Case study analysis questions

Financial Analysis of the McDonalds Company

MCD, New York Stock Exchange

One McDonald's Plaza Oak Brook, IL 60523

1-630-623-3000

Natona A. Davis

COMPANY OVERVIEW

a. Brief description of the company: McDonalds has a purpose that goes beyond just selling burgers and fries. Although food is what originally brought them into the mainstream, they have evolved and continued to grow in a positive way. They are using a reach to be a positive force for their customers, employees, and their communities. They promote choices, real ingredients, great taste and transparency. They also create opportunity, encourage diversity, offer training, and facilitate teamwork. They are known for championing happy and healthy kids, by keeping families together through Ronald McDonald House Charities. They are proud of everything they do, and dedicated to doing more alongside their customers.

b. Company history: Dick and Mac McDonald opened their eponymous burger stand in 1948 in San Bernardino, California under the guidance of Ray Kroc, a onetime milkshake-mixer salesman. By the end of the 1960s, there were more than 1,000 across the U.S. In 1937, Patrick McDonald opened "The Airdrome" restaurant at the Monrovia Airport in Monrovia, California. Hamburgers were ten cents, and all-you-can-drink orange juice was five cents. In 1940 his two sons, moved the entire building 40 miles to the corner of 14th and E Streets in San Bernardino, California. The restaurant was renamed "McDonald's".

c. Organization: In 1948, the brothers Richard and Maurice McDonald introduced the "Speedy Service System" which established the principles of the modern fast-food restaurant. In 1954, Ray Kroc, a seller of Multimixer milkshake machines, learned that brothers Richard and Maurice (Dick and Mac) McDonald were using eight of his high-tech Multimixers in their San Bernardino, California, restaurant. His curiosity was piqued, and he went to San Bernardino to take a look at the McDonalds' restaurant. The McDonald Brothers had been in the restaurant business since 1937. In 1948, they closed down a successful carhop drive-in to establish the streamlined operation Ray Kroc saw in 1954. The menu was simple: hamburgers, cheeseburgers, French fries, shakes, soft drinks, and apple pie. The carhops were eliminated to make McDonald's a self-serve operation. Mac and Dick McDonald had taken great care in setting up their kitchen like an assembly line, to ensure maximum efficiency.

d. Main products and services: Believing that the McDonald formula was a ticket to success, Kroc suggested that they franchise their restaurants throughout the country. When they hesitated to take on this additional burden, Kroc volunteered to do it for them. He returned to his home outside of Chicago with rights to set up McDonald's restaurants throughout the country, except in a handful of territories in California and Arizona already licensed by the McDonald brothers. Kroc's first McDonald's restaurant opened in Des Plaines, Illinois, near Chicago, on April 15, 1955, the same day that Kroc incorporated his company as McDonald's Corporation. This was the begging of the largest food chain corporation known today, McDonalds.

e. Geographic area of operations: As the worlds leadings global food service retailer, with over 36,000 locations serving approximately 69 million customers in over 100 countries each day, McDonalds sets the bar for all food chains to follow.  More than 80% of McDonald's restaurants worldwide are owned and operated by independent local businessmen and women. The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's success. By leveraging their system, they are able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, their business model enables McDonald's to consistently deliver locally relevant restaurant experiences to customers and be an integral part of the communities we serve. McDonald’s franchises restaurants in many international markets, most decisions relating to the selection of candidates, are made locally by the management in the country where the restaurant is located.

McDonalds provide high quality products, such as burgers, fries, drinks, muffins, etc., which are safe and reliable that it does what it is supposed to do, but not only does the quality of the products matter, the good value for money affects the business. E.g. buy one extra value meal and get one free with a food voucher that represents the offer only. They ensure that a high standard of the product is carried out at all times and they try to compete very competitively with other fast food businesses with their good value for money. McDonalds also play a role especially into the goods being safe to use and being very reliable with provided instructions. This will benefit the customer's safety and hoping to be very reliable during the customer's use because its helps the business to increase it sales by keeping the existing customers and attracting new ones. The products of McDonalds are safely packaged when it is required for the product, in order the customer does not have any problems or and negative feedbacks to McDonalds, i.e., hot coffee cups have plastic lids on top so it does not spill or burn on the customer. Also, McDonalds ensure to offer nutritional guide of the product clearly state what the product contains.

f. Recent developments: The McDonalds corporations Company Headquarters operates in 119 countries across 35,000 outlets. The recent developments that McDonalds include; the Board of Directors declared a quarterly cash dividend of $0.85 per share of common stock payable on June 15, 2015 to shareholders of record at the close of business on June 1, 2015, announcement of a global commitment on deforestation across the company's expansive global supply chain. The commitment builds upon McDonald's Global Sustainability Framework and longstanding leadership in the area of sustainable sourcing, and enhanced benefits for employees at its company-owned restaurants, including a wage increase and paid time-off for full and part-time crew employees. In addition, the company is expanding its Archways to Opportunities education offerings to provide eligible U.S. restaurant employees -- at both company-owned and franchised restaurants -- with free high school completion and college tuition assistance. Under pressure to provide healthier meals, McDonald’s announced on Thursday that it would no longer market some of its less nutritional options to children and said it also planned to include offerings of fruits and vegetables in many of its adult menu combinations. It plans to make the changes to its menu in 20 of the company’s largest markets, which account for more than 85 percent of its overall sales, including overseas. But it will take three years or more to put them into place in about half the restaurants in those markets, and the remainder may not have the changes until 2020.

PART 2, FINANCIAL OVERVIEW:

a. Sales and Income Record:

GRAPH OF SALES & NET INCOME, FY 2009 – 2013

Comments: It can be seen from the graph that sales are in an increasing trend. Sales had an upswing from 2010 to 2011. On the other hand, net income shows a smooth increasing trend. Thus, it can be said that, Sales and Net income of McDonald’s are in satisfactory condition

. b. Expense Distribution:

List of expenses	FY 2013 (First Quarter) (In Millions)
Company Operated restaurant Expense	3726.0
Franchised restaurants –occupancy expense	395.2
S, G & A expenses	596.5
Impairment and other charges	(61.9)
Interest Expense	128.1
Non-Operating Expense	4.6
Tax Expense	546.6

PIE CHART OF EXPENSES, FY 2012

Comments: Most of the expenses of the company go to the expenses to run the company operated restaurants. 68% of expenses go to this category. Second highest expense is of SG&A expense. 3rd Highest expense is tax expense. Then comes the expense of franchised restaurants. Interest expense, impairment and non-operating expense is not much descriptive.

C.Assets Distribution:

List of Assets	Year-end FY 2013 in thousands
Cash	2798700
Accounts Receivable	1319800
Inventory	123700
Prepaid expenses	5890000
Other Assets	5828900

PIE CHART OF ASSETS, Year-end FY 2013

Comments: Highest amount of asset owned by McDonald’s is fixed assets, then comes cash equivalents. Sufficient amount of inventory other assets are also shown in the graph.

c. Capital Structure:

Capital Structure	Year-end FY 2013 in thousands
Current Liabilities	3170000
Long-term and other liabilities	1669100
Preferred Stock (if any)	-
Common Stock	16600

Comments: From the chart it can be said that highest amount of debt is in long-term and other liabilities. Lowest amount of capital structure amount is in common stock.

CAPITAL STRUCTURE PIE CHART, Year-end FY 2012

Comments: From the chart it can be seed that highest amount of debt is in long-term liabilities. Lowest amount of capital structure amount is in common stock.

PART 3: RATIO ANALYSIS

(1) LIQUIDITY:

	FY 2011	FY 2012
Current Ratio
McDonald’s	1.254702	1.446358
Wendy’s	2.18504	2.474455
Quick Ratio
McDonald’s	1.221418	1.410596
Wendy’s	2.146723	2.42633

Comments: From the above scenario it can be seen both the companies have higher liquidity ratios. As both the ratios are above 1 it means both the companies have higher liquidity. But Wendy’s has higher liquidity than McDonald’s.

(2) ASSET MANAGEMENT:

	FY 2011	FY 2012
Total Asset Turnover
McDonald’s	0.818614	0.779026
Wendy’s	0.495812	0.510853
Average Collection period
McDonald’s	18.03916	18.20962
Wendy’s	11.73111	10.23023

Comments: From the above table it can be seen asset turnover is better of McDonald’s but collection period is higher of McDonald’s than Wendy’s. But the collection period is better for both companies. So, asset management condition of both the companies is good.

(3) DEBT MANAGEMENT:

	FY 2011	FY 2012
Total Debt to Total Assets
McDonald’s	0.5638	0.567815
Wendy’s	0.534621	0.538517
Times Interest Earned
McDonald’s	17.30864	16.65621
Wendy’s	1.201578	1.244422

Comments: From the table above it can be seen that both the ratios are higher for McDonald’s. SO, debt management condition is better of McDonald’s.

(4) PROFITABILITY:

	FY 2011	FY 2012
Net profit Margin:
McDonald’s	0.203773	0.198237
Wendy’s	0.004655	0.004322
Return on Assets:
McDonald’s	0.166812	0.154432
Wendy’s	0.002308	0.002208
Return on Equity:
McDonald’s	0.38242	0.357326
Wendy’s	0.00496	0.004784

Modified Du Pont Equation FY 2012	McDonald’s	Wendy’s
Net Profit Margin	0.198237	0.004322
Total Asset Turnover	0.779026	0.510853
Equity Multiplier	2.313811	2.166925
ROE	0.357326	0.004784

Comments: From the tables above it can be seen that profitability condition of McDonald’s is much better than Wendy’s. Though every ratio has decreased from 2011 to 2012 but they are higher in McDonald’s account than Wendy’s. May be as McDonald’s is a large size multinational restaurant asset and profit size of McDonald’s is higher than Wendy’s. For this reason Profitability condition is better in McDonald’s

(5) MARKET VALUE RATIOS:

	FY 2011	FY 2012
PE Ratio
McDonald’s	19.03795	16.45709
Wendy’s	218	116.75
Market to Book Ratio
McDonald’s	7.11852	5.785075
Wendy’s	1.027055	0.922075

Comments: From the table above it can be seen that P/E ratio of Wendy’s is much higher than McDonald’s. This is because earnings per share of Wendy’s are very low. But market to book value ratio is higher in McDonald’s because they have higher equity.

PART 4, CONCLUSIONS AND RECOMMENDATIONS

Conclusion:

McDonald’s is a growing and developing food chain restaurant. It remains focused on its menu and customer satisfaction and thrives to become more relevant in modern customer. Despite some criticism regarding its menu, expansion, and business practices, the company is a growing one and frequently proffered by its customers around the world.

Recommendations:

Some recommendations for McDonald’s-

· Continuous update with the new trend.

· Adapting with the growing and complex competition.

· Development in employee skills.

· More emphasize on research and development.

· Remain consistent with good performance.

* End of report Outline *

_1456433074.xls

Chart1

2798700

1319800

123700

5890000

5828900

Sheet1

List of assets	FY 2013
CASH	2798700
A/C recievables	1319800
Inventory	123700
Fixed asset	5890000
Other assets	5828900

Sheet1

Sheet2

Sheet3

_1456433076.xls

Chart1

22.7	4.55
24.07	4.95
27.01	5.5
27.57	5.46
28.11	5.59

Sales

Net Income

Sheet1

	Sales	Net Income
2009	22.7	4.55
2010	24.07	4.95
2011	27.01	5.5
2012	27.57	5.46
2013	28.11	5.59

Sheet1

Net Income

Sheet2

List of expenses	FY 2013 (First Quarter) (In Millions)
Company Operated restaurant Expense	3726
Franchised restaurants –occupancy expense	395.2
S, G & A expenses	596.5
Impairment and other charges	-61.9
Interest Expense	128.1
Non-Operating Expense	4.6
Tax Expense	546.6

Sheet2

FY 2013 (First Quarter) (In Millions)

_1456433071.xls

Chart1

317000

1669100

PREFFERED STOCK

16600

Sheet1

CAPITAL STRUCTURE	FY2013
CURRENT LIABILITIES	317000
OTHER LIABILITIES	1669100
PREFFERED STOCK
COMMON STOCK	16600

Sheet1

Sheet2

Sheet3