Financial Analysis of Mcdonald a Financial Analysis

¶ … Financial Analysis of Mcdonald

A financial analysis McDonald's Cor

Company Overview

McDonald Corporation is a global company that conducts business in 117 countries. McDonald operates 32,737 restaurants and 26,338 franchises in the highly competitive fast food industry. Since 1940, McDonald has built a loyal customer base by continuing dedicating to customer service and providing high quality fast food for customers. Presently, McDonald could boast of over 60 millions customers and the company serves average of 64 millions customers daily. In the United States, and other countries where McDonald is operating, fast food business is very competitive. Despite the competition that McDonald is facing, the company has been able to record revenues of more than $16 billions in restaurants and revenues of more than $7 billions in franchise restaurants business. McDonald operates in six geographical locations. The company business operations are in the U.S., Europe, Middle East, Asia-Pacific, Latin America and Africa. In the U.S., McDonald total revenues account for 34%. In Europe, the company total revenues account for 40% while in Asia/Pacific, Middle East and Africa (APMEA) segment, McDonald total revenues account for 21%. The company records a remarkable success in the U.S. with more than 3.8% growth in eight consecutive years. In addition, McDonald has gained competitive market advantages in its international business operations. The U.S. And Canada are the McDonald major markets. In France, the UK, and Germany, the company market performances accounts for 5% of the total revenues in Europe. Similarly, the company market performances in Australia, Japan and China account for 50% of APMEA revenues.

McDonald continues to focus on customer experience, and achieve global success by providing branded affordability. In all countries that McDonald operates, the company has been able to achieve global comparable sales of increased of 5.0% and 4.9% in guest counts. Since 2007, McDonald financial performance rise steadily. The company recorded $2.4 billions in the net income in 2007. In 2008, McDonald net income increased to $4.3 billions, and the net income was $4.5 in 2009. McDonald recorded high success in 2010, the company recorded $4.9 billions in the net income and the comparable sale growth of 5.0% with earning per share rises by 11%. Typically, McDonald recorded "92 Consecutive months of global comparable sales increases through December 2010" (McDonald's Corporation Annual Report 2010, P 2).

The objective of the paper is to provide the financial analysis of McDonald.

Financial Analysis of McDonald Corporation

A company financial analysis is revealed by using various financial instruments to evaluate the financial strength and weakness of a company. A company financial analysis enhances an understanding of the financial stability of a company, and it enhances an investment decision of a company. Based on a company financial analysis, an investor could decide whether a company is liquid or solvent. To evaluate McDonald financial analysis, this paper focuses on the company balance sheet, income statement and cash flow statement. The paper uses the company financial data of the past three-year to evaluate the company vulnerability to current financial threats of recession, global competitions and higher interest rates.

Evaluation of McDonald Financial Data between 2007 and 2010

Between 2007 and 2010, McDonald has gained the market competitive advantages. The company total revenues were $22.7 billions in 2007. In 2008, the company total revenues increased to $23.5 billions. However, in 2009, McDonald total revenue fell to $22.7 billions. In 2010, McDonald recorded rise in the total revenues of $24 billions. Based on the company financial data, McDonald also recorded rise in net income in the past 3 years. In 2007, McDonald recorded $2.4 billions in net income. Likewise 2008, the company net income increased to $4.3 billions. In 2009, McDonald also recorded $4.5 billions, and 2010, McDonald recorded $4.9 billions in the net income. However, McDonald stocks performances are traded less than its median and mean target value. In 2010, the company stock close price was traded at $77.56 revealing a decrease of 0.5%. The low target was $73 and the mean target is $85.56.

The paper also uses the ratio analysis to determine the company financial health. The paper evaluates McDonald ratio analysis for the long-term investment.

McDonald Ratio Analysis for Long-Term Investment

Analysis of McDonald equity turnover reveals that the company equity turnover deteriorated between 2008 and 2009 and the company equity turnover slightly improved between 2009 and 2010. The McDonald equity turnover was 1.7.6% in 2008 and the company equity turnover decrease to 1.62% in 2009. However, the company recorded 1.65% in the equity turnover 2010. (See fig 1 McDonald equity turnover).In addition, the company total asset turnover deteriorated between 2008 and 2010. In 2008, McDonald recorded 0.83% in the asset turnover. However, between 2009 and 2010, the company recorded 0.75% in the asset turnover. (Fig 2 reveals McDonald asset turnover).

Fig 1: McDonald Long-Term Equity Turnover

The formula that the paper uses to calculate the McDonald equity turnover is as follows:

Equity turnover = Revenues + Shareholders' equity

For example, the equity turnover for the 2010 fiscal year is calculated as follows:

Equity turnover = 24,074,600 + 14,634,200 = 1.65

Similarly, the formula to calculate the total asset turnover is as follows:

Total asset turnover = Revenues + Total assets

For the 2010 fiscal year, McDonald total asset turnover is as follows:

Total asset turnover = 24,074,600 + 31,975,200 = 0.75

Fig 2: McDonald Long-Term Asset Turnover

Table 1 reveals McDonald long-term investment analysis which reveals the equity turnover, asset turnover, ROA and ROE.

Table 1: McDonald Ratio Long -Term Investment Analysis

McDonald Corporation

2010

2009

2008

Equity Turnover

1.65%

1.62%

1.76.%

Asset Turnover

0.75%

0.75%

0.83%

Return on Equity (ROE)

33.7%

32.4%

33.2%

Return on Asset (ROA)

15.46%

15.05%

15.15%

The paper also provides profitability ratio to evaluate the financial performances of McDonald. The paper uses Return on Equity (ROE) and Return on Assets (ROA) to evaluate the company financial performances. Based on the company financial data, it is revealed that McDonald ROE improved between 2008 and 2010. However, the McDonald ROA deteriorated between 2008 and 2009, and the company ROA improved from 2009 to 2010.

To calculate the ROE, the paper uses the following formula:

ROE = 100 x Net income + Shareholders' equity.

For example, the ROE of McDonald for the 2010 fiscal years is as follows:

2010 ROE: 4,946 + 14,634.2 = 33.7%

The formula to calculate the ROA is as follows:

ROA = 100 x Net income + Total assets

Similarly, the McDonald ROA for 2010 is as follows:

2010 ROA: 4,946 + 31,975.2= 15.46%

Evaluation of the McDonald financial data reveals that the company has recorded the decline in the financial performance between 2008 and 2009. MacDonald also recorded the decline in the total revenue between 2008 and 2009. MacDonald total revenue was $23.5 billions in 2008 and the total revenues declines to $22.7 billons in 2009. Similarly the company ROA deteriorated between 2008 and 2009, and the company ROE also recorded slight decline in performances between 2009 and 2010. In addition, McDonald recorded decline in the sales of the operated restaurants between 2008 and 2009. In 2008, McDonald recorded sales of $16.5 billions and in 2009, the company sales deteriorated to $15.4 billions.

Although, McDonald recorded financial improvement in 2010, the decline in the company financial performances between 2008 and 2009 is attributed to the following factors:

First, the global crunch that has affected many financial institutions across the world has been attributed to the decline in the financial performances of McDonald between 2008 and 2009. The term credit crunch refers to the shortage in the supply of liquidity which leads to the decline in the bank values. The effect of credit crunch in the United States and other advanced countries is greatly felt across the world. Many salary earners lost their jobs because many companies could not break-even. The cumulative effects of credit crunch are recession, inflation, and decline in the people purchasing power. Mizen (2008) argues that starting from 2008; many commercial banks have reduced the lending to private individuals as well as corporate organizations. With decrease in the liquidity, many corporate organizations record decline in sales and decline in the total incomes. The effect of the credit crunch has made McDonald to record the decline in the financial performances between 2008 and 2009.

Apart from credit crunch, McDonald is also facing other financial risks such as interest rate and foreign exchange risks. Since McDonald operates in multiple countries, the company is facing the interest rates and foreign currency risks. McDonald generally raises funds by borrowing and the company is exposed to the changes in interest's rates. For example, the debt obligations at 31 December 2010 were $11.5 billions compared with $10.6 billions of 31 December 2009. The increase in of $787 millions in 2010 was due to the fluctuation in the exchange rates.

Stapleton and Subrahmanyam (2009) argue that most multinational companies face interest rates and foreign exchange risks. The risks arise because of the future cash outflow or inflow that come from operation, financing and capital investments. Since foreign exchange and interest rates are volatile, the important measures are to use various financial instruments to reduce exposures of foreign exchange and interest risks. McDonald is exposed to the global market risks due to the foreign currency fluctuation and effect of changes in interest rates.

In addition, McDonald is exposed to the credit-related losses because the company raises short-term and long-term debt to raise its financial obligations. Moreover, McDonald is exposed to the income tax uncertainties. Since McDonald operates in the U.S. And foreign countries, the company financial data is regularly audited by the states, federal and foreign authorities. When the company tax position does not meet the required standard, the company may records interests or penalties. McDonald is also exposed to the credit risks. The company may record credit related losses in the case on non-performances.

Despite the risks and uncertainties that McDonald faces in its business operations, the company makes use of series of financial instrument to mitigate the risks. "The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes." (McDonald annual Report, 2010 P. 32).McDonald uses risk management strategy to undertake hedging transactions. The company uses derivatives as hedging instruments to curtail the interest rate risks. To manage the interest rates risks and currency fluctuations, the company enters into the forward foreign interest rate agreement and Forward foreign currency exchange agreements. McDonald is using all these financial strategies to minimize the financial risks and to achieve competitive market advantages.

Evaluation of McDonald with the Competitors

The fast food sector is highly competitive. The top five competitors of McDonald Corporation include Yum Brands Inc., Domino Pizza Inc., Cracker Barrel Old Country Store Inc., Wendy's/Arby's Group Inc., and Jack Box Inc. The bottom five competitors are Brazil Fast Food Corporation, Good Times Restaurants Inc., Morgan's Foods Inc., Nathan's Famous Inc., and Rick's Cabaret International Inc.

McDonald financial data compared to other companies in the same sector shows that McDonald has recorded higher grow rate compared to other competitors. Between 2009 and 2010, the stock price of McDonald increased from $62.72 to $76.73 revealing 22.3% increase. At the same period, the Yum Brand stock price rose from $35.49 to $48.60 revealing 36.9% increase. During the period, Yum Brand outperformed McDonald. (See Fig 3).

Fig 3: Comparison of McDonald and Yum Brand

The paper also uses profitability ratio to compare McDonald with the competitors in the fast food industry. The McDonald return on investment (ROI) is 20.6%, and this is less than the industry average of 29.9% and five top competitors 45%. (Putilina, 2010).

However, Analysis of the McDonald financial ratio in 2011 reveals that McDonald is performing better than its competitors. (See Fig 4). The financial data provided by Infinancials (2011) reveals that McDonald valuation is significantly higher than the average of the industry average. For example, the profitability score of McDonald is 8.5/10 while the profitability of industry average is 7.4/10. The data shows that McDonald is more profitable than its peers. Despite the excellent financial performance of McDonald, the company growth rate is less than then its peer. The aggregate grow rate of McDonald is 4/10 while the peer group is 5.4/10. "The Risk Free Score for McDonald's Corp. is 9.2 / 10. The Risk Free Score for it's peergroup is 8.5 / 10. This means that McDonald's Corp. is less risky compared to its peers" (Infinancials, 2011 P. 1).

Fig 4: Comparison of McDonald & Competitors Financial Performances

Based on the company financial data, McDonald has recorded healthy financial data between 2009 and 2010 with the sale increase of 5% in 2010. For eight consecutive years, the company records 9% in the operating income. In 2010, the company provided 27% return to investors. Typically, the company success remains global with 3.8% increase in the sales in the U.S., and 4.4% increase in Europe. In Asia/Pacific, Middle East and Africa, the company recorded 6% in sales growth.

Fig 5: McDonald Stock Performances

Based on the overall financial data, it is recommended that McDonald will be very attractive for investors. Table 1 that reveals the McDonald long-term investment analysis which reveals that McDonald will continue to demonstrate the increase in the financial performances. By comparing McDonald with the industry, and the sector that the company is operating, it is revealed that McDonald has demonstrated higher performances in return on asset (ROA), return on investment (ROI) and return on equity (ROE) than industry average (See Table 2).

Table 2: Financial Analysis of McDonald with Industry

McDonald

Industry

Sector

S&P 500

ROA

16.92

7.29

1.58

7.39

ROA- 5 Yr. Avg.

12.84

5.34

3.83

6.62

ROI

19.49

10.08

2.54

9.68

ROI - 5 Yr. Avg.