Financial Performance of McDonald Corporation - Dissertation Example

Financial Performance of McDonald Corporation 1.0 Introduction McDonald’s is a public corporation which concentrates on fast-food restaurant’s franchising and operations. Staple items of French fries and hamburgers have been the main components in McDonald's menu since its creation, but in recent years, new items like salads and fruits have been included in its menu. About 20,000 McDonalds Restaurants are operated by franchisees, and the company is present in 118 countries, and has 31,489 restaurants in total. The company’s initial public offer was released in early 1880s and by 1985; the company had already been included to the Dow Jones Industrial Average. McDonald's competes with other fast food companies such as Yum Brands Inc and King Burger Holdings Inc. McDonald's sought to promote its competitive advantage by coming up with a new strategy, ‘Plan to Win’. According to the CEO’s letter to the shareholders’, this strategy focuses on five key areas; people, product, place, promotion and price (Keown, Martin & John 84). 2.0 Financial Ratio Analysis Financial ratios are used to standardize financial information to enhance comparisons of financial statements of different companies or even belonging to the same company but for different financial periods. McDonald’s is a key player in its industry and its presence and success can be clearly seen. 2.1 Liquidity Ratios Liquidity ratios measure the ability of a firm to meet its current liabilities as they fall due. In 2011 financial year, McDonald’s had a current ratio that was slightly above the industry median but lower than the market median. The company’s high current ratio indicates that McDonald’s has more current assets than its current liabilities, and is able to pay of its debts as they fall due. However, Burger King, a player in the same industry has a higher current ratio as compared to McDonald’s. The same applies to Quick Ratio. The quick ratio of McDonald, though it is far much lower than both the industry and market media, matches those of its competitors. This could mean that McDonald is maintaining a high level of stock which lowers its quick ratio. A high level of stock may affect the cash flows and the ability of the company to meet its current obligations as the fall due, but rate of stock turnover matter most when considering the cash flow. McDonald’s inventory turnover is more than double both the industry average and those of its competitors. This shows that the company has a good standing in balancing inventory on hand and its sales. With a high inventory turnover, cash flow is greatly boosted; McDonald’s will be able to completely offset its debts, mostly the current debts, in the shortest time possible without any hardship (Keown, Martin & John 84). Accounts receivable turnover, on the other hand, is lower than the industry median. This indicates that McDonald’s is lowering its costs, causing around 20% of its sales to translate to net income. Key competitors such as King Burger and Yum 2.2 Operating Profitability McDonald’s profit margin is significantly above both industry average and its leading competitors. The indication which this brings out is that the company is doing its best to keep its costs low, which will result to 20% of its sales being converted to net income. In terms of asset management, McDonald has an asset turnover of 0.8 as compared to the industry median of 1.2. A competitor like Yum has a much higher asset turnover rate of 1.6. However, McDonald’s asset management is favorable since it is close to the industry median. 2.3 Financing McDonald’s long-term debt to equity ratio is far much less than the industry average or its competitors. This disparity may discourage potential investors since they are aware that debtors will be compensated first in case of bankruptcy of the company. 2.4 Return on Equity (ROE) McDonald’s is behind its industry when it comes to its Return on Equity. This is most likely caused by the high volume of stock maintained by McDonald’s, almost triple that of Yum. Such high stock level dilutes earnings over a large number of shares and leads to a lower ratio. 3.0 The Business (10-K Report) According to Form10-K, McDonald’s operates and franchises its restaurants in the restaurant industry globally. A broad menu is served by these restaurants in the various places in the world where they operate, and they effectively provide value in 119 countries around the world where they are spread all over. The company also owns intellectual property such trademarks, patents and service marks. The name McDonald’s is a trademark in itself. It also operates research activities in the U.S., Europe, and Asia. The costs of the research activities are not considered material since they are less costly. Since the company is already a listed company, its operations are usually under scrutiny and must me in accordance with the provisions of the Exchange Act of 1934. Therefore, the company must file proxy statements, periodic reports, and other business related information with the U.S. Securities and Exchange Commission (SEC). In the Form 10-K, several risks facing McDonald’s are also explained in detail. Some of these risks include global and local market conditions such as the debt crisis in the Eurozone which may lead to reduction in sales and investing opportunities. Another risk is the increasing legal and regulatory complexity which exposes the company to complex compliance, litigations, among others which can affect its financial position. Other risks include natural disasters, hostilities, volatility ad price of common stock, and maintain the brand in order to remain relevant and continue making sales and profits in the current competitive environment (Keown, Martin & John 85). 4.0 CEO’s Letter to Shareholders-2011 Annual McDonald’s CEO, in the 2011 annual report, emphasized the core values of determination and pursuit of excellence which drive the success of the company in any operating environment. He mentioned several key areas of their business which indicate a bright future for the company. According to his letter to the shareholders, sales increased by 5.6% while operating income rose by 10% in constant currencies. He also mentioned the continued market extension around the world (Keown, Martin & John 85). Another key issue mentioned is the returns to shareholders and investors. A sum of $6 billion was returned to the shareholders through share purchase and dividends paid. He stated that a total return of 30% was returned to the investors. This shows the profitability of the company and its ability to meet the investor’s needs. The global success of McDonald’s was also highlighted in the CEO’s letter. According him, the company serves around 68million customers daily. U.S. alone added more than 350million new customers in the year 2011 while Europe contributed around 40% of total revenue earned. The other continents, Asia, Africa, and Middle East, doubled their revenues (Keown, Martin & John 85). The CEO also stressed two key factors which are driving their performance. One is the ‘plan to win’ strategy which focuses on people, products, place, price, and promotion. The strategy is customer based. The second factor is collaboration of their system partners. These partners are the franchisees, suppliers, employees and board of directors. He further mentioned some new developments in terms of their products, services and restaurants. Modernization by re-imaging restaurants is ongoing with approximately 40% of their interiors and 25% of their exteriors already re-imaged. It is worth noting the fact that sustainability issues such as nutrition and well being, sustainable supply chain, environmental responsibility, employee experience, and the community were also mentioned. This shows their commitment to pay back to the society. 5.0 Significant Accounting Policies McDonalds operates and franchises its restaurants in the world restaurant industry. The company either runs the restaurants directly, or involves franchisees in running the daily operations of the restaurants. Where it uses franchisees, it either uses conventional franchisees through franchise arrangements, or developmental licensees and foreign affiliates under license agreements. 5.1 Consolidation The accounts of the company and its subsidiaries are part of its consolidated financial statements, since the accounts are linked to the company. McDonalds affiliates who own 50% or less, such as the McDonald’s Japan, are accounted for through the use of the equity method. The Financial Accounting Standards Board (FASB) in June 2009 came up with amendments codified in the FASB Accounting Standards Codification (ASC), regarding the guidance on consolidation and variable interest entities. The method for determining whether an entity is a variable interest entity is modified by this guidance. The guidance also modifies on the methods permitted in the determination of a variable interest entity primary beneficiary. In addition, this guidance requires ongoing reassessments of whether a company is the primary beneficiary of a variable interest entity and enhanced disclosures related to a company’s involvement with a variable interest entity. The Company adopted this guidance as of January 1, 2010. On an ongoing basis, the makes an evaluation of its business relationships mostly the joint venture partners, franchisees, suppliers, developmental licensees and advertising cooperatives, so as to identify variable interest entities that are potential. As a result of the nature of their operations, these businesses generally qualify under the variable interest entity consolidation guidance, for a scope exception. In its conclusion, the company argued that consolidation is not appropriate for the periods presented. As a result, the adoption did not have any impact on the Company’s consolidated financial statements (Keown, Martin & John 84). 5.2 Estimates in Financial Statements Financial statements preparations which are in accordance to the accounting principles that are accepted in the US generally make a requirement for managements to come up with assumptions and estimates that have an effect to the amounts reported in accompanying notes and financial statements. In fact, the actual results will definitely have to differ with the estimates, because of some degree of errors which may be included in the calculations. 5.3 Revenue Recognition The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates. 6.0 Contingencies The company does not have many contingencies which may have adverse impact on their financial performance. There is only one contingency stated, “In connection with the sale in 2007 of its businesses in 18 countries in Latin America and the Caribbean to a developmental licensee organization, the Company agreed to indemnify the buyers for certain tax and other claims, certain of which are reflected on McDonald’s Consolidated balance sheet (2011 and 2010: other long-term liabilities–$49.4 million and $49.6 million, respectively; 2011 and 2010: accrued payroll and other liabilities–$21.2 million and $28.4 million, respectively).” But the Company is currently reviewing other contingencies which are not expected to have adverse material effect on its financial position. 7.0 Sustainability The company has a sustainability section in its Website. It is stated that the company’s efforts of sustainability makes sure that the business practices of the company and policies promote their rich heritage, which is basically impacting the society positively (Keown, Martin & John 84). The company aims at making significant progress in five major operation areas which include well-being, nutrition, environmental responsibility, sustainable supply chain, community and employee experience (Keown, Martin & John 84). 7.1 Nutrition and Well being McDonald’s, through nutrition and well being, is seeking to improve children’s health by promoting vegetable awareness, fruit awareness and low-fat or fat-free dairy, through their advertising and promotions which are usually very convincing and persuasive to customers. They offer nutrition information particularly to kids and their parents. 7.2 Sustainable Supply Chain McDonald’s trying to reduce the impact of direct suppliers on the environment by utilizing the Supplier Environmental Scorecard as a continuous improvement tool. The company is committed to sourcing all their food and packaging from sustainable suppliers. According to McDonald’s 2011 Environmental Scorecard, most suppliers are using the environmental scorecard to improve their environmental performance. 7.3 Environmental Responsibility McDonalds strives not only to adopt equipment and technology which are energy efficient but also promote energy awareness and education in the System to get savings and improve the environment. In 2011, McDonald’s introduced better energy-related metrics. This was focused on company-owned restaurants. They also came up with “energy bundles” which consists of simple energy changes like energy-efficient lighting. In addition, a green website, “the McDonald’s Best of Green Website” has been created to promote the environmental responsibility (Keown, Martin & John 84). 7.4 Employee Experience Employee experience is founded on the global Employee Value Proposition. It motivates the crew and managers. This enhances employee commitment and customer experience. McDonald’s applies Employee Value Proposition (EVP) in all its subsidiaries around the globe. The values have been activated in the restaurants of the top markets. In the year 2011, McDonald’s was listed among the top ten in Fortune’s Best Global Companies. The company was also given the Catalyst Award, which is very prestigious and highly recognized. They were given this price for recognizing women’s career progress and development. Besides these, the company has received many other awards due to its efficient operations and quality services, and it remains one of the largest restaurant chains in the world. 7.5 Community This focus area seeks to combine local and global resources to help more children, families and communities. It also promotes increased participation in the volunteer programs; corporate and private. The rate of participation in McDonald’s corporate volunteer program has grown immensely and is now approximately 35%. During the London Olympics held in 2012, McDonald’s UK helped the organizing team by providing materials, facilities and expertise for attracting, selecting and training the 70,000 volunteers that were needed to manage the Olympics (Keown, Martin & John 86). 8.0 Other Information According to The CSUB Business Log, McDonald’s has a great competitive advantage in the fast food industry. “Its net income rose from $2.4 billion in 2007 to $4.3 billion in 2008, and $4.5 billion in 2009; it is projected to reach $4.6 billion in 2010 and $5.0 billion in 2011.” However, the company faces a lot of risks such as foreign exchange rates, inflation and increasing industry regulations. The author of this article further notes that, McDonald’s debt to equity ratio is lower than the industry ratio by 0.6. This may scare away potential investors. 9.0 Summary of Key Findings and Conclusion 9.1 Summary of key findings McDonald’s is a successful multinational company holding a significant market share in the fast food industry. It has excelled in its sustainability program which focuses on five specific focus areas: Nutrition and well being, sustainable supply chain, employee experience, environmental responsibility, and community. This program has given McDonald’s a competitive edge over its competitors. In addition, McDonald’s has put in place a tool for measuring its sustainability goals. This tool is known as “McDonald’s Global Sustainability Score Card” (Keown, Martin & John 86). 9.2 Conclusion Yes, McDonald’s Stock should be included in the triple bottom line Investment. This is based on the key strengths of Mcdonald’s. It is a stable company with strong sustainability programs. Its financial ratios have been consistent and match its industry’s averages and those of its competitors’. Furthermore, it has no contingencies which may adversely affect its future operations. Works Cited Keown, Arthur, Martin, John, & John Petty. Foundations of Finance: The Logic and Practice of Financial Management. London: Prentice Hall, 2010. Print. Read More