Busi 534 Company Report for McDonalds’.pdf

Company Financial Report McDonalds’

Company Report for McDonalds’

School of Business, Liberty University

Busi 534 Business Valuation

Dr. Bosch Ph.D., CPA

Author Note

I have no known conflict of interest to disclose.

Correspondence concerning this article should be addressed

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Abstract

Company Financial Report McDonalds’

This business report is a financial analysis of McDonalds’ Corporation, one of the most

recognized fast restaurants in the industry. With its red and golden arch logo, it is the most

famous brand in the world. The report will highlight the description of the common income

statement, the table ratios, and a statement of cash flows.

Description of Business

McDonalds’ is categorized as being in the fast-food restaurant business. With over 38,000

restaurants and over 100 countries, the company serves over 36 million customers per day. The

billion-dollar business. The story of Mr. Kroc endeavors is memorialized into a movie and a

book about the making of McDonalds’ (Anderson, Kroc 1987). The entrepreneur spirit that Ray

Kroc with simple ideas to streamline the making of French fries and burgers, was a genius

method of quick and effective design of restaurant equipment and a detail plan of teaching the

operation of running a store. The main principles that all franchise must adhere to are quality,

service, cleanliness, and value (QSCV). Ray Kroc would say “If I had a brick, for every time

I’ve repeated the phrase quality, service, cleanliness and value, I think I’d probably be able to

bridge the Atlantic Ocean with them” (Anderson, Kroc 1987).

Common Income Statement

McDonald’s Corporation

Company Financial Report McDonalds’

company’s historical performance and industry averages, pointing out relative operating

strengths and weaknesses of the subject company as compared to its peers, assessing

management effectiveness, and identifying areas where the company is outperforming or

underperforming the industry. (Hitchner, 2020-2021 p. 91). It seems management has been able

to lower the cost of the operating of restaurant expenses to increase the net profit. The annual

growth rate was steady in 2017 and 2018 at 10% and 12% respectively, however the growth rate

Company Financial Report McDonalds’

dropped to 2%, although a growth rate that is positive. The rate is indicative of a slowing of

sales and net profit which should alert management that there needs to be a change in strategy in

increasing sales revenue with their company operated restaurants. The strength of the financial

statement is the franchised restaurant occupancy expenses and selling, general and administrative

expenses consistent every year while lowering operating expenses. The increase in franchise

income is good mixture of income because the expenses are lower. The concern in the financial

statement is the increase in interest expense in 2019. This expense and the level of debt should

Covid-19. The restaurant industry has been hit hard by the pandemic and the recover time is

unknown which will be reflected in the 2020 numbers.

Table of Ratios

McDonald's Corporation

Table of Ratios

Company Financial Report McDonalds’

throughout the years. The net profit margins have been healthy in the past two years of 2018 and

2019 and the return of equity has increased, respectively. The debt ratio should be monitored

because in the year 2016 the ratio was high and the change in ratio did not decrease to the 2018-

year level. Return on Equity has increased every year, which is a good sign for an investor that

the company is continuing to make a profit. However, the return on assets have been decreasing

and could be a sign that the company is acquire too much asset that is not keeping up to the pace

and it might be time to start selling off assets that is not producing income. The cash ratio is a

concern because this will be depleted to sustain the operations during the pandemic. This ratio

Company Financial Report McDonalds’

should be carefully be monitored to see how quickly the company can recover compared to other

restaurants in the industry.

Statement of Cash Flow

McDonald's Corporation

Statement of Cash Flow

interesting that the number that stands out is 2017 a positive event from investing activity. The

return on investment must have been successful and worth the use of cash decision for the

investment. This needed cash for 2020 and 2021 will be helpful for McDonalds’ to weather the

storm of the pandemic and may arise other opportunities to invest or upgrade the locations for

their franchisee. In the global arena, cash is king to stay viable and to quickly re-group the

McDonald network. Management is fully aware of the problem stated in the beginning of the

2019 annual report by the CEO, Chris Kempczinski. (McDonalds’ 2019 10K). Due to the

Company Financial Report McDonalds’

uncertainty of the pandemic, a hold on dividend distribution would be wise for 2020 in order to

preserve cash until the markets become stabilized or come back to normality.

Risk Factor

Risk factor takes into consideration the financial health of McDonald such as the current ratio

number in 2019. The number is low which is a signal that the company is reaching maturity and

there is a risk of saturation of franchises. This can lower the value of a company if there is a

possibility of slow growth risk and no room to grow. When analyzing McDonalds’ financial

has been selling off owner operated restaurant since 2016 and the sale revenue has decrease to

limit the operation risk. Since the company is public, the transparency to the investor has lessen

the liquidity risk which rewards the calculation value of McDonalds’ in their stock price. Since

McDonalds’ is well known brand, it has a risk from social media and public relations that can

hurt the branding efforts of the marketing team. The management team is vey sensitive to their

image and is very careful of their social responsibility to their community. The partnership of

Ronald McDonalds’ house is a good example of positive social responsibility to show that the

company cares and uses their influence for good. (Ronald McDonalds’ house, 2021). The

management team has also used their global network of restaurants to feed first responders and

to become staging locations to help with the efforts of controlling the spread of Covid-19. These

Company Financial Report McDonalds’

efforts seen in the public eye, keeps consumers loyal to the brand name and keeps the staff moral

high knowing that they are helping in the cause to lessen the spread of the virus. There have

been opportunities from the pandemic with the increased use of their phone app for curb side

orders and take out. The increase in delivery service is a new venue to increase sales and this

was out of necessity to keep social distance of 6ft in their restaurants. This temporary solution

looks like this will be a permanent addition to McDonalds’ sales tools and a new model how the

individual stores will conduct business. The model will hopefully increase cash flow with

through to the company’s form they will take a conservative approach before they unveil a

national product that will be the mainstream for the new generation. In the meantime, they can

watch and observe their competitors results from the new alternative meat product in the market,

so far it has shown positive results from increase sales from Burger King one of many

competitors in the fast-food industry. (Restaurantonline.com 2020). Such results has changed

the focus on their competitors to focus their branding on the new trend of Vegan based food

products.

Conclusion

McDonalds’ management has been effective in lower expenses and limited the operating

expenses of running their own restaurants. Management decided to lower the number of

Company Financial Report McDonalds’

restaurants and increase the franchising operations to increase sales revenue. Next year results

should be a positive net income if the sale of more franchises has been accomplished. If the

expenses are maintained to the numbers of 2017 to 2019, then the net income is expected to be

higher than expected. The only concern is the growth rate in 2019 is at a low 2% which could be

sign that there is no room to grow the sales or competition is gaining on their markets. The

growth pattern could be disrupted by the unforeseen circumstances such as Covid-19 in 2020 and

these numbers would be skewed based on the global condition of the economy. The franchising

safety plans and for social distancing plans and because of the quick actions the hemorrhaging of

cash has slow down. An example of this, is the role out of delivery service with the use of car

service and food delivery apps. Although the service was to comply with social distance rules,

this creative thinking has opened up a new product placement opportunity for McDonalds’. This

result is indicative of the company’s management and decisive strategy to be the leader of the

restaurant industry or fast-food industry. The company is a good value stock to keep as an

investment.

Biblical quote

“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”

(Proverb 13:11).