FOUNDATION IN NATURAL AND BUILT ENVIRONMENT

BASIC ACCOUNTING (ACC30205)

ASSIGNMENT 1: FINANCIAL RATIO ANALYSIS

GROUP MEMBERS: LIEW POH KA (0320424) LEE KAILYN (0320273) LEE SHZE HWA (0320053)

LECTURER: MR. CHANG JAU HO

COMPANY: MCDONALD’S CORPORATION

SUBMISSION DATE: 4th JUNE, THURSDAY, 12PM

TABLE OF CONTENT

CONTENT PAGE BACKGROUND OF MCDONALD’S CORPORATION 3

RECENT DEVELOPMENT 4

PROFITABILITY RATIOS 5 – 6

STABILITY RATIOS 7 – 8

PRICE & EARNING RATIO 9

INVESTMENT RECOMMENDATION

10

APPENDIX 11 – 14

REFERENCES

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Background of Mcdonald’s Corporation

McDonald’s was founded in California in 1940 by the brothers Richard and Maurice

McDonald as a BBQ restaurant. It was one of many drive-ins popping up in California at the

time. They rebranded the concept in 1948, focusing on burgers, shakes, potato chips, and pie,

and later sold the franchise to Kroc. Ray Kroc opened the first McDonald’s franchise 58

years ago, on April 15, 1955, in Des Plaines, Illinois.

Kroc, making his rounds as a milk shake mixer salesman, came across the McDonald

brothers’ small hamburger shop in Southern California. The establishment was simple,

serving only a few items: hamburgers, french fries, soft drinks, and milk shakes. These two

brothers became one of Kroc’s best customers as they purchased several of his machines in

his otherwise dying business. Kroc was curious and suggested that the brothers expand their

presence. He offered his services as their agent. That was how the little restaurants with the

bright yellow arches began.

In 1961, Kroc brought out the McDonald Corporation for $2.7 million, and celebrated

its10th anniversary with the first public stock offering at $22.50 per share in 1965. In the

mid-1980s, McDonald operated more than 3,600 restaurants outside the United States. With

the expansion of McDonald’s into many international markets, the company had become a

symbol of globalization and the spread of the American way of life. McDonald’s restaurants

are now located in 32 countries around the world. There are 7,778 restaurants at the year end.

McDonald’s entered India in 1996, against the backdrop of a market that was hesitant to try

fast food and was still dependent on the “tiffin” lunch boxes many lug to work. The big mac

served in these cities made with lamb called the Maharaja Mac. The operating income

numbers showed a reduction from 60 percent derived from United States in 1992 to 42.5

percent in 1997.

After a long run of success, McDonald Corporation had become the world’s largest and

most famous chain of hamburger fast food industry. The net worth of McDonald on 2014 was

more than $95 billion.

3

Recent Development

McDonald’s had became the world’s leading quick-service restaurant brand due

to the power of franchisees, the high quality and safety of supply and also the collaboration

of employees. Currently, McDonald’s franchisees had opened more than 36,000 locations in

the world. They were serving more than 100 countries and they served 69 million customers

a day.

Recently, McDonald’s Corporation were striving to achieve McDonald’s 2020

Corporate Social Responsibility & Sustainability Framework. McDonald’s 2020 CSR &

Sustainability Framework was planned to generate measurable and positive impacts for

society in order to position the company for the future. This framework included serving

100% more fruits, vegetables, low-fat dairy or whole grains in 9 of its top markets.

McDonald’s Corporation were striving to achieve this goal in the end of 2015. Besides, this

framework also included supporting sustainable beef, sourcing 100% of coffee, palm oil and

fish that was verified to support sustainable production and increasing energy efficiency in

company-owned restaurants. Furthermore, their aspiration was to develop the most

environmentally efficient McDonald’s restaurants. Therefore, they were trying to procure

100% of fibre-based packaging. They were also trying to increase the recycle concept in

every franchisee and minimizing the waste.

In 4th May 2015, McDonald’s president and Chief Executive Officer Steve

Easterbrook had announced the initial steps of the Company’s turnaround plan. It included a

restructuring of McDonald’s worldwide business and financial updates. They planned to

shape McDonald’s future as a modern and progressive burger company. In addition, they

will restore growth under a new organization structure and ownership mixes designed to

provide bigger focus on the customer, improve their operating fundamentals and drive a

recommitment to running great restaurant.

McDonald’s Corporation always put customers at first place of the consideration.

Their goal was to create a favourite place for customers and create the way to eat and drink

by serving core favourites such as French Fried, Big Mac and Chicken Mc Nuggets. They

always practiced to provide good food and better customer service. 4

P rofitability Ratios

Profitability Ratios 2013 2014Return on Equity (ROE)

RatioNet Profit

AverageO /E×100 %

= 558615652

×100 %

= 35.7%

Net ProfitAverageO /E

×100 %

= 4758

15652×100 %

= 30.4%Net Profit Margin (NPM)

RatioNet ProfitNet Sales

×100 %

= 5586

28106×100 %

= 19.9%

Net ProfitNet Sales

×100 %

= 4758

27441×100 %

= 17.3%Gross Profit Margin

(GPM) RatioGross ProfitNet Sales

×100 %

= 1090328106

×100 %

= 38.8%

Gross ProfitNet Sales

×100 %

= 1045627441

×100 %

= 38.1%Selling Expense Ratio

(SER)Total Sellingexp .

Net Sales×100 %

= 2674

28106×100 %

= 9.5%

Total Sellingexp .Net Sales

×100 %

= 2305

27441×100 %

= 8.4%General Expense Ratio

(GER)TotalGeneral exp .

Net Sales×100 %

= 7121

28106×100 %

= 25.3%

TotalGeneral exp .Net Sales

×100 %

= 6730

27441×100 %

= 24.5%Financial Expense Ratio

(FER)Total Financialexp .

Net Sales×100 %

= 4043

28106×100 %

= 14.4%

Total Financialexp .Net Sales

×100 %

= 4618

27441×100 %

= 16.8%

Net profit- 5586, 4758

Average O/E- 15652, 14431.5

Net sales- 28106, 27441

Gross Profit- 10903, 10456

Total Selling Expenses- 2674, 2305

Total General Expense- 7121, 6730

Total financial expense- 4043, 4618

5

Interpretation of results (Profitability Ratios)

During the period of 2013 to 2014, the percentage of the return on equity (ROE) of Mcdonald’s Corporation has decreased from 35.7% to 30.4%. This means the owner is getting less return from her capital compare to last year.

During the period of 2013 to 2014, the percentage of the net profit margin (NPM) of Mcdonald’s Corporation has decreased from 19.9% to 17.3%. This means the business ability to control the expenses is getting worst.

During the period of 2013 to 2014, the percentage of the gross profit margin (GPM) of Mcdonald’s Corporation has decreased from 38.8% to 38.1%. This means that the business ability to control COGS is getting worst.

During the period of 2013 to 2014, the percentage of selling expense ratio (SER) of Mcdonald’s Corporation has decreased from 9.5% to 8.4%. This means that the business ability to control the selling expense has become better.

During the period of 2013 to 2014, the percentage of general expense ratio (GER) of Mcdonald’s Corporation has decreased from 25.3% to 24.5%. This means that the business ability to control general expense has become better.

During the period of 2013 to 2014, the percentage of financial expense ratio (FER) of Mcdonald’s Corporation has increased from 14.4% to 16.8%. This means that the business ability to control financial expense has become worst.

6

Stability Ratios

Profitability Ratios

2013 2014

Working Capital Total Current AssetTotalCurrent Liabilities

= 50503170

= 1.59 : 1

Total Current AssetTotalCurrent Liabilities

= 41862148

= 1.95 : 1Total Debt Total Liabilities

Total Asset×100 %

= 2061736626

×100 %

= 56.3%

Total LiabilitiesTotal Asset

×100 %

= 2142834281

×100 %

= 62.7%Stock Turnover

365÷COGS

Average Inventory

= 365÷17203

123= 2.6 days

365÷COGS

Average Inventory

= 365÷16986

117= 2.5 days

Debtor Turnover365÷

Credit SalesAverageDebtor

= 365days÷13201348

= 372.7 days

365÷Credit Sales

AverageDebtor

= 365days÷12141267

= 380.9 daysInterest Coverage Interest Expense+Net Profit

Interest Expense

= 522+5586

522= 11.7 times

Interest Expense+Net ProfitInterest Expense

= 570+4758

570= 9.3 times

Total current asset- 5050, 4186

Total current liabilities- 3170, 2148

Total liabilities- 20617, 21428

Total assets- 36626, 34281

COGS- 17203, 16986

Average inventory- 123, 117

Credit sales- 1320, 1214

Average Debtor- 1348, 1267

Interest expense- 522, 570

7

Interpretation of results (Stability Ratios)

During the period of 2013 to 2014, the percentage of working capital (WCR) of Mcdonald’s Corporation has increased from 1.59 to 1.95. The business to pay off current liabilities has getting better. In addition, it does satisfy the minimum of 2:1.

During the period of 2013 to 2014, the percentage of total debt (TDR) of Mcdonald’s Corporation has increased from 56.3% to 62.7%. This means that the total debt has increased. However, it went over the maximum 50% limit.

During the period of 2013 to 2014, the percentage of the stock turnover of Mcdonald’s Corporation has decreased from 2.6 days to 2.5 days. The business sells its goods faster compared to last year.

During the period of 2013 to 2014, the percentage of debtor turnover of Mcdonald’s Corporation has increased from 372.7 days to 380.9 days. The business is taking more time to collect his debt.

During the period of 2013 to 2014, the percentage of interest coverage of Mcdonald’s Corporation has decreased from 11.7% times to 9.3% times. The businesses ability to pay its interest expense is getting worst. In addition, it does satisfy with the minimum requirement of 5 times.

8

Price/Earning Ratio (P/E Ratio)

₌ Current Share Price Earning Per Share

₌ $103.78 $4.82

₌ 21.53

With the P/E ratio with 21.53, this shows that McDonald has to wait for 22 years to claim their shares.

9

Investment Recommendation

Through the profitability ratio, the return on equity (ROE) shows that the business has a fall on 2014 compare to 2013. It’s not a good thing for McDonald’s because they are getting less return compare to the previous year. For the net profit margin (NPG), there was a fall on 2014 compare to 2013, this means that the business is getting worst at controlling expenses on 2014. Based on gross profit margin (GPM), there was a slightly fall on 2014 compare to 2013, this means that the business is getting worst at controlling cost of goods sold on 2014. For the selling expenses ratios (SER), there was a fall on 2014 compare to 2013, this means that the company is getting better at controlling selling expenses. Based on general expenses ratios (GER), there was also a fall on 2014 compare to the previous year, which means that the business ability to control the general expenses is getting better. However, the financial expenses ratios (FER) shows that Mcdonald’s has not improved their ability to control financial expenses.

As for stability ratio, the working capital (WCR) shows that the business has improved from 1.59 to 1.95 which means that the business pay off the current liabilities is getting better. It does satisfy the minimum of 2:1. For the total debt (TDR), the company has improved for 56.3% to 62.7% which is bad because the business has more debt compare to previous year. Based on stock turnover ratio (STR) shows that the business has decreased from 2.6 days to 2.5 days, this means that the company sells its goods faster compare to previous year. For the debtor turnover ratio (DTR), the business has a rise from 372.7 days to 380.9 days which is bad because the business is taking more time to collect their debt. Based on the interest coverage ratio (ICR), the business has a fall from 11.7% times to 9.3% times, it’s bad for the company because the businesses ability to pay its interest expense is getting worst. In addition, it does satisfy with the minimum requirement of 5 times.

Lastly, the share price of Mcdonald’s Corporation was $103.78. It’s considered as a high price. The earnings per share were $4.82. It’s considered as a low price. The current P/E ratio of Mcdonald’s Corporation is 21.53 times. This shows that if an investor wants to purchase the shares

of Mcdonald’s, he/she has to wait for 22 years to claim back his/her investment. A conservative investor will normally pay no more than P/E of 15 for a share that he/she likes.

10

Statement of Income of Mcdonald’s Corporation for 2012, 2013 and 2014

11

Balance Sheet of Mcdonald’s Corporation for 2013 and 2014

12

Statement of Cash Flows of Mcdonald’s Corporation for 2012, 2013 and 2014

13

Mcdonald’s Corporation Current Share Price

1

References

1.

Mcdonald's Corp. (n.d). Share Retrieved from http://finance.yahoo.com/q?s=MCD

2. Good Food. (n.d.). Retrieved from http://www.aboutmcdonalds.com/mcd/sustainability/food.html

3. Good Sourcing. (n.d.). Retrieved from http://www.aboutmcdonalds.com/mcd/sustainability/sourcing.html

4. McDonald's Announces 2020 Corporate Social Responsibility and Sustainability Plans. (n.d.). Retrieved from http://www.csrwire.com/press_releases/36995-McDonald-s-Announces-2020-Corporate-Social-Responsibility-and-Sustainability-Plans

5. McDonald's Announces Initial Steps In Turnaround Plan Including Worldwide Business Restructuring And Financial Updates. (n.d.). Retrieved from http://news.mcdonalds.com/Corporate/news-stories/2013/McDonald-s-Announces-Initial-Steps-In-Turnaround-P

6, Mcdonald's Corporation. (n.d.). Retrieved from http://www.referenceforbusiness.com/businesses/M-Z/McDonald-s-Corporation.html

7. Mcdonald's Corporation Annual Report 2013. (n.d.). Retrieved from http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.pdf

8. Mcdonald's Corporation Annual Report 2014. (n.d.). Retrieved from http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDonald%27s%202014%20Annual%20Report.PDF

9. History of Mcdonald's (n.d.). Retrieved from http://www.aboutmcdonalds.com/mcd/our_company/mcdonalds-history.html

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