Financial Statements of McDonald's - Case Study Example

EXECUTIVE SUMMARY: This paper comprehensively analyses the operations and activities of McDonald’s Corporation. It is considered as the largest and most successful corporation operating in the global market. In this dissertation, McDonald’s Corporation is studied extensively, its financial statements are analyzed and other tools of strategic managements were used to assess the corporation performance of the organization McDonald is perhaps the most successful corporation of the world. There’s no magic formula to it, but the company believes that its success has come due to their insistence on their values and because of their belief in truthfulness and honesty. McDonald’s Corporation is the world’s largest fast food restaurant chains, serving nearly 50 million customers daily. McDonald’s Corporation is primarily engaged in selling hamburgers, cheeseburgers, French fries, chicken products, soft drinks, break fast items, milkshakes and desserts. This business was initiated as a family business by two siblings, Dick and Mac. Their family name was McDonalds, so they named it after their family name. They opened with a sole branch in San Bernardino, California. The business was an instant success and numbers of branches were increased. However, the fate of the business was turned with the introduction of “Speedee Service System” in 1948. This made McDonald’s the most modern restaurant at that time and it started becoming a very famous restaurant in the USA. This was a brief history of the restaurant. McDonald’s Corporation is a Public Corporation, with its headquarters located in Oak Brook, Illinois. This restaurant was converted to a Corporation by Ray Kroc. Since then the “M” of McDonald’s restaurants has become a global symbol, with 31000 branches of McDonald’s opened worldwide. (McDonald’s Official Website, 2009) McDonald’s Corporation gives a lot of importance to their customer choice. It has recently added new product in line with what customers want. These additions have become instant hit, which is not only good for the business, but has also given increased weight to the McDonald’s menu and increased the choice as they now offer variety of products. Ratio Analysis is important tools to convert the financial statements of companies into common statements and to asses the performance of the company over a period of years. This allows us to see the financial trend of a company. This also allows us to look at various aspects of the company, such as: Profitability, Liquidity, Financial Leverage and how well is it carrying out its operations. (Haka and Bettner, 1999) Similarly, I will also analyze the financial statements of McDonald Corporation to find out the financial position of the company. This will not only give us a snap-shot of the company’s assets and liabilities, but it will also give us important details about the profitability of the company. Financial Analysis: P/E RATIO: FORMULA: Market Price of Common Stock/ Earning Per Share 2008: 62.19/3.76 = 16.53 2007: 58.91/1.93 = 30.52 Result: The P/E ratio indicates the investment that is needed to earn a dividend of $1. This means that a lower ratio is better indicator and shows better return on investment made. If we apply this McDonald’s Corporation case, we will find out that the company shows good result for the investors as this ratio has decline. If we look at the past performance, the investors were ploughing more money to obtain a $1 dividend. Now, the investors have to pay less to obtain a similar dividend. This ratio has halved, which mean that this company is serving the investors better and there are more chance that it will attract more performance. In the light of this ratio, we can safely say that the corporate performance of the company has improved significantly. The green arrow in the result column shows the improved performance of McDonald’s Corporation. (Ross, 2002) Equity Turnover: Formula: Sales/ Stockholder’s Equity 2008 23522/13382.6= 1.75 2007 22,787/15279.8= 1.44 This ratio shows how well the company is using the investment of its shareholders in order to generate the revenue for the company. In the McDonald Corporation case, this ratio is increasing, which shows the increased efficiency by which the management is using the invested money and converting it into revenue for the company. In this case, for every $1 invested in the company, McDonald Corporation is earning revenue of $1.75 against that dollar. In past this ratio was only 1.44 which clearly signals that the company is on the improving trend. This is a positive sign and will lead to higher return for the stockholders/shareholder. This improvement in corporate performance of the company will surely lead to the increased profits, if further money is invested into McDonald’s Corporation, thereby attracting prospective investors to the company. (Meigs, 1990) Current Ratio: Formula: Current Assets/ Current Liabilities 2008 3517.6/2537.9= 1.3 2007 3,581.9/4,498.5= 0.79 Result This ratio basically tells us the ability of McDonald’s Corporation to pay-off their current liabilities from its current assets. This ratio is current on a very good level as McDonald Corporation has enough assets to clear all their liabilities and still they will have some amount of current assets left. In fact, in the current situation, McDonald Corporation has around $1.3 worth of current assets to pay-off of each dollar’s worth of liability. This is a good sign because there will be no problem for the company to pay-off their short-term debts and creditors cannot force such companies to go bankrupt. Hence, we can clearly see that McDonald Corporation is in a very good position and has improved its liquidity position. In 2007, it did not have enough current assets to pay-off its current debts as it only had 97 cents for each dollar worth of liability. This was a dangerous sign, as if asked to pay-off their debts immediately; McDonald could not have done so. But now they can clearly pay-off their liabilities. (Randall, 1996) Profit Margins: Net Profit and Gross Profit Margin Gross Profit Margin: Formula: Gross Profit/ Sales *100 2008 17079/23522 * 100 = 72.6 % 2007 18908/ 22787 * 100 = 82.9 % Result Net Profit Margin: Formula: Net Profit/ Sales *100 2008 4313/23522 * 100 = 18.3 % 2007 2395/ 22787 * 100 = 10.5 % Result There has been a decrease in gross profit margin of the company from 82% to 72% from 2007 to 2008. This could be either because of reduction in the selling price of the McDonald’s products or due to increase in the cost of manufacturing goods. Whatever the reason maybe, this decline in the ratio suggests the failure of the internal management in keep gross profit constant in proportion to its sales. However, if we look at the net profit margin, it has showed a increase from 10.5 to 18% during the same period. This is a good sign as the company has been able to cut-down on their operating expenses. This shows that the company is using its resources more efficiently than before and their cost reduction policies are successful. (Wood, 2008) McDonald’s Past Performance and Competitor Comparisons: McDonald’s Corporation had another very good year in 2008, during this period the total revenue that were earned by the corporation amounted to $23.5 billion (McDonald’s Corporation Annual Report, 2008). The company was also able to increase its market by an impressive 7% during the same period. These good results were reflected in a very generous dividend policy by the company, giving out around $6 billion, which is around 24% of what the company has earned during the fiscal year ending 2008. Comparing the current year’s results with past performance of the company, one can clearly see that the company is moving in the right direction- forward. In the financial analyses that are incorporated in the earlier part of this report it can be seen that all the ratios and financial figures have showed improved. It was only that the gross profit ratio has come down by 10%. This may be due to the fact that McDonald’s Corporation has lowered its product prices, faced by intense competition in the market. Price to Earning ratio is now 14% better off as less investment is needed to earn substantial amount of dividend. This may be due to the fact that the Board of Directors has announced a very generous dividend policy of around 22%. Similarly, the company has also started utilizing there equity properly, as the return on equity has seen an increased. The company is also more liquid now, as the current ratio suggests, and could pay-off their liabilities with much ease and this may help the companies in indulging in more efficient operations and in the long run, this may lead to increased profits in the futures. The future of McDonald’s looks very bright, considering their current and past performances. During all of these years, McDonald’s has done so much that there’s hardly anything left for them. However, in the future, McDonald’s Corporation plans to improve the motivation of its employees and to make sure that good employees are retained; they have introduced a Super-Sized Retirement plant. This scheme is planned, so that employees get best value for their money. The plan gives the McDonald’s employees $3 for every $1 invested in the company. This is to make sure that employees are finically secure, once they retire from the company. This is an important policy and could be associated with the future success of McDonald’s. Another important component of McDonald’s Corporation’s future policy is Plan to win. This policy aims to give flexible investment plans to the investor to make sure that the empire built by Ray Kroc, keeps on growing. This is a very good policy as it will attract more investment and capital into the business and will provide more chances to the organization for growth. (McDonald’s Corporation Annual Report, 2007) APPENDIX PROFITABILITY RATIOS: Net profit margin results by dividing the net income by revenue. Net income comes from the profit and loss account, where it is stated as profit after taxation. Gross profit margin results by dividing the gross profit by revenue. Gross profit comes from the profit and loss account. Operating profit margin results by dividing the operating income by total revenue. Operating income comes from the profit and loss account, where it is stated as profit from operations. SOLVENCY RATIOS: Debt to equity ratio come from by dividing the total debt by total shares holders equity. Total debt value come from the liabilities section of balance sheet, where it is stated as total liabilities. Total shareholders’ equity comes from the capital and reserves section of the balance sheet. Debt to capital ratio results by dividing the total debts by the sum of total debts and total shareholders’ equity. Debt to assets ratio results by dividing the total debts by total assets. Financial leverage results by dividing the average total assets by average total equity. LIQUIDITY RATIOS: Current ratios come by dividing the current assets by current liabilities. Current assets come from the assets section of balance sheet and current liabilities come from the liabilities section of the balance sheet. References About McDonald’s. (2009). Cause that counts. Retrieved June 30, 2009, from http://www.aboutmcdonalds.com/mcd/students/mcdonalds_does_good/cause_that_counts.html. Kotler, P. & Keller, K.L. (2006). Marketing management (12th Edition). Pearson: Prentice-Hall. McDonald’s.com. (2009). Retrieved June 29, 2009, from http://www.aboutmcdonalds.com/mcd/investors/corporate_governance.html. 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