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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
1
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 - 11
APPENDIX 12 – 17
REFERENCES 18
2
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
Average O / E× 100 %
= 558615652
×100 %
= 35.7%
Net ProfitAverage O / 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 Profit
Net 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%
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 ÷
COGSAverage Inventory
= 365 ÷17203
123= 2.6 days
365 ÷COGS
Average Inventory
= 365 ÷16986
117= 2.5 days
Debtor Turnover
365 ÷Credit Sales
Average Debtor
= 365 days÷13201348
= 372.7 days
365 ÷Credit Sales
Average Debtor
= 365 days÷12141267
= 380.9 daysInterest
CoverageInterest Expense+Net Profit
Interest Expense
= 522+5586
522= 11.7 times
Interest Expense+Net ProfitInterest Expense
= 570+4758
570= 9.3 times
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 ability to pay off current liabilities is 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/Earnings 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.
10
Lastly, the share price of McDonald’s Corporation was $103.78. It’s such a high
price. The earnings per share were $4.82. It’s considered as a low price. The current P/E of
McDonald’s Corporation is 21.53 times. This shows that if an investor wants to purchase the
shares of McDonald’s Corporation, he/she have 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.
11
Statement of Income of McDonald’s Corporation for years 2012, 2013 and 2014
12
Balance Sheet of McDonald’s Corporation for years 2012, 2013 and 2014
13
14
Statement of Cash Flows of McDonald’s Corporation for years 2012, 2013 and 2014
15
McDonald’s Corporation Current Share Price
16
McDonald’s Corporation Current Share Price and Earnings Per Share
17
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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