McDonalds Is the Largest Food Service Company - Essay Example

Financial Analysis of McDonalds information Financial Analysis of McDonalds COMPANY OVERVIEW A. Brief description about the company - McDonald's is the largest food service company in the world. The company regards itself as the leading global food service retailer. With more than 30,000 restaurants serving more than 47 million people each day in 121 countries it is hard to argue! In 1974 McDonald's opened its first restaurant in the UK. As of 31 December 2001, McDonald's and its franchisees operated over 1,184 restaurants in the UK1. B. Company History - McDonald's originated in California, USA. In 1954, Ray Kroc became a franchisee of the McDonald brothers (Dick and Mac) and began opening new restaurants, buying all the rights to the McDonald's concept in 1961 for $2.7 million2. As of today, more than 2.5 million people of the entire UK population trust the day-to-day operations of McDonalds and also the high standard quality of service and the value for the money spent by them3. C. Organizational Structure - McDonald's are structured along functional lines. Their Chief Executive oversees five major areas of activity4: Operations (equipment and franchising) Development (property and construction) Finance (supply chain and new product development) Marketing (sales marketing) Human Resources (customer services, personnel, hygiene and safety) D. Main products and services - McDonald's menu concentrates on five main ingredients: beef, chicken, bread, potatoes and milk, which account for 255 million of food expenditure. The company's main menu lists its basic food offering: the Big Mac, which still exists as a major seller; other standard product names come from the McDonald's convention of adding a 'Mc' to a particular item. So, a chicken sandwich becomes a 'McChicken' sandwich and chicken nuggets become chicken 'McNuggets'. This idea has been extended to their dessert range, with the creation of the 'McFlurry' ice cream5. E. Geographic area of operations - McDonald's is one of only a handful of brands that command instant recognition in virtually every country of the world. McDonald's began with one restaurant in the US in 1955 and today there are more than 26,500 restaurants in over 119 countries, serving around 39 million people every day - making McDonald's by far the largest food service company in the world6. The business is managed as distinct geographic segments: United States; Europe; Asia/Pacific, Middle East and Africa (APMEA); Latin America; and Canada. In addition, throughout this report we present a segment entitled "Corporate& Other" that includes corporate activities and non-McDonald's brands (e.g., Boston Market). The U.S. and Europe segments each account for approximately 35% of total revenues. France, Germany and the United Kingdom (U.K.), collectively, account for approximately 60% of Europe's revenues; and Australia, China and Japan (a 50%-owned affiliate accounted for under the equity method), collectively, account for nearly 50% of APMEA's revenues. These six markets along with the U.S. and Canada are referred to as "major markets" throughout this report and comprise approximately 70% of total revenues.7 F. Recent developments - Extra Value Meals and Happy Meals are two of the most successful innovations of McDonalds. Extra Value Meals offer customers a hamburger, drink and fries sold together at a fixed money-saving price. Similarly, McDonald's Happy Meal boxes offer parents a simple and appealing package, with a smaller portioned meal served in a fun box with a toy. The reason behind the continued success of the family business of McDonalds is these innovations being instrumental. FINANCIAL ANALYSIS a. Sales and Income Record: Fiscal Years 2001 2002 2003 2004 2005 2006 Sales ($) 14,738 15,201 16,825 18,594 19,832 21,586 % change in sales (each yr) 4 3.14 10.6 10.5 6.65 8.84 Net Income ($) 1,637 894 1,471 2,279 2,602 3,544 % change in net income (each yr) 69 -45 65 54 14 36 8 GRAPH OF SALES & NET INCOME, FY 2001 - 2006 Comments on the above financial figures: In 2006, the Company's increased relevance contributed to more customers visiting McDonald's restaurants, helping drive global comparable sales up 5.7% and extending the company's consecutive monthly increases to 44 months through December 20069. The comparable sales of the company increased 5.7% building on a 3.9% increase in 2005. Also, System wide sales of the company increased 7% both as reported and in constant currencies and there has been an increase of 9% in consolidated revenues. From the above figures, it is very clear that the company's efforts have increased the consumer relevance and is helping the company in continuously delivered strong results in each year with revenue growth, operating income growth and returns on incremental invested capital. b. Expense Distribution Major Expenses FY 2006 OPERATING COSTS AND EXPENSES Company-operated restaurant expenses Food & paper 5,349.7 Payroll & employee benefits 4,185.4 Occupancy & other operating expenses 4,006.6 Franchised restaurants-occupancy expenses 1,060.4 Selling, general & administrative expenses 2,337.9 Impairment and other charges (credits), net 134.2 Other operating expense, net 67.1 Total operating costs and expenses 17,141.3 CHART OF EXPENSES, FY 2006 Comments: From the above expense distribution statements, it is very clear that the company has distributed the maximum amount of money over payroll and benefits of its employees after food & paper. This clearly states that the company is taking every measure for the benefits of its employees and also this states that the company believes in the strength of its employees. c. Assets and Capital Structure: Assets FY 2006 Buildings 21,682 Land/Improvements 4,723 Machinery/Equipment 4,840 Other Property/Plant/Equipment 566 Property/Plant/Equipment - Gross 31,810 Accumulated Depreciation (10,964) Property/Plant/Equipment - Net 20,846 Goodwill, Net 2,209 Long Term Investments 1,036 Other Long Term Assets 1,307 Total Assets 29,024 CHART OF ASSETS, FY 2006 Comments: The McDonald's total assets includes a portfolio of over 3000 McDonald's sites where the real estate is leased, rather than owned. Lease option exercises and purchase option exercises, negotiated purchases, negotiated lease extensions, and terminations and all similar issues are handled by the company's asset management team. They handle special situations that arise with leased property. Capital Structure FY 2006 Total Current Liabilities 3,008 Other long-term liabilities 1,074.9 Common Stock 17 Preferred Stock 0 CAPITAL STRUCTURE, FY 2006 Comments: Capital Structure of McDonalds is highly concentrated upon increasing the values of its shareholders. The company, with an intention to maximize shareholder values, continuously strives to find out the best ways of capital deployment and also focuses its efforts on driving higher returns by running great restaurants. d. Ratio Analysis: (1) LIQUIDITY: FY 2005 FY 2006 Current Ratio: Company10 1.45 1.21 Industry Average 0.4 0.98 Quick Ratio: Company 1.25 1.01 Industry Average 0.4 0.74 COMMENTS: McDonald's ratings continue to incorporate its leading position in the global quick service restaurant industry, exceptional brand awareness, extensive real estate holdings, franchise income and broad geographic diversity. (2) ASSET MANAGEMENT FY 2005 FY 2006 Total Asset Turnover: Company 0.71 0.73 Industry Average 1.06 1.18 Average Collection Period: Company NA NA Industry Average 8.46 10.70 COMMENTS: Most stocks in the restaurants industry have seen steadily growing revenue and impressive earnings growth over the past three years. The stocks of McDonalds has seen steady revenue growth over the past three years. Like its peers, this stock's earnings per share have grown at a very high rate over past three years, though they actually declined last year. Note that this stock's sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. That means that the company will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate. (3) DEBT MANAGEMENT: FY 2005 FY 2006 Total Debt to Total Assets: Company 0.59 0.54 Industry Average 0.68 0.93 Times Interest Earned: Company 18.1 19.3 Industry Average ____ 8.89 (4) PROFITABILITY: FY 2005 FY 2006 Net profit Margin: Company 12.72 16.42 Industry Average 7.26 7.97 Return on Assets: Company 0.71 0.73 Industry Average 8.12 8.46 Return on Equity: Company 17.73 23.16 Industry Average 21.78 21.47 COMMENTS ON THE COMPANY'S PROFITABILITY: Most companies in the restaurants industry have generated very low returns on assets over the past five years. McDonalds has posted results that are about average for its industry, though its ROA over the most recent 12 months was very high. (5) MARKET VALUE RATIOS: FY 2005 FY 2006 PE Ratio: Company 19.3 39.5 Industry Average 29.65 25.9 Market to Book Ratio: Company 3.6 4.7 Industry Average 4.6 5.73 COMMENTS ON THE COMPANY'S MARKET VALUE RATIOS: McDonalds has generated market-like returns over the past 5- and 10-year periods. McDonalds has been one of the strongest performers in its industry over the five-year period. The company has got relatively large number of competitors, and looking at its sales, it is one of the largest players. Bibliography: 1. Employment Spot, 1998, http://www.employmentspot.com/Job.aspJob_DID=J8H2M674D9JH9P7FXZ3 2. United States Securities and Exchange Commission, McDonald's Corporation, 10 - k Report http://www.sec.gov/Archives/edgar/data/63908/000119312507039707/d10k.htm#toc 3. CFO Review, Financial Perspective, 1998 http://www.mcdonalds.com/corp/invest/pub/annual_rpt_archives/1998_annual.RowPar.0003.ContentPar.0001.ColumnPar.0006.File.tmp/page20.pdf 4. http://quicktake.morningstar.com/StockNet/Diagnostics.aspxCountry=USA&Symbol=MCD 5. Restaurant Industry, May 14, 2002, All Business Research Industry, http://www.allbusiness.com/banking-finance/financial-markets-investing-securities/5948276-1.html 6. http://stocks.us.reuters.com/stocks/keyDevelopments.aspsymbol=MCD 7. http://www.bized.co.uk/compfact/mcdonalds/mc11.htm 8. http://quicktake.morningstar.com/StockNet/Diagnostics.aspxCountry=USA&Symbol=MCD 9. http://buck.com/10ktenkyear=05&idx=m&co=MCD&nam=DEMO&pw=DEMO 10. http://investing.businessweek.com/research/stocks/financials/financials.aspsymbol=MCD 11. http://www.marketwatch.com/news/story/mcdonalds-sales-growth-continues-january/story.aspxguid=%7BF0B17D17%2DD465%2D402B%2DA3E2%2D256DC3C98240%7D&siteid=yhoof 12. www.sec.gov/litigation/complaints/comp19344.pdf 13. www.hoovers.com/mcdonald's/--ID__10974,period__Q--/freeuk-co-fin-cash.xhtml 14. www.advfn.com/news_McDonalds-Reports-Record-3-3-Billion-Cash-Flow-for-2003-Releases-2003-Cash-Flo_6820184... 15. www.secinfo.com/dV5Ff.4FF5k.d.htm 16. www.mcdonalds.com/.../1998_annual.RowPar.0003.ContentPar.0001.ColumnPar.0006.File.tmp/page20.pdf 17. seekingalpha.com/article/18854-mcdonalds-q3-2006-earnings-call-transcript - 82k - 18. www.forbes.com/2007/04/24/sosnoff-google-ibm-oped-cx_mts_0424sosnoff.html - 50k 19. https://www.audit.executiveboard.com/Public/ADR_Research%20Alert.html - 15k 20. www.organicconsumers.org/Politics/russia32205.cfm - 17k Read More