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Company overview McDonald’s Corp, one of the largest chain fast food restaurant group, has more than thirty thousand branches in hundreds of countries over six continents. The company is serving food for more than 68 million people per day. Major products are hamburger, french fries, fried chicken, soda, salad, etc. In May 15th, 1940, Richard and Maurice McDonald began a little restaurant named “Dick and Mac McDonald”. Then in 1948, they changed the principle to fast food restaurant using assembly line, which made productivity much more efficient. In last year, the company’s global comparable sales growth was 3.1%. The earning per share growth was 5%, and the average number of customers served every day was 69 million. The operating income increased $100 million than the year before. Financial Statement Research | Million | Balance Sheet Items | 2011 | | 2012 | | Observation Cash | 2,335.70 | 7.08% | 2,336.10 | 6.60% | The amount of cash increased, but percentage decreased. Accounts receivable+ note receivable | 1,334.70 | 4.05% | 1,375.30 | 3.89% | The amount of receivable increased but percentage decreased. Inventory | 116.8 | 0.35% | 121.7 | 0.34% | The amount of inventory increased, but percentage decreased. Total Current Assets | 4,403.00 | 13.35% | 4,922.10 | 13.91% | The prepaid expenses and other current assets increased dramatically in 2012, so that the amount of current and the percentage increase. Property, Plant, and Equipment | 22,834.50 | 69.22% | 26,677.20 | 75.39% | In the “letter to stockholders”, it said there were 1439 new restaurant built. That made amount and percentage increased. Total Assets | 32,989.90 | 100% | 35,386.50 | 100% | Amount increased. Accounts payable | 961.30 | 2.91% | 1,141.90 | 3.23% | The price of beef went up in 2012, which may cause the account payable increased. The price dropped, so maybe the account payable in 2013 will decrease. Total Current Liabilities | 3,509.20 | 10.64% | 3,403.10 | 9.62% | Long Term Debt | 12,133.80 | 36.78% | 13,632.50 | 38.52% | I think because of the new restaurant around the world; the long term debt for land and equipment increased. Also, in the “letter to stockholder”, the interior of the restaurants was replaced 50% of all the restaurants, which may increase the long-term debt. Total Debt | 18,599.70 | 56.38% | 20092.9 | 56.78% | Percentage increased slightly but amount increased by $1.493.2 million Common Stock | 16.60 | 0.05% | 16.60 | 0.05% | Did not change. Retained Earnings | 36,707.50 | 111.27% | 39,278.00 | 111.00% | Amount increased, but percentage decreased. Total Equity | 14,390.20 | 43.62% | 15,293.60 | 43.22% | Amount increased, but percentage decreased, which means the share of liabilities increased. | 2011 | % Change | 2012 | % Change | Cash | 2335.7 | -2.15 | 2336.1 | 0.017 | Even the amount increased slightly, but percentage turned to positive. Inventory | 116.8 | 6.28 | 121.7 | 4.03 | Inventory increased, which means the goods left in the company increased. Total Current Assets | 4403 | 0.79 | 4922.1 | 11.79 | Current assets increased about 10% Long Term Debt | 12133.8 | 5.54 | 13632.5 | 12.351 | Long-term debt soared. Total Equity | 14390.2 | -1.67 | 15293.6 | 6.278 | Percentage turned to positive, and amount increased by $900 million Total Assets | 32989.9 | 3.17 | 35386.5 | 7.265 | Liabilities and the new restaurants made total assets higher. Income Statement Items | 2011 | | 2012 | | Revenue/Sales | 27,006.00 | 100% | 27,567.00 | 100% | Even though 1,400 more restaurant were open, they still need time to make a profit. Cost of goods | 18,476.30 | 68.42% | 18,962.40 | 68.79% | Due to the increased price of American beef, the cost went up. Gross Profit | 8,529.70 | 31.58% | 8,604.60 | 31.21% | Amount increased, but percentage decreased. Salaries expense | 2,393.70 | 8.86% | 2,455.20 | 8.90% | The company hired more people or the salary of employees increased. Earning before interest & tax | 8,012.20 | 29.67% | 8,079.00 | 29.31% | Amount increased, but percentage decreased. Taxes | 2,509.10 | 9.29% | 2,614.20 | 9.48% | Sales tax rate went up in 2012. Net Income | 5,503.10 | 20.38% | 5,464.80 | 19.82% | Company was still making money, but less. | 2011 | % Change | 2012 | % Change | Sales | 27006 | 12.18 | 27567 | 2.077 | The growth rate decreased. COGS | 18476.3 | 11.29 | 18962.4 | 2.631 | Though the percentage decreased, the COG was still growing. The company should come up with another way to produce more efficiently. Gross Profit | 8529.7 | 14.14 | 8604.6 | 0.878 | The growth rate decreased. Net Income | 5503.1 | 11.26 | 5464.8 | -0.696 | The company didn't make as much money as before.
Financial Analysis Current Ratio/Liquidity (Current assets/ current liabilities ) | 1.25 | 1.45 | 1.31 | Current ratio was lower than industry before, but it grew in 2012, which means the company could change assets to cash faster than other restaurants. Debt to Equity Ratio (Total liabilities/ owners’ equity) | 129% | 131% | 40% | Because of too many restaurant around the world, the ratio is growing and much higher than the industry. It is risky. Company should decrease debt or increase equity. Return on equity (Net income after tax/ total owners’ equity) | 38.24% | 36% | 14.56% | The money that owners put in the company was used more efficient than the industry average. Inventory Turnover (Costs of goods sold/ average inventory) | 158.19 | 155.81 | 43.62 | As fast food restaurant, McDonald’s doesn't have as much food left as other restaurant. Profit Margin(Return on sales) (net income/ net sales) | 31.58% | 31.21% | 7.49% | McDonald’s makes more profit on each good sold, which means the cost of good is low. Basic earning/share (Net income after taxes/ number of common stock shares outstanding) | 3.31 | 3.29 | | Acid Test (Quick Ratio)(Cash+ accounts receivable+ marketable securities/ current liabilities) | 1.08 | 1.13 | 1.18 | Because of high liabilities, the company is risky. Interpretive Analysis 1. Liquidity means the company’s ability to turn assets into cash to pay its short-term debts. As it shows in the chart in 2011, the liquidity is $1.25, then in 2012; it became $1.45; therefore the company increased liquidity in past two years, and the company could turn assets into cash easier than past 12 month. Given that the current liability increased by $180.6 million proves that the company is financially stable, but its long-term liability increased hugely from $13,746.4 million in 2011 to $15,158.7 million in 2012. It may cause the company not to be stable in the future. 2. Profit margin tells how much of the selling price that turned into profit. McDonald’s is experiencing a decrease in return on sale from 31.58% to 31.21%. Decrease on profit margin means the company couldn’t have as much profit as it used to be. As it shows on the balance sheet, the cost of good went up by $500 million, but the net income decreased $40 million. As my opinion, the price of the material went up dramatically in last few years, and a growing number of people now are trying to eat much more health, but everyone knows that food the McDonald’s sold is fast food, which is not really healthy, even though they have salad. It will hurt the company if they still offer fast food in a long term. In a short term, the industry average profit margin is 7.49%, which means McDonald’s is still ahead most of the restaurant. 3. Debt to equity ratio compares the debt that the company has with the assets the owners have to see if owners are able to pay back their debt. The company is facing a larger leverage than the year before, from 129% in 2011 to 131% in 2012. The current liabilities decreased slightly ($100 million), but the long-term liabilities soared about $1,400 million. The lower debt to equity the company has the healthier that the company is. In the short term, the McDonald’s is relatively safe, because of the small amount current liabilities, but for long term, even the company sells everything they have, they cannot pay back their debt. It’s a big problem when the long-term debt due day comes. 4. Inventory turnover shows how fast the goods are sold. Inventory is how much stock the company keeps in store. As fast food restaurant, the company should not keep any food in the store. Inventory turnover of McDonald’s decreased in last two years from 158.18 in 2011 to 155.81 in 2012, but comparing with the restaurant industry average inventory turnover which is 43.62, McDonald’s is doing well in the industry. Conclusion As all the number shown on the balance sheet and income statement, some of the income decreased when expenses soared, especially on long-term liabilities, which jump from $12,133.8 to $13,632.5. Overall, the company is not running well. From the property and equipment we can see that the company is opening more branches, but new branches didn't have enough profit to offset all the expenses it made. In additional, the world-wide trend of eating healthy is everywhere, how to change the reputation from junk fast food to healthy fast food is a challenge that the company has to face right now. Also, opening too many branches will definitely hurt the company because the demand and supply. In a limited area and limited customers, but too many branches, it is wasting resource, and spending on labor (which cost a lot). I wonder not only how the company continues to create new dishes to attract customers, but also how they pay back their long-term liabilities when the time is coming. Will they keep borrowing money or have enough money to pay back (and how)?
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