The financial performance of McDonalds - Research Paper Example

Introduction One of the biggest success stories in American business history is the hamburger giant McDonald’s. The firm is a fast food restaurant that operates as a multinational corporation. The business model used by the company is franchising. The organization has been extremely successful since its inception due to the fact that it has quality food at affordable prices. The company has great product variety with over 100 items in its menu. In recent years the company diversified its product offering by creating the McCafe which was geared to compete directly with Starbucks Cafe.

The purpose of this paper is to analyze the financial performance of McDonald’s. Company overview McDonald’s is the industry leader in the fast food industry. The company was founded by Ray Kroc in 1954. Today the company has over 33,000 establishments across 119 countries. McDonalds’s serves food to approximately 68 million customers on a daily basis. The company’s mascot is a clown character called Ronald McDonald. The company has been very effective at attracting kids and teenagers to its establishments.

The chief executive officer (CEO) of the company is Don Thompson. McDonald’s is one of the largest employers in the world with a global staff of 1.8 million workers. “McDonald's brand mission is to be our customers' favorite place and way to eat and drink” (Aboutmcdonalds, 2013). Two of McDonald’s biggest competitors are Burger King and Wendy’s. McDonald’s is a public company whose stocks are traded in the New York Stock Exchange (NYSE) under the symbol MCD. The price of MCD stocks as of April 5, 2013 was $101.

42 (Yahoo, 2013). The market capitalization of the company is $101.70 billion. Horizontal Analysis The most recent fiscal year that is available with the financials of the company is 2011. A horizontal analysis of the income statement and balance sheet of 2011, 2010, and 2009 is illustrated below. Horizontal Analysis Income Statement (millions) 2011 2010 Change 2009 Change Total revenues 27006 24074.6 22744.7 Operating costs and expenses Company-operated restaurant expenses Food & paper 6167.2 5300.1 16.36% 5178 2.

36% Payroll & employee benefits 4606.3 4121.4 11.77% 3965.6 3.93% Occupancy & other operating expenses 4064.4 3638 11.72% 3507.6 3.72% Franchising restaurant-occupancy expenses 1481.5 1377.8 7.53% 1301.7 5.85% Selling, general & administrative expenses 2393.7 2333.3 2.59% 2234.2 4.44% Impairment and other changes (credits), net -3.9 29.1 -113.40% -61.1 -147.63% Other operating (income) expense, net -232.9 -198.2 17.51% -222.3 -10.84% Total operating costs and expenses 18476.3 16601.5 11.29% 15903.7 4.39% Operating income 8529.7 7473.1 14.

14% 6841 9.24% Interest expense-net of capitalized interest 492.8 450.9 9.29% 473.2 -4.71% Non operating expense, net 24.7 21.9 12.79% -24.3 -190.12% Gain on sale of investment -94.9 -100.00% Income before provision for income taxes 8012.2 7000.3 14.46% 6487 7.91% Provision for income taxes 2509.1 2054 22.16% 1936 6.10% Net income 5503.1 4946.3 11.26% 4551 8.69% Horizontal Analysis Balance Sheet (millions) 2011 2010 Change 2009 Change Assets Current assets Cash and equivalents 2335.7 2387 -2.15% 1796 32.

91% Accounts and notes receivable 1134.7 1179.1 -3.77% 1060.4 11.19% Inventory 116.8 109.9 6.28% 106.2 3.48% Prepaid expenses and other current assets 615.8 692.5 -11.08% 453.7 52.63% Total current assets 4403 4368.5 0.79% 3416.3 27.87% Other assets Investments in and advances to affiliates 1427 1335.3 6.87% 1212.7 10.11% Goodwill 2653.2 2586.1 2.59% 2425.2 6.63% Miscellaneous 1672.2 1624.7 2.92% 1639.2 -0.88% Total other assets 5752.4 5546.1 3.72% 5277.1 5.10% Property and equipment 35737.6 34482.4 3.64% 33440.5 3.12% Accumulated depreciation and amortization -12903.1 -12421.8 3.

87% -11909 4.31% Net property and equipment 22834.5 22060.6 3.51% 21531.5 2.46% Total assets 32989.9 31975.2 3.17% 30224.9 5.79% Liabilities and shareholder's equity Current liabilities Accounts payable 961.3 943.9 1.84% 636 48.41% Income taxes 262.2 111.3 135.58% 202.4 -45.01% Other taxes 338.1 275.6 22.68% 277.4 -0.65% Accrued interest 218.2 200.7 8.72% 195.8 2.50% Accrued payroll and other liabilities 1362.8 1384.9 -1.60% 1659 -16.52% Current maturities of long-term debt 366.6 8.3 4316.87% 18.1 -54.14% Total current liabilities 3509.2 2924.7 19.98% 2988.7 -2.

14% Long-term debt 12133.8 11497 5.54% 10560.3 8.87% Other long-term liabilities 1612.6 1586.9 1.62% 1363.1 16.42% Deferred income taxes 1344.1 1332.4 0.88% 1278.9 4.18% Shareholder's equity Preferred stock Common stock 16.6 16.6 0.00% 16.6 0.00% Additional paid-in capital 5487.3 5196.4 5.60% 4853.9 7.06% Retained earnings 36707.5 33811.7 8.56% 31270.8 8.13% Accumulated other comprehensive income 449.7 752.9 -40.27% 747.4 0.74% Common stock in treasury -28270.9 -25143.4 12.44% -22854.8 10.01% Total shareholder's equity 14390.2 14634.2 -1.67% 14033.9 4.

28% Total liabilities and shareholders equity 32989.9 31975.2 3.17% 30224.9 5.79% The horizontal analysis showed various trends in the financial performance of the firm. The total revenues of the company increased during the last two years. The growth in revenue between 2011 and 2010 was 16.36%. The net income of the company grew in 2011 by 11.26%, while the previous year the firm experienced a net income growth of 8.69%. In 2011 McDonald’s had a growth in total assets of 3.17%, but its cash reserves during that year decreased by 2.15%. Between 2009 and 2010 the company had a growth in total equity of 4.28%. Unfortunately in 2011 the firm’s total equity decreased by 1.67%. Ratio Analysis A ratio analysis of McDonald’s for fiscal year 2011 is illustrated below.

2011 Net margin 20.38% Earnings per share $5.33 Dividends per share $2.53 Return on assets 16.68% Return on equity 38.24% Current ratio 1.25 Quick ratio 1.22 Debt to equity 1.29 Debt ratio 0.56 Times interest earned 17.31 The net margin of the company in 2011 was 20.38%. Net margin measures the absolute profitability of the company. The firm’s net margin was outstanding considering the fact that the food industry has very low margins. In 2011 the earnings per share (EPS) of McDonald’s was $5.33. “The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm” (Accounting4management, 2012).

McDonald’s paid $2.53 of dividends per share in 2011. Companies that pay dividends to its investors are more attractive investment alternatives. The return on assets (ROA) and return of equity (ROE) of the organization in 2011 were 16.68% and 38.24% respectively. ROA measures the ability of a company to generate profits from its assets, while ROE indicates how effective a firm has been at generating profits from its equity. The current ratio of McDonald’s in 2011 was 1.25. A current ratio is an indicator of the ability of a company to pay off its short term debt.

The firm’s current ratio is good due to the fact that is above 1.0. The quick ratio of the firm was also good at 1.22. The debt to equity ratio of McDonald’s in 2011 was 1.29. This ratio shows how much debt the company has in relation to its equity. During 2011 the debt ratio of the firm was 0.56. McDonald’s has relative low debt in comparison to its assets. The times interest earned ratio of the organization in 2011 was 17.31. Times interest earned measures the ability of the company to make interest payments.

The company is in a good position to pay its interest obligations. Recommendation The financial analysis performed on McDonald’s showed a lot of positive signs. The total revenues and net income of the company has grown during the last three years. The profitability of the company as reflected by its net margin, return on assets, and return on equity was outstanding. McDonald’s has the capacity to pay both its short term and long term debt which implies that the firm does not face any type of liquidity issues.

The firm paid dividends to its investors and its EPS results were solid. Despite the size of the firm and the growth that it has achieved over the years the company has not undertaken excessive amounts of debt. The debt of the company in relation to its assets is relatively low. I would recommend the purchase of McDonald’s common stocks to an investor. Conclusion It is important for investors to evaluate the financial performance of a company prior to buying its common shares. An excellent source of information to investigate the financial performance of a company is its annual report which contains the company’s most recent financial statements.

The use of horizontal analysis can help an investor analyze the trends in the performance of a company over time. Ratio analysis is an extremely useful tool to evaluate a company because its proper use can help an investor determine the profitability, liquidity, and debt position of a firm. References Aboutmcdonalds.com (2013). Mission and Values. Retrieved April 6, 2013 from http://www.aboutmcdonalds.com/mcd/our_company/mission_and_values.html Accounting4management.com (2012). Earnings Per Share (EPS) Ratio.

Retrieved April 6, 2013 from http://accounting4management.com/earnings_per_share_ratio.htm Yahoo.com (2013). McDonald’s Corp (MCD). Retrieved April 6, 2013 from http://finance.yahoo.com/q?s=mcd&ql=1