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FOUNDATION IN NATURAL AND BUILT ENVIRONMENT

BASIC ACCOUNTING (ACC30205)

ASSIGNMENT 1: FINANCIAL RATIO ANALYSIS

GROUP MEMBERS:

CHAN PEI SHAN (0318350)

YEO DOR EEN (0316224)

LIM JIE QI (0318313)

COMPANY: MCDONALDS CORPORATION

LECTURER: MR CHANG JAU HO

SUBMISSION DATE: 13th NOVEMBER, THURSDAY, 12PM

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TABLE OF CONTENTS

BACKGROUND OF MCDONALDS CORP. PAGE 3

RECENT DEVELOPMENT PAGE 4

PROFITABILITY RATIOS PAGE 5-6

STABILITY RATIOS PAGE 7-8

PRICE/EARNING RATIO PAGE 9

INVESTMENT RECOMMENDATION PAGE 10-11

APPENDIX PAGE 12-15

REFERENCES PAGE 16

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BACKGROUND OF MCDONALDS CORP.

McDonalds was originally owned by just the McDonald’s brothers,

Richard and Maurice (Dick and Mac) McDonald. It had been in business since

1930 in a carhop drive-in, but it was until 1954 when Raymond “Ray” Kroc

founded their restaurant and opened their first franchise in Illinois. That was

when McDonald’s Corporation was created, and since then, the McDonald’s

franchise kept expanding and just in 5 years, the 100th McDonald restaurant

was opened on Chicago.

The original menu set by the McDonald brothers were very simple, of

just two types of burgers, french fries, shakes, soft drinks and apple pie. They

initially used the founder’s milkshake machine to make the shakes, which

made Ray Kroc curious and decided to check their restaurant out.

During 1960 to 1970, the fast-food chain began to grow rapidly. In the

early 1960 Ray Kroc used $2.7 million to buy the concepts rights from the

brothers, and since then, McDonald’s begin expanding not only the size of the

franchise, but also the varieties of food on the menu. The first McDonald

opened outside of the USA was in Canada and Puerto Rico in the year 1967,

and soon, all the countries began expanding the franchise.

Up until today, McDonald had become a worldwide fast-food industry

and could be found almost anywhere. It is ranked the first fast-food chain in

terms of size and popularity, and its net worth on 2013 was $90.3 billion!!

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RECENT DEVELOPMENT

Over the years, McDonald’s had increased their menu varieties and also

expanding the franchise. Since McDonald’s had become a worldwide

franchise, it can’t keep the few menus they have forever. The expanding of

McDonald’s had make the fast food chain to come up with many different

types of burgers, McNuggets, and also breakfast menu and happy meals for

kids. They even provided toys for the happy meals.

Until the recent year of 2013, McDonald have had 440,000 employees in

total including all restaurants around the world. Up until now Japan has the

largest number of franchise In the U.S. 225 new restaurants had opened in the

same year, and in Europe the company emphasized on value meals and offers.

By the end of the year, over 65% of McDonald’s chain had improved in

interior and 55% of the exteriors.

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PROFITABILITY RATIOS

Profitability

ratios

2012 2013

Return on

Equity

(ROE) ratio

Net Profit

Average O/E x 100%

= 5465

14842 x 100%

= 36.8%

Net Profit

Average O/E x 100%

= 5586

15652 x 100%

= 36.7%

Net Profit

Margin

(NPM) ratio

Net Profit

Net Sales x 100%

= 5465

27567 x 100%

= 19.8%

Net Profit

Net Sales x 100%

= 5586

28106 x 100%

= 19.9%

Gross Profit

Margin

(GPM) ratio

Gross Profit

Net Salesx 100%

= 8605

27567 x 100%

= 31.22%

Gross Profit

Net Salesx 100%

= 8764

28106 x 100%

= 31.20%

Selling

Expense

ratio (SER)

Total Selling Expense

Net Sales x 100%

= 3167

27567 x 100%

= 11.5%

Total Selling Expense

Net Sales x 100%

= 2674

28106 x 100%

= 9.8%

General

Expense

ratio (GER)

Total General Expense

Net Sales x 100%

= 6966

27567 x 100%

= 25.27%

Total General Expense

Net Sales x 100%

= 7121

28106 x 100%

= 25.34%

Financial

Expense

ratio (FER)

Total Financial Expense

Net Sales x 100%

= 3850

27567 x 100%

= 14.0%

Total Financial Expense

Net Sales x 100%

= 4043

28106 x 100%

= 14.4%

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Profitability Ratios Interpretation

Return on Equity (ROE)

During the 2012-2013 period, the Return of Equity (ROE) has decreased from

36.8% to 36.7% .This means that Mcdonald is getting slightly less return from

the capital than last year.

Net Profit Margin (NPM)

During the 2012-2013 period, the Net Profit Margin (NPM) has increased from

19.8% to 19.9%. This means that the business is getting better at controlling its

overall expenses.

Gross Profit Margin (GPM)

During the 2012-2013 period, the Gross Profit Margin (GPM) has decreased

from 31.22% to 31.20%. This means that the business ability to control cost of

goods sold has slightly worsened.

Selling Expense Ratio (SER)

During the 2012-2013 period, the Selling Expense Ratio has decreased from

11.5% to 9.8%. This means that the business ability to control selling expenses

has worsened.

General Expense (GER)

During the 2012-2013 period, the General Expense Ratio has increased from

25.27% to 25.34%. This means that the business is getting better at controlling

its general expenses.

Financial Expense Ratio (FER)

During the 2012-2013 period, the Financial Expense Ratio has increased from

14.0% to 14.4%. Thus means that the business is getting better at controlling its

financial expenses.

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STABILITY RATIOS

Financial

Stability ratios

2012 2013

Working

Capital ratio

(WER)

Total Current Asset

Total Current Liabilities

= 4922

3403

= 1.45 : 1

Total Current Asset

Total Current Liabilities

= 5050

3170

= 1.59 : 1

Total Debt

ratio (TDR)

Total Liabilities

Total Asset x 100%

= 20093

35386 x 100%

= 56.8%

Total Liabilities

Total Asset x 100%

= 20617

36626 x 100%

= 56.3%

Inventory

Turnover

ratio (ITR)

365 days ÷Cost of Good Sold

Average Inventory

= 365 days ÷ 16751

119

= 2.59 days

365 days ÷Cost of Good Sold

Average Inventory

= 365 days ÷17203

123

= 2.61 days

Debtor

Turnover

ratio (DTR)

365 days ÷ Credit Sales

Average Debtors

= 365 days ÷ 1375

1355

= 359.7 days

365 days ÷ Credit Sales

Average Debtors

= 365 days ÷ 1320

1348

= 372.7 days

Interest

Coverage

Ratio (ICR)

Interest Expense + Net Profit

Interest Expense

= 517+5465

517

= 11.6 times

Interest Expense + Net Profit

Interest Expense

= 522+5586

522

= 11.7 times

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Financial Stability Ratios Interpretation

Working Capital Ratio (WER)

During the 2012-2013 period, the Working Capital Ratio has increased from

1.45: 1 to 1.59: 1. This means that the business ability to pay current liabilities

with current assets is getting better. In addition, it does not satisfy the

minimum requirement of 2: 1.

Total Debt Ratio (TDR)

During the 2012-2013 period, the Total Debt Ratio has decreased from 56.8%

to 56.3%. This means that the business overall liabilities has reduced. In

addition, it is still over 50% maximum limit.

Inventory Turnover Ratio (ITR)

During the 2012-2013 period, the Inventory Turnover Ratio has increased

from 2.59 days to 2.61 days. This means that the business is selling its

products at a slightly slower rate.

Debtor Turnover Ratio (DTR)

During the 2012-2013 period, the Debtor Turnover Ratio has increased from

359.7days to 372.7days. This means that the business is getting slower in

collecting debts.

Interest Coverage Ratio (ICR)

During the 2012-2013 period, the Interest Coverage Ratio has increased from

11.6 times to 11.7 times. This means that the business ability to pay its interest

expenses has become slightly better. In addition, the business satisfies the

minimum requirement of 5 times.

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PRICE/EARNING RATIO (P/E RATIO)

Price Earning Ratio

= Current Share Price

Earnings per share

= $103.7

$5.55

= 18.68

With the P/E ratio with 18.68, this shows that Mc Donald has to wait

for almost 19 years to claim their shares.

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INVESTMENT RECOMMENDATION

From the profitability ratio, the return of equity (ROE) shows that there

was actually a slightly fell on 2013 compare to 2012 and it is bad for their

company. Based on net profit margin (NPM), Mc Donald’s did better at

controlling the expenses on 2013, this is a good thing. And now, take a look at

gross profit margin (GPM), there was a fall on 2013 compare to 2012, this

shows that Mc Donald’s is getting worse at controlling their costs of goods

sold, which is bad. For selling expense ratios (SER), the ability of the

company at controlling their selling expenses is getting worse. However, the

general expense ratio (GER) shows that McDonald’s has improved their

ability at controlling general expenses and it is good. Besides that, the

financial expense ratio (FER) shows that McDonald’s has also improved their

ability at controlling the financial expenses and it is good to the company.

For financial stability ratios, the working capital ratio(WCR) shows

that the WCR of McDonald’s has improved from 1.45:1 to 1.59:1, it doesn’t

satisfy the ratio of 2:1 so this is a good thing, because this company is able to

pay their current liabilities in a shorter time. For total debt ratio (TDR), the

TDR ratio has decreased from 56.8% to 56.3% and it is a good thing, because it

shows that the business is now has a less debt compare to the year before. For

inventory turnover ratio (ITR), the ITR remained unchanged, this shows that

the business was actually selling their products at the same price for the two

years we compared. For debtor turnover ratio (DTR), the DTR has increased

from 359.7 to 372.7 days, this is bad for the business because it means the

business’ ability to collect their debt is getting worsen. For interest coverage

ratio (ICR), the ICR has slightly increased from 11.6 to 11.7 times and this is a

good thing to the business, because this means the business’ ability to pay

their interest expense becomes better than the previous year.

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APPENDIX

Income Statement of McDonald’s Corp for 2011, 2012, 2013

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Balance Sheet of McDonald’s Corp for 2011, 2012, 2013

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Cash Flow Statement of McDonald’s Corp for 2011, 2012, 2013

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McDonald’s Current Share Price

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REFERENCES

1. Unknown. (1996, November 10). A brief history of McDonald’s. Retrieved

from http://www.mcspotlight.org/company/company_history.html

2. McDonald’s Plaza. (2010, February 12). McDonald’s Corporation –

company profile, information, business description, history, background

information in McDonald’s Corporation. Retrieved from

http://www.referenceforbusiness.com/history2/56/McDonald-s-

Corporation.html

3. Golden G. (2010, July 23). How much does McDonald’s make? Retrieved

from http://www.celebritynetworth.com/articles/how-much-

does/how-much-does-mcdonalds-make/

4. McDonald’s Corporation. (2014, July 17). 2013 Annual Report, Part 1

Business. Retrieved from

http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/I

nvestors/McDs2013AnnualReport.pdf

5. Unknown. (2014, November 11). McDonald’s Corp. Retrieved from

http://www.msn.com/en-us/money/stockdetails?symbol=US:MCD

6. Finance Yahoo. (2014, November 11). Income Statement. Retrieved from

http://finance.yahoo.com/q/is?s=MCD+Income+Statement&annual

7. Finance Yahoo. (2014, November 11). Balance Sheet. Retrieved from

http://finance.yahoo.com/q/bs?s=MCD+Balance+Sheet&annual

8. Finance Yahoo. (2014, November 11). Cash Flow. Retrieved from

http://finance.yahoo.com/q/cf?s=MCD+Cash+Flow&annual