McDonald company’s value in terms of revenues and market capitalization has been on the rise. By 2012 the company had annual revenues of about $27.5 billion and profits of about $5.5 billion as reported by BBC. The company has over the years tried to excel in terms of profitability to ensure that it remains competitive and sustainable as long as possible. It has been recognized as one of the most profitable firms in the fast food sector as it enjoys the largest market share in UK which forms the largest market (19%) for fast food products (Dunn, 2010). It is however critical understanding that the company also faces stiff competitor from other firms such as Sturbucks, Yum Brands, Whitebread PLC among others. However, McDonalds has the largest market capitalization as compared to its competitors.

FINANCIAL STATEMENT ANALYSIS

The financial statements at McDonald are a clear indication that the company’s performance is in an upward trend.  For us to have a clear analysis, we will use the financial statements for 2012, 2013 and 2014 (Robinson, 2009). This will be of great importance since it will give an analysis of the trend in financial statements within its operations.

From the above financial statements, it is clear that the company’s revenues have been on an upward trend. For instance, the revenues increased from 27,567,000 in 2012 to 28,105,700 in 2013 and later slightly declining to 27,441,300 in 2014. It is however important understanding that despite the slight decline in revenues in 2014, the company still managed better profits as compared to its competitors (Dunn, 2010). The same trend can also be noted on the company’s assets, liabilities and stockholders’ equity. The slight decline in revenues and overall assets in 2014 can be attributed to business cycle during low period.

PRO FORMA ANALYSIS

Pro Forma analysis on financial statements is an essential aspect that helps understand the future prospects of a business. The analysis helps determine likely cost reductions and synergies as well as other revenue enhancement strategies (Robinson, 2009). It is however imperative noting that the analysis must be based on logic and reasonable assumptions. In this scenario, we will make an assumption that the sales increase and the cost of goods sold increases by 10% next year. The analysis will tend to dig deep on how this will affect the net income at McDonalds.

The figure below represents pro forma income statements for 2015 assuming 10% increase in sales.

From the pro forma invoice, it is clear that a 10% increase in revenues will automatically lead to a significant increase in net income.

RATIO ANALYSIS:

Financial ratio analysis is a critical aspect that helps the business identify its financial position. The financial ratios are classified in different categories and gives varied information regarding the financial performance of an organization. The most common category f financial ratios include; liquidity, financial leverage, profitability, assessment management and market value.

Liquidity ratios

Liquidity ratios generally measure the financial health of a company or the company’s ability to meet its daily financial obligation. The most common forms of liquidity ratios include; quick ratio/current ratio and debt/equity ratio among others. Current ratio is computed by dividing the current assets of the company by its current liabilities. For instance, McDonald’s current ratio for 2014 is given as; CR= current assets/current liabilities; 4,185.5 /2,747.9=1.52 (Finance.yahoo.com, 2015). Since the quick ratio is greater than, then this is  a clear indication that the company can meet its short term financial obligations when they fall due.

Profitability ratios

This is another category of ratios that is concerned with an organizations ability to generate income from its daily operations. The ratios are mainly concerned with return on investment, inventory and other organizational assets. Some of these ratios include; profit margin, return on assets, return on capital employed and return on equity among others. In this case, we will use return on assets ratio to determine the organizations profitability. Return on assets ratio= net income/average total assets. Therefore ROA = 4,757.8/34,281.4=0.14 (Stock Analysis on Net, 2015). This implies that the company can easily cover the amount used in purchasing its assets.

Efficiency ratios

These are also called activity ratios and are normally concerned with how an organization is able to utilize their assets to generate income. They are at times confused as profitability ratio. They include; working capital ratio, asset turnover ratio, accounts receivable turn over and inventory turnover among others. To understand the efficiency ratios, we will use the asset turnover ratio. This is an efficiency ratio that is concerned with the company’s ability to generate sales from assets through comparison of net sales with average total assets (Peterson & Fabozzi, 2012). In essence, the ratio determines how easily an organization can use its assets to generate sales. Asset turnover ratio= net sales/ average total assets= 144.36.

Leverage ratios

Business entities are always financed with the owners’ equity and debts. It is on this premises that the leverage ratios becomes important as they assess the ability of the organization to meet its financial obligation. The ratios are mostly concerned with assets, interest expenses and business capital. The most common leverage ratios are the debt ratio and debt-to-equity ratio. Debt ratio= total liabilities/total assets, while debt-to-equity ratio= total liabilities/stockholders equity. For instance, the company’s debt ratio as 30thjune 2014 stood at 57.2% which is a clear indication that most f its assets are no debt financed and hence the company is not at risk of having huge debts (Finance.yahoo.com, 2015).

Market value/ performance ratios

These are important accounting ratios that that help determine the performance of a business within stipulated time frame. The ratios often look at how best organization utilizes its resources to have increased profits. Some of the most common ratios include earnings per share and price earnings ratios among others. Earnings per share is calculated as EPS = net income-dividends on preferred stock/ average outstanding shares (Robinson, 2009).  On the other hand, P/E ratio is calculated as P/E= market value per share/ earnings per share.

ROE & DuPont Analysis

DuPont system is an essential accounting procedure that is concerned with three critical aspects of financial conditions of a company. The elements include; operating management, management of assets and capital structure within the organization. it involve the use of DuPont formula that is concerned with the interrelationship between key financial ratios as shown below;

Return on equity (ROE) = net income / total equity

If we multiply ROE by sales, we get:
Return on equity = (net income / sales) * (sales / total equity)

Said differently:
ROE = net profit margin * return on equity.

EVA ANALYSIS

Economic value added mostly referred to as EVA is a measure of a company’s financial performance based on the residual wealth obtained from deducting the cost of capital from the organizations’ operating profits (Dunn, 2010). The analysis main objective is to capture the true economic profit of a company and is given by the formula below;

EVA= Net Operating Profit After Taxes (NOPAT) – (Capital * Cost of Capital)

CONCLUSION AND RECOMMENDATIONS

After applying all analysis on the financial data of McDonald’s, it is revealed that short term solvency position of McDonald’s is very strong as compared to industry average. McDonald’s is self-sufficient in the payment of its current obligations as claimed as well as has sufficient working capital to meet its day to day operations expenses. Let’s talk about profitability of company; it is found that McDonald’s profitability is improving positively as compared to strong competitor. Due to increased profitability, faith of shareholders ad investors also increased. McDonald’s is also very efficient in operations and continuously trying to reduce its operating costs. Efficient operations are a big reason of high profitability of McDonald’s.

Moreover company debt to assets and equity ratio is good as compared to industry average but require more improvement to remain number one in competitive industry. As talk about the assets utilization efficiency, it is found that company assets are not utilized efficiently to get potential results. Another good thing revealed about McDonald’s is that company is less leveraged than industry and focusing on more debt by leasing. And capital structure composition is shifting from equity based to debt base (Stock Analysis on Net, 2015). It is the point of trouble for the company. Because due to heavy reliance on debt financing risk increases that discourage shareholders and investors. But all in all high profit margins, continuous dividend payment, strong solvency position broad network expansion and continuous value addition to the menu are major component of McDonald’s leadership in fast food industry.

Nevertheless, there are serious recommendations that the organization must follow to improve its performance. Firstly, company has to improve its efficiency of assets utilization. The  less efficient asset utilization results in increased  operating costs  and profitability affected. So, management has to focus on effective management of assets. Additionally, McDonald’s has to become more conscious about the composition of its capital structure. Heavy reliance on debt in capital structure makes the company more risky and loses investor’s trust (Robinson, 2009). The stock purchase at the organization is likely to increase substantially due to increased investor’s confidence.

References

(2015). Retrieved 22 September 2015, from

Dunn, J. (2010). Financial reporting and analysis. Hoboken, N.J.: Wiley.

Finance.yahoo.com,. (2015). MCD Income Statement | McDonald’s Corporation Common S Stock – Yahoo! Finance. Retrieved 22 September 2015, from https://finance.yahoo.com/q/is?s=MCD&annual

Peterson, P., & Fabozzi, F. (2012). Analysis of Financial Statements. Hoboken: John Wiley & Sons.

Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.

Stickney, C. (2010). Financial accounting. Mason, OH: South-Western/Cengage Learning.

Stock Analysis on Net,. (2015). McDonald’s Corp. (MCD) | Financial Analysis and Stock Valuation. Retrieved 22 September 2015, from https://www.stock-analysis-on.net/NYSE/Company/McDonalds-Corp#

 
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