Financial Statement Analysis Professional Challenge: McDonalds - Essay Example

?Executive Summary McDonald’s is the most successful fast food restaurant chain in the world. The firm is the market leader in a $63 billion industry. The company has been in business for 56 years. The firm has the most sales and most stores in the industry. In 2010 the company achieved total sales of $24 billion. There are over 33,000 McDonald’s stores around the world of which nearly 80% are independently owned franchises. McDonald’s biggest competitor and the second largest fast food burger chain in the world is Burger King. The financial performance of Burger King and Sonic were used to compare McDonald’s financial performance during fiscal years 2010, 2009, and 2008. McDonald’s revenues grew by 5.8% in 2010 in comparison with the previous year. McDonald’s 2010 sales were 43 times larger than Sonic and 9.63 times larger than Burger King. One of the reasons McDonald’s generated such a large amount of sales is because the company receives 64 million customers on a daily basis. The net income of McDonald’s in 2010 was $4.94 billion. During the past two years the net income of McDonald’s has increased by 14.61%. The net incomes of Burger King and Sonic in 2010 were much lower than McDonald’s at $186.8 million and $21.2 million respectively. The ratio analysis performed on McDonald’s and the two competitors illustrated that McDonald’s is a superior company that had much better financial results than the competition. The net margin of McDonald’s was 20.54% which is twice as high as Burger King and nearly ten times larger than Sonic. McDonald’s return on assets in 2010 was 15.47%. In comparison with Sonic and Burger King the ROA of McDonald’s was 4.60 and 5.37 times higher respectively. All three companies had current ratios above 1.0 which means all companies are in a good position to pay off their short term debt. The company with the highest current ratio was McDonald’s with a metric of 1.49. McDonald’s Company Profile Ray Crock established the first McDonald’s store in Del Plaines, Illinois in 1955. The company became an instant sensation in America. In its 10 year anniversary the company celebrated the fact it had 700 McDonald’s franchises in the domestic U.S. market and that year McDonald’s went public with an initial pubic offering of $22.50 per common stock. The management of the company realized from its inception that the key to success of this franchise was advertising. In 1966 the company revealed for the first time in a television commercial the Ronald McDonald’s character. This character has been instrumental in the success of McDonald’s particularly among children. In 1967 McDonald’s launched its first international store. Today McDonald’s is the market leader in the fast food industry. The fast food industry generated over $63 billion in sales in the United States in 2010. McDonald’s had 2010 total sales of $24 billion. McDonald’s is the biggest fast food chain in the world with over 33,000 stores worldwide. The chief executive officer of the company is Jim Skinner. McDonald’s is one of the biggest employers in the world with 1.7 million employees worldwide. The company has penetrated 118 countries around the globe. The massive expansion of McDonald’s has occurred due its aggressive franchising strategy. Franchisees own 80% of the McDonald’s stores. The remaining 20% of the stores are company owned subsidiaries. The company’s common stock is traded in the New York Stock Exchange (NYSE) under the symbol MCD. The price of the MCD common stock at 3:07 P.M. on September 26, 2011 was $88.44 (Yahoo). The company’s common stock has gone up a lot during the past few decades. Appendix A shows the price movement of the McDonald’s common stock during the last 40 years. Operations and Products / Services McDonald’s started out as a company that offered hamburgers and fries in its menu. Today the fast restaurant has evolved and even though burgers and fries are its core offering the menu of the store is quite diverse. The company has breakfast menu and a lunch / dinner menu. A service that McDonald’s pioneered back in 1975 is its drive-though window. The McDonald’s product selection can be divided into eight categories. The eight product categories and the amount of products in each category are listed below: 1. Burger & Sandwiches (34) (includes 11 wraps) 2. Chicken (22) 3. Breakfast (21) 4. Salads (14) 5. Snacks & Sides (16) 6. Beverages (14) 7. McCafe (14) 8. Dessert & Shakes (21) The McDonald’s menu has over 120 products to choose from. McDonald’s has one of the largest menu offerings in the fast food industry. Some of its most popular burger & sandwiches include the Big Mac, Filet-O-Fish, Quarter Pounder with Cheese, and the McDouble. Among its chicken menu the McChiken and McNuggets are popular products. The Breakfast menu includes products such as McMuffin, Big Breakfast, and Sausage Burrito. Three of salads included in the salad menu are the Premium Bacon Ranch Salad with Crispy Chicken, Snack Size Fruit and Walnut Salad, and the Premium Caesar Salad. Some of the desserts sold at McDonald’s are the Baked Apple Pie, Chocolate Chip Cookies, McFlurry with M&Ms, and Caramel Sunday. One of the newest and most popular additions to the McDonald’s menu has been the McCafe. McCafe was created to compete directly with Starbucks Cafe. A classic McDonald’s menu that provides McDonald’s customers with great value is its Dollar Menu. The Dollar Menu has 13 items five of which are sold during breakfast, while the other eight are sold during lunch and evenings. The 13 items in the Dollar Menu are illustrated in table below. Breakfast Lunch / Dinner Sausage McMuffin Small Fries Small Coffee McDouble Hash Brown McChiken Sausage Burrito Small Beverage Sausage Biscuit Apple Pie Side Salad Fruit’ N Yogurt Parfait Hot Fudge Sunday The Dollar Menu has been aggressively used in McDonald’s marketing campaigns. The company offers value to its customers through the sale of food combos referred to by McDonald’s as Extra Value Meals. Most combos include a sandwich, fries, and beverage. McDonald’s also has a kid’s menu called Happy Meals to serve the needs of its younger customer audience. A special service the company offers is rental of its kid’s playground for birthday celebrations or kid’s parties. When the kid’s playground area is not rented for a special event it can be used by kids free of charge. Financial Statement and Common Size Statement Analysis The four main financial statements are the income statement, balance sheet, statement of cash flow, and the statement of retained earnings. The balance sheet and the income statement are often referred to as the common size financial statements. The income statement shows the profitability of a company during an accounting period. The balance sheet is a statement of position. The balance sheet shows the balances of the assets, equity, and liability accounts of the company at a specific point in time. Appendix D and Appendix E show the common size income statement and balance sheet of McDonald’s with variance analysis and a benchmark comparison to Burger King. In 2010 McDonald’s generated revenues of $24 billion. Between 2008 and 2009 which was parallel with global recession the total sales of McDonald’s decreased by 3.3%. The company bounced back in 2010 with a sales increase of 5.8% in comparison with 2009. A bar graph illustrating the sales of McDonald’s from 2008 to 2010 is illustrated in Appendix B. The total operating costs and expenses in 2010 were $16.6 billion. In comparison with the previous year the total operating costs and expenses of McDonald’s increased by 4.4%. In comparison with 2008 the 2010 total operating costs and expenses decreased by 2.8%. The net income of McDonald’s in 2010 was $4.94 billion. In 2008 the net income of the company was $4.31 billion. In comparison with 2008 the net income of McDonald’s increased by 14.61%. McDonald’s total liabilities in 2010 were $17,341 billion. The total liabilities of the company went up by 7.1% in comparison with the previous year. Increasing the total debt of the firm is usually not a good indicator, but if the added debt was used to make the business grow the debt was put to good use. The total equity of the firm was $14,634 billion. The equity of McDonald’s increased by $600 million in 2010 in comparison with 2009. McDonald’s cash position at the end of 2010 was $2.39 billion. The cash account of the company increased by 33% in comparison with 2009. McDonald’s top competitor is Burger King. A second company that directly competes with McDonald’s in the fast food industry is Sonic. In 2010 Burger King generated sales of $2.5 billion (Sec). The sales of McDonald’s in 2010 were 9.63 times larger than Burger King. The sales of Burger King decreased by 1.57% in 2010 in comparison with 2009, while its sales increased by 2% in comparison with 2008. Sonic had 2010 total revenues of $559 million (Shareholder). The revenues of Sonic wend down by 22% in the past year and 31% in comparison with 2008. In 2010 the revenues of McDonald’s were 43 larger than Sonic. The net income of Burger King in 2010 was $186.8 million. Burger King’s net income decreased by 6.6% in 2010 in comparison with 2009 and it decreased by 1.47% since 2008. Sonic had a net income of $21.2 million in 2010. Since 2008 the net income of Sonic has decreased by 64.83%. Appendix C compares the net incomes of McDonald’s, Burger King and Sonic. The total cash of Burger King at the end of 2010 was $207 million. In comparison with 2008 the cash account of the company has increased by 70%. Sonic had cash reserves of $86 million in 2010. The cash reserve of Sonic decreased by 59% in comparison with the previous year. The total equity of Burger King in 2010 was $1,455 million. The firm’s equity has grown by 49.38% since 2008. When comparing the equity of McDonald’s and Burger King in 2010 the total equity of McDonald’s is over 10 times larger. Sonic had total equity of $22.56 million in 2010. The equity of McDonald’s was 665 times larger than Sonic at the end of 2010. The total liabilities of Burger King in 2010 were $4,104 million. The firm’s liability grew by 253% since 2009. The total liabilities of Burger King are 76% lower than McDonald’s. Sonic had total liabilities of $715 million in 2010. Ratio Analysis The nine ratios used for the ratio analysis were profit margin, earnings per share (EPS), return on assets (ROA), return on equity (ROE), current ratio, debt ratio, working capital, price / earnings ratio, and market capitalization. The profit margin is calculated dividing net income by sales. The profit margin measures the net profitability of a company. Return on assets measures the efficiency or how well a company has utilized its assets to generate income. ROE indicates how effective a company has been at using its financial leverage in the favor of its shareholders. Earnings per share show the net earnings that were generated per common shares outstanding. A high EPS tends to increase the market value of a common stock. The debt ratio shows the ability of a company to pay off its long term debt, while the current ratio measures the ability of the firm to pay its short term obligations. Working capital is calculated subtracting current liabilities from current assets. It is a test to measure a corporation’s ability to pay its short term debts. The market capitalization is the total value of the company in the market. The formula to calculate market capitalization is the current price of the common stock multiplied by the total shares outstanding. The table below shows a ratio analysis comparison of McDonald’s, Burger King, and Sonic for fiscal year 2010. Financial Ratio McDonald’s Burger King Sonic Profit Margin 20.54% 10.16% 2.1% Earnings per share $4.64 $1.36 $0.35 Return on Assets 15.47% 3.36% 2.88% Return on Equity 33.8% 12.85% 93.98% Current Ratio 1.49 1.18 1.13 Debt Ratio 2.78 1.35 1.03 Working Capital $1,444 (mil) $82 (mil) 15.3 (mil) Price / Earnings 18.17 17.64 29.60 Market Capitalization $92.65 (bil) $3.27 (bil) $458.32 (mil) Among the three companies McDonald’s had the highest profit margin in 2010 at 20.54%. McDonald’s profit margin was higher than Burger King by 10.36% and higher than Sonic by 18.44%. The net profit of McDonald’s in 2010 grew by 0.54% in comparison with the previous year. In relation to 2008 the net profit of McDonald’s grew by 2.21%. McDonald’s return on assets in 2010 was 15.47%. In comparison with Sonic and Burger King the ROA of McDonald’s was 4.60 and 5.37 times higher respectively. Sonic had the highest return on equity among the three companies at 93.98% which means the firm has done an excellent job at generating profits from its equity. McDonald’s had the second highest ROE of the group at 33.8% with Burger King having the worst ROE at 12.85%. In 2009 and 2008 the return on equity of McDonald’s were 31.10% and 30.73% respectively. A current ratio is considered good if the metric is above 1.0. All three companies had current ratios above 1.0 which means all companies are in a good position to pay off their short term debt. The company with the highest current ratio was McDonald’s with a metric of 1.49. The 2.78 debt ratio of McDonald’s was the highest of the group. Due to the fact that all three companies had debt ratio of above 1.0 all companies are in a good position to pay off their long term debt. The working capital of McDonald’s is a hefty $1.44 billion. Both the working capital of Burger King and Sonic were much lower at $81 million and $15 million respectively. The earnings per share of McDonald’s in 2010 was $4.64. The EPS of the company climbed by 11.27% in comparison with the previous year and it went up by 21.14% in comparison with 2008. Burger King EPS in 2010 was $1.36, while Sonic EPS last year was $0.35. McDonald’s Historical Ratio Analysis Financial Ratios 2010 2009 2008 Diff 2010-2009 BKC 2010 Diff MCD-BKC Profit Margin 20.54% 20.01% 18.34% 2.65% 10.16% 102.17% EPS $4.64 4.17 3.83 12.27% $1.36 241.18% ROA 15.47% 15.06% 15.15% 2.74% 3.36% 360.42% ROE 33.80% 28.11% 28.60% 20.25% 12.85% 163.04% Current Ratio 1.49 1.14 1.39 30.35% 1.18 26.27% Debt Ratio 2.78 1.87 1.89 48.92% 1.35 105.93% Working Capital $1,444 (mil) 427.6 (mil) 979.7 (mil) 237.70% $82 (mil) 1660.98% Price/Earnigs 18.17 14.91 16.30 21.86% 17.64 3.00% Market Capitalization $92.65 (bil) $3.27 (bil) 2733.33% All the financial ratios selected for analysis in this term paper for McDonald’s corporation improved in 2010 in comparison with 2009. Conclusion In 2010 the industry leader in the fast food industry McDonald’s was able to recover well from the decline in sales it offered in 2009 largely due to the effects the global recession had in all businesses. The sale of McDonald’s increased by 5.8% in 2010, while its profit margin was higher by 20.54%. The firm’s performance was compared to two competitors, McDonald’s and Sonic. The variance analysis and ratio analysis showed McDonald’s outperformed both competitors. %. McDonald’s profit margin was higher than Burger King by 10.36% and higher than Sonic by 18.44%. These two companies are generating millions in, while McDonald’s is moving billions. Investing in the McDonald’s common stock is a wise move. Work Cited Page Aboutmcdonalds.com. 2010. “McDonald’s 2010 Annual Report.” 26 September 2011 Sec.gov. 2010. “Burger King Annual Report 2010.” 26 September 2011. < http://www.sec.gov/Archives/edgar/data/1352801/000095012311027965/g26522e10vkt.htm#G26522102> Yahoo.com. 26 September 2011. “McDonald’s (MCD).” 26 September 2011. Yahoo.com. 2011. “Basic Chart” 26 September 2011. Shareholder.com Appendix A: Historical Prices MCD (Yahoo). Appendix B: McDonald’s Sales 2008 to 2010 Appendix C: Net Incomes: McDonald’s, Burger King, Sonic (2010) Appendix D: McDonald’s Common Size Income Statement with variance analysis MC DONALDS Common-Size Income Statements For the Year Ended December 31, 2010 Revenues 2010 2009 2008 Diff. 2010-2009 BKC 2010 Diff. MCD-BKC sales by company operated restaurants $16,233.30 $15,458.50 $16,560.90 5.01% $1,839.30 782.58% revenues fromfranchises restaurants 7841.3 7286.2 6961.5 7.62% 549.2 1327.77% Totalrevenue   $24,074.60 $22,744.70 $23,552.40 5.85% $2,502.20 862.14% operating costs and expenses           company operated restaurant expenses             Food & paper   $5,300.10 $5,178.00 $5,586.10 2.36% $585.00 806.00% payroll and employee benefits $4,121.40 $3,965.70 $4,300.10 3.93% $568.70 624.71% occupancy & other operating expenses $3,638.00 $3,507.60 $3,766.70 3.72% $461.10 688.98% franchised restaurants-occupancy expenses $1,377.80 $1,301.70 $1,230.30 5.85% $1,614.80 -14.68% Operating, selling and administrative exp. $2,333.30 $2,234.20 $2,355.50 4.44% $495.00 371.37% impairment expenses $29.10 ($61.10) $6.00 -147.63% $59.40 -51.01% other operating income(loss)   ($198.20) ($222.30) ($165.20) -10.84% ($0.70) ($197.50)                 Total operating expenses $16,601.50 $15,903.70 $17,079.50 4.39% $2,139.30 676.02% Income from operations $7,473.10 $6,841.00 $6,442.90 9.24% $332.90 2144.85% Interest expense $450.90 $473.20 $522.60 -4.71% $49.60 809.07% non operating income   $21.90 ($24.30) $177.60 -190.12% ($1.00) -2290.00%                 totalinterest expense net $472.80 ($94.90) ($160.10) -598.21% $48.60 872.84% income from before tax $7,000.30 $6,487.00 $6,158.00 7.91% $284.30 2362.29% provision for income tax $2,054.00 $1,936.00 $1,844.80 6.10% $97.50 2006.67% net income $4,946.3 $4,551.0 $4,313.2 8.69% $186.8 2547.91% Appendix E: McDonald’s Common Size Balance Sheet with variance analysis MC DONALDS Common-Size Balance Sheet 31-Dec-10   2010 2009 2008 Diff 2010-2009 BKC 2010 Diff MCD-BKC Assets             current assets               Cash andcash equivalents $2,387.00 $1,796.00 2063.4 32.91% $187.60 1172.39% Accounts and notesreceivable $1,179.10 $1,060.40 $931.40 11.19% $142.90 725.12% Inventories $109.90 $106.20 $111.50 3.48% $88.40 24.32% prepaid expenses   $692.50 $453.70 $411.50 52.63% $15.10 4486.09% total current assets   $4,368.50 $3,416.30 $3,517.60 27.87% $434.00 906.57% Intangible assets       $1,025.40   other assets     $104.20   investments in and advances to affliates   $1,335.30 $1,212.70 $1,222.30 10.11% $138.50 864.12% Goodwill   $2,586.10 $2,425.20 $2,237.40 6.63% $31.00 8242.26% Miscellaneous   $1,624.70 $1,639.20 $1,229.70 -0.88%     totalother assets   $5,546.10 $5,277.10 $4,689.40 5.10% $138.50 3904.40% property and equipment             property and equipment   $34,482.40 $33,440.50 $31,152.40 3.12% $1,014.10 3300.30% Accumulateddepreciation   ($12,421.80) ($11,909.00) ($10,897.90) 4.31%     net property   $22,060.60 $21,531.50 $20,254.50 2.46%     Total assets $31,975.20 $30,224.90 $28,461.50 5.79% $2,747.20 1063.92%                             current liabilities               Accounts payable $943.90 $636.00 $620.40 48.41% $106.90 782.97% income taxes $111.30 $202.40 $0.00 -45.01%   other taxes $275.60 $277.40 $252.70 -0.65%     accrued advertising           $71.90   accrued interest   $200.70 $195.80 $173.80 2.50%     accrued payroll and other liabilities   $1,384.90 $1,659.00 $1,459.20 -16.52% $200.90 589.35% current maturities of long termdebt   $8.30 $18.10 $31.80 -54.14% $93.30 -91.10% total current liabilities $2,924.70 $2,988.70 $2,557.90 -2.14% $473.00 518.33%                 long termdebt   $11,497.00 $10,560.30 $10,186.00 8.87% $667.70 1621.88%             $65.30   other long term liabilities   $1,586.90 $1,363.10 $1,410.10 16.42% $344.60 360.50% deferred income taxes   $1,332.40 $1,278.90 $944.90 4.18% $68.20 1853.67% total liabilities   $17,341.00 $16,191.00 $15,078.90 7.10% $1,618.80 971.23% Common stock, $10 par value $16.60 $16.60 $16.60 0.00% $1.40 1085.71% paid in capital in excess of par value   $5,196.40 $4,853.90 $4,600.20 7.06% $647.20 702.90% Retained earnings $33,811.70 $31,270.80 $28,953.90 8.13% $608.00 5461.13% les: accumulated comprehensive loss   $752.90 $747.40 $101.30 0.74% ($66.90) -1225.41% treasury stock   ($25,143.40) ($22,854.80) ($20,289.40) 10.01% ($61.30) 40916.97% total stock holders equity $14,634.20 $14,033.90 $13,382.60 4.28% $1,128.40 1196.90% Total liabilities and stockholders' equity $31,975.20 $30,224.90 $28,461.50 5.79% $2,747.20 1063.92% Read More