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

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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

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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.

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Recent Development

McDonald’s had become 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.

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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%

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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.

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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

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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.

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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.

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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.

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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.

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

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Balance Sheet of McDonald’s Corporation for years 2012, 2013 and 2014

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

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McDonald’s Corporation Current Share Price

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McDonald’s Corporation Current Share Price and Earnings Per Share

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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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