1. 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
2. TABLE OF CONTENT
CONTENT PAGE
BACKGROUND OF MCDONALD’S CORPORATION 3
RECENT DEVELOPMENT 4
PROFITABILITYRATIOS 5 – 6
STABILITYRATIOS 7 – 8
PRICE& EARNING RATIO 9
INVESTMENT RECOMMENDATION 10
APPENDIX 11 – 14
REFERENCES 15
3. 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
4. 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
6. Interpretation of results (Profitability Ratios)
Duringthe periodof 2013 to 2014, the percentage of the return on equity(ROE) of Mcdonald’s
Corporation hasdecreasedfrom35.7% to 30.4%. This meansthe ownerisgettingless returnfrom
hercapital compare tolast year.
Duringthe periodof 2013 to 2014, the percentage of the netprofit margin (NPM) of Mcdonald’s
Corporation hasdecreasedfrom19.9% to 17.3%. Thismeansthe businessabilitytocontrol the
expensesis gettingworst.
Duringthe periodof 2013 to 2014, the percentage of the gross profit margin (GPM) of Mcdonald’s
Corporation hasdecreasedfrom38.8% to 38.1%. Thismeansthat the businessability tocontrol
COGS isgettingworst.
Duringthe periodof 2013 to 2014, the percentage of sellingexpense ratio(SER) of Mcdonald’s
Corporationhasdecreasedfrom9.5% to 8.4%. Thismeansthat the businessabilitytocontrol the
sellingexpense hasbecome better.
Duringthe periodof 2013 to 2014, the percentage of general expense ratio(GER) of Mcdonald’s
Corporationhasdecreasedfrom25.3% to 24.5%. Thismeansthat the businessabilitytocontrol
general expense hasbecome better.
Duringthe periodof 2013 to 2014, the percentage of financial expense ratio(FER) of Mcdonald’s
Corporationhasincreasedfrom14.4% to 16.8%. Thismeansthat the businessabilitytocontrol
financial expensehasbecome worst.
6
8. Interpretation of results (Stability Ratios)
Duringthe periodof 2013 to 2014, the percentage of workingcapital (WCR) of Mcdonald’s
Corporationhasincreasedfrom1.59 to 1.95. The business topayoff currentliabilitieshasgetting
better.Inaddition,itdoessatisfythe minimumof 2:1.
Duringthe periodof 2013 to 2014, the percentage of total debt(TDR) of Mcdonald’sCorporation
has increasedfrom56.3% to 62.7%. This meansthatthe total debthas increased.However,itwent
overthe maximum 50% limit.
Duringthe periodof 2013 to 2014, the percentage of the stock turnover of Mcdonald’sCorporation
has decreasedfrom2.6 daysto 2.5 days.The businesssellsitsgoodsfastercomparedtolastyear.
Duringthe periodof 2013 to 2014, the percentage of debtorturnover of Mcdonald’sCorporation
has increasedfrom372.7 daysto 380.9 days.The businessistakingmore time tocollecthisdebt.
Duringthe periodof 2013 to 2014, the percentage of interestcoverage of Mcdonald’sCorporation
has decreasedfrom11.7% timesto9.3% times.The businessesabilitytopayitsinterestexpenseis
gettingworst.Inaddition,itdoes satisfywiththe minimumrequirementof 5 times.
8
10. Investment Recommendation
Through the profitability ratio, the return on equity (ROE) showsthat the businesshasa fall
on 2014 compare to 2013. It’snot a goodthingfor McDonald’sbecause theyare getting lessreturn
compare to the previousyear.Forthe net profit margin (NPG),there wasafall on 2014 compare to
2013, thismeansthatthe business isgettingworstatcontrolling expenseson2014. Basedon gross
profit margin (GPM),there wasaslightlyfall on2014 compare to 2013, thismeansthat the business
isgettingworstat controllingcostof goodssoldon 2014. For the sellingexpenses ratios(SER),there
was a fall on2014 compare to 2013, thismeansthat the companyis getting betteratcontrolling
sellingexpenses.Basedon general expensesratios(GER),there wasalsoa fall on2014 compare to
the previousyear,whichmeansthatthe businessabilitytocontrol the general expensesisgetting
better. However,the financial expensesratios(FER) showsthatMcdonald’shas not improvedtheir
abilitytocontrol financial expenses.
As for stabilityratio,the workingcapital (WCR) showsthat the businesshasimprovedfrom
1.59 to 1.95 whichmeansthatthe businesspayoff the currentliabilitiesisgettingbetter.Itdoes
satisfythe minimumof 2:1.For the total debt(TDR), the companyhas improvedfor 56.3% to 62.7%
whichisbad because the businesshasmore debtcompare topreviousyear.Basedon stock
turnover ratio (STR) showsthat the businesshasdecreasedfrom 2.6days to2.5 days,this means
that the companysellsitsgoodsfastercompare to previousyear.Forthe debtorturnover ratio
(DTR), the businesshasa rise from372.7 daysto 380.9 dayswhichisbad because the businessis
takingmore time to collecttheirdebt.Basedonthe interestcoverage ratio (ICR),the businesshasa
fall from11.7% timesto9.3% times,it’sbadfor the companybecause the businessesabilitytopay
itsinterestexpense isgetting worst.Inaddition,itdoes satisfywiththe minimumrequirementof 5
times.
Lastly,the share price of Mcdonald’sCorporationwas$103.78. It’sconsideredas a highprice.
The earningspershare were $4.82. It’s consideredasalow price.The current P/E ratioof
Mcdonald’sCorporationis21.53 times.Thisshowsthatif an investorwantstopurchase the shares
of Mcdonald’s,he/she hastowaitfor22 years to claimback his/herinvestment.A conservative
investorwill normallypaynomore thanP/E of 15 fora share that he/she likes.
