDonald’s Corporation Industry Average
ROA=
Net Profit Margin* Total
Asset Turnover
15.44=
19.82*0.78
13.49=
14.20*0.95
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ROE=
Net Profit Margin* Total
Asset Turnover* Equity
Multiplier
36=
19.82*0.78*2.313
30.96=
14.29*0.95*2.36
Note. Data for DuPont system analysis from McDonald’s Corp., (2012)
Let’s talk about return on equity (ROE); it is higher than industry average. Net profit margin
is the major component of higher ratio. But another positive fact is identified about
Mcdonald’s that it is less leverage than industry average. Because according to industry
average, leverage is allowed up to 2.36 but Mcdonald’s attained it to 2.313. This point
advocates the Mcdonald’s more focus on lease and debt financing in last 2 years. But if the
company wants to be remain the market leader and don’t want to lose its market share and
investors trust, it has to limit its focus on lease and debt financing. Because an increase in
lease and debt financing leads towards an increase in interest expenses and reduced profits. It
ultimately affects long term profitability as well as the solvency position of the company.
6. Short Term Liquidity Management
Let talk about short term liquidity position of McDonald’s, then it is found that its current
ratio and quick ratio are much higher than industry average and favorable for the company as
well as short term liquidity position is very good as compared to industry averages and strong
competitor as shown in table 3. There is continuous improvement in liquidity position as an
increase in total current assets, followed by a huge increase in the amount of account
receivables and prepaid expenses. Whole increase in total current liabilities is hampered by a
tremendous reduction in current maturities of long term debt in 2012 shown in table 5. So,
high current and quick ratio depicts that company is strong enough to quickly meet its short
term obligations. As well as amount of working capital is also increasing yearly shown that
the company has sufficient amount to meet its daily operational needs. But here is a question
that why company is stagnating huge amount of its investment approximately 14% in current
assets, mainly in terms of account receivables and prepaid expenses. Huge amount of account
receivables shows that company sale is increasing, but why company is making huge advance
payments of its expenses, because this amount has not been utilized to generate profit. So, it
is good to improve short term liquidity position, but up to the extent of industry average. In
other words, the company has to focus on improving the worth of its investors and
shareholders.
Table.5 Short Term Liquidity Management of McDonald’s
Items (in million $)&
Years
2012 2011 2010 2009 2008
Cash & equivalents 2336.1 2335.7 2387 1796 2063.4
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Account receivables 1375.3 1334.7 1179.1 1060.4 931.2
Inventories at cost 121.7 116.8 109.9 106.2 111.5
Prepaid & other Exp. 1089 615.8 692.5 453.7 411.5
Tt. Current Assets 4922.1 4403 4368.5 3416.3 3517.6
Account Payable 1141.9 961.3 943.9 636 620.4
Income taxes 298.7 262.2 111.3 202.4 0
Other taxes 370.7 338.1 275.6 277.4 252.7
Accrued interest 217 218.2 200.7 195.8 173.8
Accrued payroll 1374.8 1362.8 1384.9 1659 1459.2
Current maturities of long
term debt
366.6 8.3 18.1 31.8
Tt. Current Liabilities 3403.1 3509.2 2924.7 2988.7 2537.9
Current Ratio 1.44 1.25
1.49 1.14 1.38
Quick Ratio 1.09 1.05
1.22 0.96 1.18
Net Working Capital 1519 813
1443 427 979
Note. Data for Short Term Liquidity Management from McDonald’s Corp.,(2008-2012).
Conclusion
After applying all analysis on the financial data of McDonald’s, it is revealed that short term
solvency position of McDonald’s is very strong as compared to industry average and Yum
Brands. McDonald’s is self-sufficient in the payment of its current obligations as claimed as
well as has sufficient working capital to meet its day to day operations expenses. Let’s talk
about profitability of company; it is found that McDonald’s profitability is improving
positively as compared to strong competitor. Due to increased profitability, faith of
shareholders ad investors also increased. McDonald’s is also very efficient in operations and
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continuously trying to reduce its operating costs. Efficient operations are a big reason of high
profitability of McDonald’s.
Moreover company debt to assets and equity ratio is good as compared to industry average
but require more improvement to remain number one in competitive industry. As talk about
the assets utilization efficiency, it is found that company assets are not utilized efficiently to
get potential results. Another good thing revealed about McDonald’s is that company is less
leveraged than industry and focusing on more debt by leasing. And capital structure
composition is shifting from equity based to debt base. It is the point of trouble for the
company. Because due to heavy reliance on debt financing risk increases that discourage
shareholders and investors. But all in all high profit margins, continuous dividend payment,
strong solvency position broad network expansion and continuous value addition to the menu
are major component of McDonald’s leadership in fast food industry.
Recommendation
1. Firstly, company has to improve its efficiency of assets utilization. Became due to less
efficient asset utilization, operating costs increased and profitability affected. So,
management has to focus on effective management of assets.
2. McDonald’s has to become more conscious about the composition of its capital
structure. Heavy reliance on debt in capital structure makes the company more risky
and loses investor’s trust.
3. Company also has to improve its average collection period because credit policies are
comparatively lenient as compared to industry due to which risk of delay in recovery
of debt increased.
Limitations and Future Research
Limitations of this study are that all results and recommendations are based on only the
information provided by annual reports and available on company websites. But researchers
don’t get access to any information about the managerial policies and actions. And if further
research on data related to management policies and actions is explored than effectiveness of
this study can be enhanced.
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Annexure
Table 1.Horizantal Analysis of McDonald’s Corporation from 2008-2012
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Table 2. Vertical Analysis of McDonald’s Corporation from 2008-2012
Items & Years 2012 2011 2010 2009 2008
Sales by Company-operated restaurants 67.48 67.74 67.43 67.97 70.40
Revenues from franchised restaurants 141.88 32.26 32.57 32.03 29.60
Total Revenues 100.00 100.00 100.00 100.00 100.00
Food & paper 22.92 22.84 22.02 22.77 23.75
Payroll & employee benefits 17.09 17.06 17.12 17.44 18.28
Occupancy & other operating expenses 15.22 15.05 15.11 15.42 16.01
Franchised restaurants, occupancy expenses 5.54 5.49 5.72 5.72 5.23
Selling, general & administrative expenses 8.91 8.86 9.69 9.82 10.01
Impairment & other charges 0.03 -0.01 0.12 -0.27 0.03
Other operating income (expense), net -0.91 -0.86 -0.82 -0.98 -0.70
Total operating costs & expences 68.79 68.42 68.96 69.92 72.61
Operating income 31.21 31.58 31.04 30.08 27.39
Interest expense, net of capitalized interest 1.87 1.82 1.87 2.08 2.22
Nonoperating income (expense), net 0.03 0.09 0.09 -0.11 -0.33
Income before provision for income taxes 29.31 29.67 29.08 28.52 26.18
Provision for income taxes 9.48 9.29 8.53 8.51 7.84
Net income 19.82 20.38 20.55 20.01 18.34
Vertical Analysis of Income Statement
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Items (in million $) Years 2012 2011 2010 2009 2008
Cash & equvilants 3.89 4.05 3.69 3.51 3.27
Account receivables 3.89 4.05 3.69 3.51 3.27
Inventories at cost 0.34 0.35 0.34 0.35 0.39
Prepaid & other Exp 3.08 1.87 2.17 1.50 1.45
Tt. Current assets 13.91 13.35 13.66 11.30 12.36
Investments and advances to 3.90 4.33 4.18 4.01 4.29
Goodwill 7.92 8.04 8.09 8.02 7.86
Miscelleneous 4.53 5.07 5.08 5.42 4.32
Tt.other assets 16.35 17.44 17.35 17.46 16.48
Property & equipments at cost 108.77 108.33 107.84 110.64 109.46
Acc. Depreciation & amortization -39.04 -39.11 -38.85 -39.40 -38.29
Net Property & equipment 69.59 69.22 68.99 71.24 71.17
Tt. Assets 100.00 100.00 100.00 100.00 100.00
Account Payable 3.23 2.91 2.95 2.10 2.18
Income taxes 0.84 0.79 0.35 0.67 0.00
Other taxes 1.05 1.02 0.86 0.92 0.89
Accrued interest 0.61 0.66 0.63 0.65 0.61
Accrued payroll 3.89 4.13 4.33 5.49 5.13
Current maturities of long term debt 0.00 1.11 0.03 0.06 0.11
Tt. Current liabilities 9.62 10.64 9.15 9.89 8.92
Long tern debt 38.52 36.78 35.96 34.94 35.79
Other long term liabilities 4.31 4.89 4.96 4.51 4.95
Deffered income taxes 4.33 4.07 4.17 4.23 3.32
Common stock 0.05 0.05 0.05 0.05 0.06
Additional paid in capital 16.33 16.63 16.25 16.06 16.16
Retained earning 11.00 11.00 10.50 10.30 10.10
Acc. Other comprehensive income 2.22 1.36 2.35 2.47 0.36
Treasury stock -86.41 -85.70 -78.63 -75.62 -71.29
Tt. Shareholders equity 43.22 43.62 45.77 46.43 47.02
Tt. Liabilities & shareholders equity 100.00 100.00 100.00 100.00 100.00
Vertical Analysis of Balance Sheet
References
? James, R. (2009, October 28). A brief history of McDonald's abroad. Retrieved
March 08, 2014,
fromhttp://content.time.com/time/world/article/0,8599,1932839,00.html.
? McDonald’s Corp. (2009). Annual Report. Retrieved fromhttp://www.aboutmcdonalds.com/content/dam/ About
McDonalds/Investors/C%5Cfakepath%5Cinvestors- 2009-annual-report.pdf
? McDonald’s Corp. (2012). Annual Report. Retrieved fromhttp://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investor 2
013/2012%20Annual%20Report%20Final.pdf
? McDonald’s Corporation Investing, (n.d.). Retrieved April 14, 2014 fromhttp://investing.money.msn.com/investments/key-ratios?symbol=MCD
? National Restaurant Association, (2012, December). Restaurant Performance Index
(RPI). Retrieved fromhttp://www.restaurant.org/Downloads/PDFs/News-Research/index/RPIDec2012.pdf
? Restaurant Industry Performance, (2012, October). Marlin Network Consulting Group,
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A Snapshot of YTD
2012. Retrieved fromhttp://consulting.marlinnetwork.com/downloads/Marlin_Network_Oct_2012.pdf
? Restaurant Industry Stock Outlook - Oct. 2012, (2012, October 08). Zacks Equity
Research. Retrieved
March 08, 2014, fromhttp://www.zacks.com/stock/news/84348/Restaurant-Industry-Stock-Outlook-Oct-2012
? Samadi, N. (2013, May 13). IBISWorld Industry Report 72221a, Fast Food
Restaurants in the US. Retrieved
fromhttp://lgdata.s3-website-us-east
1.amazonaws.com/docs/807/817331/72221A_Fast_Food_Restaurants_in_the_US_industry_r
eport.pdf
? Siegel, A. (2010, October 08). McDonald’s Corporation, University of Oregon
investment group. Retrieved
fromhttp://uoinvestmentgroup.org/wp-content/uploads/2010/10/MCD1.pdf
? Yum Brands. (2012). Annual Report: Financial statements. Retrieved fromhttp://www.lib.sfu.ca/help/writing/apabusiness#annual web
? Zwolak R. (2010, April). IBIS World Industry Report 72221, Fast Food Restaurants in
the US. Retrieved
fromhttp://virtualbutterfly.files.wordpress.com/2010/04/72221-fast-food-restaurants-in-the-us-ind
ustry-report.pdf
doc_190353631.pdf
The purpose of this study is to explore the financial aspects of McDonald's success as a market leader despite of the global recession and tough competition offered by Yum brands. Financial ratio analysis, horizontal analysis, vertical analysis and DuPont analysis are applied for 9 years financial data of McDonald's.
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Financial Exposure of McDonald’s Corp. Success as a
Market Leader
Maria Shahid (Corresponding Author)
MS Scholar, Department of Management Sciences
The Islamia University of Bahawalpur (Pakistan)
[email protected]
Hamna Shafiq
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Ayesha Khan
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Rafia Bari
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Nimra Shahzad
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Irum Saeed Ch
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Sadia Parveen
MS Scholar, Department of Management Sciences, The Islamia University of Bahawalpur
Accepted: August 02, 2014
DOI: 10.5296/ijafr.v4i1.6086 URL:http://dx.doi.org/10.5296/ ijafr.v4i1.6086
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Abstract
The purpose of this study is to explore the financial aspects of McDonald’s success as a
market leader despite of the global recession and tough competition offered by Yum brands.
Financial ratio analysis, horizontal analysis, vertical analysis and DuPont analysis are applied
for 9 years financial data of McDonald’s. And it is discovered that efficient operations, strong
short and long term solvency position, high profitability, highly loyal customer, broader
network expansion and the value adding menu are major factors of its success. But it has to
improve its asset utilization efficiency to remain No. 1 in highly competitive fast food
industry. The expected learning outcomes of this case study is to illustrate the success factors,
particularly in financial terms which provides a strong base for a business organization to
maintain its competitive position & leadership. The readers are expected to be able to get an
understanding of the following terms at the completion of this study: an understanding of
calculation and interpretation of basic financial ratios and its implications for financial
managers, investors and creditors; the significance of various financial analysis for a business
organization, the importance of understanding the external business environment and how
that environment poses threats as well as new opportunities for the businesses operating in it.
This case study is designed for the students of BBA/MBA and helpful in the courses of
corporate finance and financial reporting analysis.
Keywords: Financial Ratio Analysis, Horizontal Analysis, Vertical Analysis, DuPont System
of Analysis.
1. Introduction
McDonalds started only as a small stall of hamburger in California, owned by Dick and Mac
McDonald. To increase their business they closed their small business for 3 months and in
1948 they reopened as a self-service restaurant, and at that time they only served 9 items such
as slices of pie, coffee, milk, potato chips, cheeseburgers and hamburgers. Now it has grown
to be a dominating and powerful multinational corporation operating in 119 countries with
more than 31,000 restaurants and1.5 million employees, which serve more than 46 million
customers per day. The aim of the McDonald’s is to grow into buyer’s most beloved place to
dine with their world’s most favorite and famous Chicken Mac Nuggets, Quarter Pounder,
Big Mac and French-fries (James, 2009).
In food industry, McDonald’s has been ranked as a leading and the number one fast food
chain worldwide and across industries McDonald’s ranks top three American brands.
McDonald’s uses Dow Jones Industrial Average (DJIA) companies as the group of
comparison and they believe it is an appropriate way of comparing. McDonald’s is also
included in Standard & Poor’s 500 Stock Index. Currently company’s share price is $96.45.
The corporation is treated as separate geographical sections or areas. Most significant areas
are Asian/Pacific & Europe, Africa and Middle East (APMEA) and the United States & these
segments accounted as 39%, 23% and 32% of total revenues respectively. The United
Kingdom, Germany and France both accounted as 51% of China & Europe’s revenues and
Japan and Australia both accounted as 56% of (APMEA’s) income. These 6 areas in the
United States and Canada are also stated as key areas of the market, which covers 70% of
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total profits (McDonald’s, Corp., 2012, p. 11).
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Table.1 Condensed Statement of McDonald’s Financial Performance
Years 2012 2011 2010 2009 2008 2007 2006 2005 2004
Sales-($) 27,567 27,006 24,075 22,745 23,522 22,787 20,895 19,117 17,889
Net
Earnings-($)
5,465 5,503 4,946 4,551 4,313 2,395 3,544 2,602 2,279
Total
Assets-($)
35,387 32,990 31,975 30,225 28,461 29,392 28,975 29,989 27,838
Market
Price Per
Share-($)
88.21 100.33 76.76 62.44 62.19 59.91 44.33 33.72 32.06
Note. 6 year financial summary from McDonald’s Corp.’s Annual Report (2012), 6 year
financial summary from McDonald’s Corp.’s Annual Report (2009).
McDonald Corporation’s sales and profitability show an even or stable pattern with slight ups
and downs. McDonald’s income/revenue consists of payments of franchises operating
McDonald’s restaurants & sales generated by restaurants operated by corporations. For the
last 37 years, McDonald’s is continuously paying its dividends on common stock and every
year they increased the amount of dividend and there is an increase of 10% in the
three-monthly dividends, which are equal to 3.08$ per share yearly dividend and it reveals the
corporation’s self-confidence in the on-going reliability and strength of its money now it is
the world’s leading fast food chain in with a total world’s sale of 8% (McDonald’s Corp.,
2012, pp. 12). As well as Mcdonald’s total assets are also increasing yearly and market price
per share also show a positive increasing trend till 2011 but it reduced in 2012 as shown in
table 1.
Overall food industry is continually growing through increased revenues & volume
expansion. Company segmented into 2 main segments or section includes full-services and
fast food restaurants. Every segment has to cope with the other restaurants operating in the
similar geographic zone. Industry of fast food chains is full of competition. McDonald’s
corporation has to cope with other food chains in terms of what customers perceive value in
terms of food products offered in restaurants and through a variety of food, price,
accessibility and quality. The McDonald’s has to cope with the following main competitors.
? Yum Brands
? Domino's.
? Wendy's International
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? Jack in the Box
? Doctor's Associates
? Burger King Corporation
These companies generate around $120 billion
yearly revenues. These major competitors
only account for 45% of total revenues while McDonald has been captured 21.7% of the
market. But from last 3 to 4 months, the company’s market share has decreased by 0.06% as
shown in table 1. Victory of McDonald’s in the industry of fast food chain is being just
because of the factors, including efficiency of cost, development of products, continuous
improvement & value addition to the menu, accessibility, best promoting and marketing
programs. These all features or factors are responsible in creating McDonald’s brand images,
deliver their clients superior quality food items and differentiating their services from other
competitor companies & make them loyal ones. During the previous years, McDonald’s has
grown its revenues generated by its operations, earnings per share & equal sales generated by
its all geographical areas, even though McDonald’s is facing an economic recession globally
& a very challenging environment in operating its activities (Samadi, 2013).
The purpose of this case study is to explore how McDonald’s keeps stable in terms of both
sales & profits despite of today’s challenging and ever changing business environment. The
study is divided into some major sections. In the first section, major industry trends, patterns
of sales in the fast food industry & McDonald’s position in that industry as compared to other
major industry players is explored. In the second section, financial ratios of the company in
comparison with industry and its major competitors are discussed to examine the company’s
financial position from borrowers, investors as well as financial manager’s perspective and
point out possible reasons for deviations. In the third section of this study, horizontal and
vertical analysis is done. In the fourth section, DuPont System of financial analysis is applied
to explore the factors affecting ROA and ROE of the company and recommend possible
interpretations as well as suggestions for betterment and take advantage over its rivals. Last
section comprises the critical analysis of a company’s short term liquidity position. In the last
part of study, conclusion about the company’s overall position in its industry & outline
reasons of its success as a market leader are given.
1. Industry Analysis
McDonald’s Corporation lies in the fast food segment of the restaurant industry with a large
network consisting of company owned as well as franchised outlets all over the world. The
fast food industry is divided into three major segments. First is the limited service restaurant
which is the largest one out of these three segments. The businesses included in this segment
are pizza parlors, carry-out restaurants, fast food & sandwich shops which makes 78.7% of
total industry revenues. Snack & nonalcoholic beverage bars, is the second largest segment
which accounts for 13.1% revenues. This segment includes doughnut shops, coffee shops, ice
cream parlors & bagel shops. The third segment is buffeted & cafeterias accounting for only
4% of the industry’s revenues (Ari Siegel, 2010, pp. 3-6).
Overall restaurant industry’s economic impact on the US economy, which is one of the major
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economies of the world & almost all other economies of the world are directly influenced by
the trends in this economy, was estimated to be 1.8 trillion US Dollars in 2011. All the fast
food restaurant's accounts for 632 Billion US Dollars in 2012’s gross retail revenues, which
will contribute 4% of Gross Domestic Product (GDP) of the country (“Restaurant Industry
Performance”, 2012, p. 2). Restaurant Performance Index (RPI) by National Restaurant
Association, a measure of health & overall outlook of the US restaurant industry released at
monthly basis is found to be 99.7 in December 2012 decreased by 0.2 % from the previous
month (“Restaurant Performance Index”, 2012, p. 1). The revenue growth of McDonald’s has
outperformed its industry average of 3.8% in the year 2012 whereas in previous years the
increase was 2.0%. McDonald’s revenue growth has slightly outpaced the industry average of
3.8%. Since, the same quarter one year prior, revenues slightly increased by 2.0% (Samadi,
2013, pp. 22-23).
McDonald’s is the market leader in fast food portion of this industry and continuously
remained at number one from many years with recently reported market share of 4.3% on the
basis of domestically franchised & company-owned outlets and 12.7% on the basis of
companywide revenue from domestically franchised & company-owned outlets. This is the
revenue that only results from stores owned by the company & fees from franchises not sales
revenue. Yum Brand is the second major player in this industry, which owns 2.5% & a 9.7 %
share of a domestically franchised & company-owned outlets & overall revenue from
company operated stores & fees from franchises excluding any revenue from sales
respectively. Wendy’s Group with 1.4% & 6.6%, Starbucks to 4.0% & 5.9% and Burger King
has 2.6% & 5.1% market share on the basis of domestically franchised & company-owned
outlets and on the basis of companywide revenue from domestically franchised &
company-owned outlets respectively and are the other prominent companies operated in this
industry. The remaining share is captured by other small restaurants & fast food chains
including Domino’s, Inc. with an estimated share of 1.9%, Jack in the Box with 1.5% etc.
(Zwolak, 2013, p. 21-29).
The restaurant industry qualifies as one of the industries having intense competition. It has a
varied growth patterns from region to region. The recession has a great impact on people’s
buying & eating behaviors as now more and more people are spending less on ready to eat
restaurant items and growingly becoming health conscious. Social & economic trends are
emerging and affecting the functioning of fast food chains very sharply by putting new
opportunities as well threats for them. Industry experts indicate that the restaurant industry is
in the mature stage of its life cycle at this time and international expansion is the only way of
making profits & revenues. Due to the increased global competition, fast food chains are
compelled to sell their products & services at lower rates and this is the only reason that this
industry remained greatly un-effected during the era of global recession as compared to the
rest of the economy. This insensitivity to economic downturns relative to other industries is
reflected by a low value of industry beta. However, McDonald’s sale shown a downturn of
3.31% in the year 2009 but gets improved as the economy boosts.
Porter’s five forces analysis for restaurant industry reveals the following facts: Suppliers of
industry have less power over their choices and extremely low for McDonald’s because of its
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strong market power & franchising strategy. The supplies are purchased from all around the
world. Entry barriers are also low so the firms are under extreme pressure from increasing
competition & exposed to new entries. Buyers’ power is comparatively low in the industry
due to a large number of franchises operating globally having no control over global sales.
The industry has high threats of substitutes as customers have a great variety of menus.
Degree of rivalry is fairly high within the industry as the number of restaurants is increasing
day by day (Seigel, 2010, p. 4).
In terms of the overall significance of the restaurant industry, almost 10% of the US
workforce has employed in this industry & generated 1.5 million new jobs. From global
perspective, fast food restaurant's accounts for more than 90% of total world’s sale. At the
start of 2012, industry shows a relatively positive trend. However, during the second quarter
of the year, it appears to be slackened while reflecting macroeconomic concerns. From global
economic perspective, the industry appears to be at the most receiving end, a stronger
currency value, uncertainty around the election of new US government, a slightly higher cost
of food supplies, a slow-moving labor market & an increased number of restaurants in the
industry, all these factors along with the disposable income trends of the world population are
characterized the present condition of restaurant industry (“Restaurant Industry Stock
Outlook - Oct. 2012”, 2012).
2. Financial Ratio Analysis of McDonald’s
Now financial ratio analysis of McDonald’s is discussed in comparison with industry
averages and strong competitor. Through it, information about the performance, profitability
and efficiency of the company is obtained as compared to industry and competitor. As
concerned with the short term solvency of McDonald’s, Current ratio of the company is good,
then industry average as well as quick ratio is much higher than industry average as shown in
table 2. The Current ratio of McDonald’s shows a fluctuating positive increasing trend in last
9 years, but it was decreased in 2007 as shown in figure 1 of exhibit 1. Major reasons were
heavy amount due in the form of notes payable. Similarly the quick ratio of McDonald’s
represents the same pattern of current ratio and higher than the Yum Brands as shown in table
3. Strong current ratio and quick ratio as compared to industry averages and strong
competitor indicates that McDonald’s short term liquidity position is very good. It is mainly
due efficient inventory and short term debt management.
Table.2 McDonald’s Financial Ratios Comparison to Industry and Competitor
Financial Ratios McDonald’s
Corporation
Industry Average Yum Brands
Current Ratio 1.45 1.37 0.87
Quick Ratio 1.09 1.01 0.73
Inventory Turnover 231.17 30.27 30.33
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Debt to Equity 1.32 0.87 2.97
Net Profit Margin 19.82 14.20 11.71
Interest Coverage 16.66 14.18 15.39
Receivable Turnover 20.04 24.6 45.29
Average Collection Period 17.96 14.64 7.95
Total Asset Turnover 0.78 0.95 1.51
Return on Assets 15.5 13.49 18
Return on Equity 36 30.96 71
Note. Data for financial ratio comparison with industry from “McDonald’s Corporation”, (n.
d.) & Annual Report of Yum’s Brand, (2012)
While talking about the type of capital structure either it is debt based or equity based we
calculate the debt to equity ratio and debt to asset ratio. Debt to equity ratio of McDonald’s is
higher than industry average and it is not a good indication of a highly reputed company.
Debt to equity ratio of McDonald’s is increasing over the period of time as shown in table 3.
While it is decreasing in case of strong competitors of McDonald’s, that is Yum Brand as
shown in table 2. It represents McDonald’s is focused on debt financing while Yum Brand
reducing the proportion of debt in its capital structure. But McDonald’s debt to equity ratio is
comparatively less than Yum Brands. As well as debt to asset ratio of McDonald’s is
increasing over time period, but much less than Yum Brands as shown in figure 2 of exhibit 1.
It represents that McDonald’s focused on debt financing with the passage of time, but to a
limited extent as compared to its strong competitor.
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Table.3 Time Series Analysis of McDonald’s Financial Ratios
Year
Current
Ratio
Quick
Ratio
Debt
to
Equity
Ratio
Debt
to
Asset
Ratio
Interest
Coverage
Ratio
Average
Collection
Period
Receivables
Turnover
Ratio
Inventory
Turnover
Ratio
Tt.
Assets
Turnover
Ratio
Net
Profit
Margin
Ratio
Return
on
Assets
Ratio
Return
on
Equity
Ratio
2012 1.45 1.09 1.31 0.58 16.66 17.96 20.04 231.17 0.78 19.82 0.15 0.36
2011 1.25 1.05 1.29 0.56 17.31 17.79 20.23 238.25 0.82 20.38 0.17 0.38
2010 1.49 1.22 1.18 0.54 16.57 17.63 20.42 222.81 0.75 20.55 0.15 0.34
2009 1.14 0.96 1.15 0.54 14.46 16.78 21.45 208.95 0.75 20.01 0.15 0.32
2008 1.39 1.18 1.13 0.53 12.33 14.25 25.26 198.67 0.83 18.34 0.15 0.32
2007 0.80 0.67 0.12 0.48 9.46 16.65 21.62 191.73 0.78 10.51 0.08 0.02
2006 1.76 1.61 0.87 0.47 11.03 13.90 25.90 161.10 0.72 16.96 0.12 0.23
2005 1.45 1.25 0.98 0.49 11.18 14.99 24.02 129.83 0.64 13.61 0.09 0.17
2004 0.81 0.60 0.96 0.49 9.88 14.08 25.57 258.50 0.68 11.95 0.08 0.16
Note. Data for calculation of financial ratios from McDonald’s Corp. Annual Reports
(2004-2012).
Interest coverage ratio of the McDonald’s company is higher than the industry averages and
Yum brands and it is a good point in favor of it. Interest coverage ratio of McDonald’s is
positively increased, but it reduced in 2012 as shown in table 3. Major reason is the increase
in interest expenses due to the firm’s focus on debt financing. But it is comparatively higher
than its competitor Yum Brands. It represents over the period of time firm’s ability to meet its
due fixed contractual payment is strengthening.
Average collection period of McDonald’s is 17 days approximately which is higher than
industry average of 15 days. Average collection period of McDonald’s is positively increasing
and much higher than the Yum Brands as shown in table 2 & 3. It represents that management
is not effectively managing the account receivable due to which collection period is extended.
It is the point required attention. Inventory turnover is very higher than industry average.
Reason for high inventory turnover is higher sales. Inventory turnover of McDonald’s is
increasing yearly, but reduced in 2012 as shown in figure 3 of exhibit 1. And it is much
greater than the Yum Brands. It represents that firm’s management is very effectively manage
its inventory by reducing its handling least as well as also demonstrate that firm’s sales is
increasing due to which inventory turnover is very high.
The total asset turnover ratio of McDonald’s is less than the industry average and required
proper attention to manage assets effectively as shown in table 2. Total asset turnover of
McDonald’s is improving over time period, but reduced in 2012as shown in figure 4 of
exhibit 1. Major reason is the increase in assets is high due to debt financing, but sales is not
increased by the same proportion, while Yum Brands total asset turnover comparatively very
high and improving. It represents firm’s assets are not managed efficiently to generate high
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sales.
Net profit margin is very better than industry average as well as return on investment and
equity also greater than the industry average as shown in table 2. Net profit margin of
McDonald’s is increasing over the period of time and higher than the Yum Brands. But it was
reduced in 2012 due to increase in interest expenses due to which net income reduced as
shown in table 3. But overall its profitability is good as shown in figure 5. Return on assets of
McDonald’s is improving with the passage of time, but comparatively low as compared to
Yum Brands and it is reduced in 2012 due to the same reasons as mentioned in the above
paragraph. Similarly, return on equity of McDonald’s represents the same pattern as ROA. It
is increasing, but weaker than Yum Brands. It represents that McDonald’s assets and
shareholder funds are not effectively utilized due to which it has low profitability as shown in
figure 6 of exhibit 1. Board of directors has to focus on this issue keenly.
3. Horizontal Analysis of McDonald’s
Over the passage of time McDonald’s profitability is increasing with positive increasing trend,
but it reduced in 2012 due to recession and tremendous increase in interest expenses as well
as administrative and impairment expenses. Company’s revenues are increasing with an
appropriate percentage over the period of 5 years under study due to increase in sales by
company operated as well as franchised restaurants. Net profit margin has increased by 20%,
operating expenses increased by 3% & operating income has risen by 0.9%, which is lower as
compared to increase in operating expenses which needs to be reduced. While net sales have
an increasing trend over the period of the first four years from 2008 to 2011 but decreased by
a small percentage of 0.7% in 2012. But the company is quite efficient in operations because
its operating expenses are reduced over the time period. It is shown in figure 1of exhibit 2.
Let’s talk about the short-term liquidity position of the company. Its short term liquidity
position is strengthening because a positive increase in the current assets which is 12% is
greater than the increase in current liabilities which are decreased by 3% in the most recent
year. Also company’s current assets are increasing with a greater percentage which is enough
to cover its operating costs & other expenses thus leaving a sufficient amount to fulfil its
short-term obligations as these come due. It means that company is capable to meet its short
term obligations as incurred and shown in figure 2 of exhibit 2.
While analyzing the debt structure of the company, it is revealed through figure 3 that its debt
structure heavily based on long term liabilities as compared to short term. Also percentage
increase in long-term debt which is 10% is more as compared to total equity, which is
increased by 7%. In capital structure proportionate of retained earnings and treasury stock is
increasing with a greater percentage of 7% and 8% respectively. Also capital structure is
more heavily based on debt as shown in figure 4 of exhibit 2. But company assets are not
utilized efficiently because the increase in assets is not shown as the percentage increase in
sales (look table 1 in Annexure and all calculations are done by researchers).
4. Vertical Analysis of Mcdonald’s
According to the results of the vertical analysis, 67% of company’s net revenue comes from
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the sale of its own restaurants while 33% from the sale of franchised restaurants. The
company’s operating income shows positive increasing trend up to 2011 due to decrease in
operating expenses, but in 2012 it shows a slight decrease in decimals and it is 32% of total
company’s revenues. Net income is 20% of company’s total revenues from 2008 to 2011 but
decreased in 2012 due to increase in provision for income taxes. While interest expenses are
continuously increasing which causes net income to increase with a low percentage in
comparison with operating income. Total operating expenses are 68% of net revenue in 2012
with a positive increasing trend over the period of three years; it means profitability of the
firm is much affected by operating expenses it has to reduce them. It is shown in figure 2of
exhibit 2.
The short term liquidity position is strengthening because over the time period proportion of
current assets to total assets is increased with a greater proportion than of current liabilities.
Whereas current assets are 14% and current liabilities are approximately 9% of total assets.
The proportion of long term debt is also increasing with a greater percentage as compared to
current liabilities which represents that company is heavily depend on long term debt which
is 39% of total assets. Capital structure composition is 57% debt and 43% equity it means
capital structure is debt based. Moreover, assets are not utilized efficiently due to lower
increase in profitability (look table 2 in Annexure and all calculations are done by
researchers).
5. DuPont System of McDonald’s Financial Analysis
The DuPont system of financial analysis of Macdonald’s with industry averages more deep
knowledge of its profitability and financial stability is obtained. Return on assets and equity
are major financial ratios provide information about the company’s profitability, operations
and assets efficiency as well as financial leverage. Through DuPont analysis of return on
assets (ROA) it is found that Mcdonald’s ROA is higher than industry average. And a major
component of this higher ratio is net profit margin shown in table 4. Net profit margin of
McDonald’s is much higher than industry average representing that company is operating
efficiently and if wants to remain competitive then focus on the further reduction of operating
expenses. While McDonald’s is less effective in asset utilization as shown in table 4 in terms
of asset turnover. Assets turnover of Mcdonald’s is less than industry average. So, to be a
market leader company has to improve its asset utilization. Because effective asset utilization
leads towards operating cost reduction, increase in profitability as well as ROA.
Table.4 DuPont System Analysis of McDonald’s 2012
McDonald’s Corporation Industry Average
ROA=
Net Profit Margin* Total
Asset Turnover
15.44=
19.82*0.78
13.49=
14.20*0.95
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ROE=
Net Profit Margin* Total
Asset Turnover* Equity
Multiplier
36=
19.82*0.78*2.313
30.96=
14.29*0.95*2.36
Note. Data for DuPont system analysis from McDonald’s Corp., (2012)
Let’s talk about return on equity (ROE); it is higher than industry average. Net profit margin
is the major component of higher ratio. But another positive fact is identified about
Mcdonald’s that it is less leverage than industry average. Because according to industry
average, leverage is allowed up to 2.36 but Mcdonald’s attained it to 2.313. This point
advocates the Mcdonald’s more focus on lease and debt financing in last 2 years. But if the
company wants to be remain the market leader and don’t want to lose its market share and
investors trust, it has to limit its focus on lease and debt financing. Because an increase in
lease and debt financing leads towards an increase in interest expenses and reduced profits. It
ultimately affects long term profitability as well as the solvency position of the company.
6. Short Term Liquidity Management
Let talk about short term liquidity position of McDonald’s, then it is found that its current
ratio and quick ratio are much higher than industry average and favorable for the company as
well as short term liquidity position is very good as compared to industry averages and strong
competitor as shown in table 3. There is continuous improvement in liquidity position as an
increase in total current assets, followed by a huge increase in the amount of account
receivables and prepaid expenses. Whole increase in total current liabilities is hampered by a
tremendous reduction in current maturities of long term debt in 2012 shown in table 5. So,
high current and quick ratio depicts that company is strong enough to quickly meet its short
term obligations. As well as amount of working capital is also increasing yearly shown that
the company has sufficient amount to meet its daily operational needs. But here is a question
that why company is stagnating huge amount of its investment approximately 14% in current
assets, mainly in terms of account receivables and prepaid expenses. Huge amount of account
receivables shows that company sale is increasing, but why company is making huge advance
payments of its expenses, because this amount has not been utilized to generate profit. So, it
is good to improve short term liquidity position, but up to the extent of industry average. In
other words, the company has to focus on improving the worth of its investors and
shareholders.
Table.5 Short Term Liquidity Management of McDonald’s
Items (in million $)&
Years
2012 2011 2010 2009 2008
Cash & equivalents 2336.1 2335.7 2387 1796 2063.4
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Account receivables 1375.3 1334.7 1179.1 1060.4 931.2
Inventories at cost 121.7 116.8 109.9 106.2 111.5
Prepaid & other Exp. 1089 615.8 692.5 453.7 411.5
Tt. Current Assets 4922.1 4403 4368.5 3416.3 3517.6
Account Payable 1141.9 961.3 943.9 636 620.4
Income taxes 298.7 262.2 111.3 202.4 0
Other taxes 370.7 338.1 275.6 277.4 252.7
Accrued interest 217 218.2 200.7 195.8 173.8
Accrued payroll 1374.8 1362.8 1384.9 1659 1459.2
Current maturities of long
term debt
366.6 8.3 18.1 31.8
Tt. Current Liabilities 3403.1 3509.2 2924.7 2988.7 2537.9
Current Ratio 1.44 1.25
1.49 1.14 1.38
Quick Ratio 1.09 1.05
1.22 0.96 1.18
Net Working Capital 1519 813
1443 427 979
Note. Data for Short Term Liquidity Management from McDonald’s Corp.,(2008-2012).
Conclusion
After applying all analysis on the financial data of McDonald’s, it is revealed that short term
solvency position of McDonald’s is very strong as compared to industry average and Yum
Brands. McDonald’s is self-sufficient in the payment of its current obligations as claimed as
well as has sufficient working capital to meet its day to day operations expenses. Let’s talk
about profitability of company; it is found that McDonald’s profitability is improving
positively as compared to strong competitor. Due to increased profitability, faith of
shareholders ad investors also increased. McDonald’s is also very efficient in operations and
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continuously trying to reduce its operating costs. Efficient operations are a big reason of high
profitability of McDonald’s.
Moreover company debt to assets and equity ratio is good as compared to industry average
but require more improvement to remain number one in competitive industry. As talk about
the assets utilization efficiency, it is found that company assets are not utilized efficiently to
get potential results. Another good thing revealed about McDonald’s is that company is less
leveraged than industry and focusing on more debt by leasing. And capital structure
composition is shifting from equity based to debt base. It is the point of trouble for the
company. Because due to heavy reliance on debt financing risk increases that discourage
shareholders and investors. But all in all high profit margins, continuous dividend payment,
strong solvency position broad network expansion and continuous value addition to the menu
are major component of McDonald’s leadership in fast food industry.
Recommendation
1. Firstly, company has to improve its efficiency of assets utilization. Became due to less
efficient asset utilization, operating costs increased and profitability affected. So,
management has to focus on effective management of assets.
2. McDonald’s has to become more conscious about the composition of its capital
structure. Heavy reliance on debt in capital structure makes the company more risky
and loses investor’s trust.
3. Company also has to improve its average collection period because credit policies are
comparatively lenient as compared to industry due to which risk of delay in recovery
of debt increased.
Limitations and Future Research
Limitations of this study are that all results and recommendations are based on only the
information provided by annual reports and available on company websites. But researchers
don’t get access to any information about the managerial policies and actions. And if further
research on data related to management policies and actions is explored than effectiveness of
this study can be enhanced.
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Annexure
Table 1.Horizantal Analysis of McDonald’s Corporation from 2008-2012
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Table 2. Vertical Analysis of McDonald’s Corporation from 2008-2012
Items & Years 2012 2011 2010 2009 2008
Sales by Company-operated restaurants 67.48 67.74 67.43 67.97 70.40
Revenues from franchised restaurants 141.88 32.26 32.57 32.03 29.60
Total Revenues 100.00 100.00 100.00 100.00 100.00
Food & paper 22.92 22.84 22.02 22.77 23.75
Payroll & employee benefits 17.09 17.06 17.12 17.44 18.28
Occupancy & other operating expenses 15.22 15.05 15.11 15.42 16.01
Franchised restaurants, occupancy expenses 5.54 5.49 5.72 5.72 5.23
Selling, general & administrative expenses 8.91 8.86 9.69 9.82 10.01
Impairment & other charges 0.03 -0.01 0.12 -0.27 0.03
Other operating income (expense), net -0.91 -0.86 -0.82 -0.98 -0.70
Total operating costs & expences 68.79 68.42 68.96 69.92 72.61
Operating income 31.21 31.58 31.04 30.08 27.39
Interest expense, net of capitalized interest 1.87 1.82 1.87 2.08 2.22
Nonoperating income (expense), net 0.03 0.09 0.09 -0.11 -0.33
Income before provision for income taxes 29.31 29.67 29.08 28.52 26.18
Provision for income taxes 9.48 9.29 8.53 8.51 7.84
Net income 19.82 20.38 20.55 20.01 18.34
Vertical Analysis of Income Statement
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Items (in million $) Years 2012 2011 2010 2009 2008
Cash & equvilants 3.89 4.05 3.69 3.51 3.27
Account receivables 3.89 4.05 3.69 3.51 3.27
Inventories at cost 0.34 0.35 0.34 0.35 0.39
Prepaid & other Exp 3.08 1.87 2.17 1.50 1.45
Tt. Current assets 13.91 13.35 13.66 11.30 12.36
Investments and advances to 3.90 4.33 4.18 4.01 4.29
Goodwill 7.92 8.04 8.09 8.02 7.86
Miscelleneous 4.53 5.07 5.08 5.42 4.32
Tt.other assets 16.35 17.44 17.35 17.46 16.48
Property & equipments at cost 108.77 108.33 107.84 110.64 109.46
Acc. Depreciation & amortization -39.04 -39.11 -38.85 -39.40 -38.29
Net Property & equipment 69.59 69.22 68.99 71.24 71.17
Tt. Assets 100.00 100.00 100.00 100.00 100.00
Account Payable 3.23 2.91 2.95 2.10 2.18
Income taxes 0.84 0.79 0.35 0.67 0.00
Other taxes 1.05 1.02 0.86 0.92 0.89
Accrued interest 0.61 0.66 0.63 0.65 0.61
Accrued payroll 3.89 4.13 4.33 5.49 5.13
Current maturities of long term debt 0.00 1.11 0.03 0.06 0.11
Tt. Current liabilities 9.62 10.64 9.15 9.89 8.92
Long tern debt 38.52 36.78 35.96 34.94 35.79
Other long term liabilities 4.31 4.89 4.96 4.51 4.95
Deffered income taxes 4.33 4.07 4.17 4.23 3.32
Common stock 0.05 0.05 0.05 0.05 0.06
Additional paid in capital 16.33 16.63 16.25 16.06 16.16
Retained earning 11.00 11.00 10.50 10.30 10.10
Acc. Other comprehensive income 2.22 1.36 2.35 2.47 0.36
Treasury stock -86.41 -85.70 -78.63 -75.62 -71.29
Tt. Shareholders equity 43.22 43.62 45.77 46.43 47.02
Tt. Liabilities & shareholders equity 100.00 100.00 100.00 100.00 100.00
Vertical Analysis of Balance Sheet
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