New Era UniversityCollege of Business Administration

No.9 Central Avenue, New Era, Quezon City 1107

1st Semester, SY 2015-2016

Comparative Analysis on the Financial Statements of Jollibee Food Corporation

and Golden Arches Development Corporation (McDonalds) for Investors’

Investment Decision Making

In Partial Fulfilment of the requirements for the course

SECURITY ANALYSIS

Submitted to:

Prof. Liwanag

Submitted by:

Mercado, Abigail

Laurel, Maureen

Lofamia, Aisa

Ghanie, Leonard

Almosara, Shiela Mae

Inductivo, Aries

BSBA Financial Management, 4th Year Students

September 2015

CHAPTER I

THE PROBLEM AND ITS BACKGROUND

Introduction

A lot of businessmen and entrepreneurs would rather choose franchising a as

business than starting a new one from scratch. In franchise, you don’t have to be known

because your franchise business is known already and has been successfully

established years ago. You will save a lot of time too in thinking about building and

executing your business because all aspects have been laid out and planned already.

Franchising is a proven profitable business that requires big investment capital in return

of bigger and higher profit for you. Jollibee and McDonald’s, the two competing giants in

the Philippines, have competed in terms of offering various food products and services

to its customers. The competition between two giant fast food chains, Jollibee and

McDonald’s has existed for years. These fast food chains compete not only to win the

market share of fast food customers, but also to dominate the Quick Service

Restaurants (QSR) industry in the Philippines. The obvious side of the fierce

competition is the offering of similar product lines. But the question remains which

company is more successful in managing its operations.

We choose to study fast food business as a good investment vehicle simply

because food businesses are ninety-five percent profitable than any other kind of

business. People always eat, anytime, anywhere and at any cost. You can skip buying a

new pair of shoes or fancy clothing in a mall but you can never skip dining inside your

favourite fast food restaurant. When you’re on a road trip, you always drop by any drive

thru or when you’re lame at home, a fast food delivery is just a call away. Would you

pass not eating fried chicken, fries, etc. in any of your favourite fast food restaurant in a

year? Or probably not even in a month nor week? See, fast foods are already part of

our lives.

This aims to perform an analysis of the financial statements of Jollibee Foods

Corporation (“JFC”, “Jollibee”) and Golden Arches Development Corporation (“GADC”

[the licensee of McDonald’s Corporation in the Philippines], or “McDonald’s. Specifically,

the study delves in the financial aspect of these companies by comparing them to the

existing industry averages and making an evaluation of which company would have

greater chances of dominating the fast food industry in the Philippines, as well as to be

able to give informative analysis for investors as to which company should they invest or

put their money into.

Statement of the Problem

An analysis of their respective financial statements will help users broaden their

understanding about the company’s financial position and the results of operations.

Thus, the research questions for this study will be:

1. Among Jollibee and McDonalds, what is their position in the stock market in

terms of their financial position?

A. Liquidity

B. Profitability

C. Solvency

2. How would the investor relay the decision on choosing the right company to

invest?

3. How well the investors have understood the financial statement and financial

ratios before making their investment decisions?

4. In to what extent does the investor depend on the credibility of auditors/ financial

expert approval of financial statement in making investment decisions?

5. What are the risks an investor might face?

6. How will this study be use in providing investors with investment guidelines and

information prior to investing?

Objective of the Study

This study will analyze the financial statements of Jollibee and McDonald’s and to

determine which fast food company will lead in terms of financial performance. The

study aims to provide informative data and analysis in which the investors can use in

deciding where to put their money in form of investment between Jollibee and

McDonald’s.

Hypothesis of the Study

When deciding where to invest, there are three basic factors to consider, what

risk do you want to take with your financial investments? If you want higher

expected returns, you will have to take on higher risks. There is no way to avoid

that trade-off.

Assets as an item of financial statement do significantly assist the effectiveness

ofinvestment decision making.

There is a significance extent to which investors depend on the credibility of

auditors/financial expert approval of financial statement in making investment

decisions.

There is significance in how well the investors have understood the financial

statements and financial ratios before making investment decisions.

Significance of the Study

This research study would be valuable for the following:

Present and Future Investors will be able to evaluate the performance of the two

companies for reassessing and making sound investment decisions.

The Academe would utilize this research to be a reference material in the study of

Financial Analysis and Financial Management. In addition, the research will serve as a

guide for future researchers in analyzing the financial statements of other companies

within and outside the fast food industry. It also gives insight to researchers as to how to

integrate current issues and modern philosophies in business and conducting financial

analysis.

General Readers will be able to obtain an objective understanding and to determine the

real score on the financial status of Jollibee and McDonald’s, plus an overview of their

commitment to their social responsibility for the general welfare of many.

Government and Regulatory Authorities, and Non-Governmental Organizations

(NGOs) can benefit from this research in formulating policies, setting up guidelines, and

enforcing laws that promotes social responsibility among Quick Service Restaurants,

particularly those related to environmental safety and protection, waste disposal

systems, and investing on youth nutrition and education.

Scope and Limitation

The scope and limitations on the analysis of financial statements of Jollibee and

McDonald’s in the Philippines are the following: The study used consolidated financial

statements for the years 2012 – 2014. Accounts receivable turnover and Average

collection period are not used in the study because fast food restaurants generate. The

subsidiaries of both fast food companies were not excluded; however, since 95 percent

of their subsidiaries are also engaged in food service, then this might tolerable for the

research. Benchmarking is important in order to compare the financial ratios of each

company with the prescribed industry average. However, there is difficulty in obtaining

the industry averages for the Philippine fast food industry since the Hotel and

Restaurant Association of the Philippines (HRAP) cannot provide that information. In

this case, the average data for the United States fast food.

Definition of Terms

Financial Statements - used to evaluate a company’s financial performance and

position; to determine the ability of a business to generate cash, and the sources and

uses of that cash; to derive financial ratios from the statements that can indicate the

condition of the business.

Assets - an expenditure that has utility through multiple future accounting periods.

Liabilities - incurred in order to fund the ongoing activities of a business.

Financial Ratios - compare different line items in the financial statements to yield

insights into the condition and results of a business.

Leverage Ratios - compare the total debt obligation to either the assets or equity of a

business to determine the relative level of debt load that a business has incurred.

Liquidity Ratios - result of dividing cash and other liquid assets by the short term

borrowings and current liabilities. They show the number of times the short term debt

obligations are covered by the cash and liquid assets

Profitability Ratios - comparison of revenues to difference groupings of expenses

within the income statement to determine the ability of a business to create earnings.

Activity Ratios - compare the assets of a company to its sales revenue to indicate how

successfully a company is utilizing its assets to generate revenues.

Investor - commits money to a venture with an expectation of generating a return. They

are the risk taker.

Investment Decisions - determination of where, when, how, and how much capital to

spend and/or debt to acquire in the pursuit of making a profit.

Franchise - a right to market a company’s goods and services in a specific territory.

This right is granted by the company to an individual, group of individuals, marketing

group, or entity.

Comparative Analysis - comparison of two or more comparable alternatives,

processes, products, qualifications, sets of data, systems, or the like.

Financial Risk - probability that an actual return on an investment will be lower than

the expected return.

Dividends - represents the amount earmarked for distribution to shareholders

Ratio analysis - used to evaluate various aspects of a company’s operating and

financial performance such as its efficiency, liquidity, profitability and solvency.

DuPont Analysis - with this method, assets are measured at their gross book value

rather than at net book value in order to produce a higher return on equity (ROE)

CHAPTER 2

REVIEW OF THE RELATED LITERATURE AND STUDY

This chapter review a historical summary that shaped Jollibee and McDonalds to

lead the fast food (QSR) industry in the Philippines. It also discusses the factors that

might affect the investors’ investment decision. The review also includes the Role of

Financial Statement in Making Investment Decisions, Types of Ratio and their uses, and

DuPont Analysis.

LITERATURE

Investment decisions are made by investors and investment managers. Investors

commonly perform investment analysis by making use of fundamental analysis,

technical analysis and judgment. Investment decisions are often supported by decision

tools. It is assumed that information structure and the factors in the market

systematically influence individuals’ investment decisions as well as market outcomes.

The following are the factors that might affect the investors’ investment decision.

Past market trends

Sometimes history repeats itself; sometimes markets learn from their mistakes. You

need to understand how various asset classes have performed in the past before

planning your finances.

Your risk appetite

The ability to tolerate risk differs from person to person. It depends on factors such as

your financial responsibilities, your environment, your basic personality, etc. Therefore,

understanding your capacity to take on risk becomes a crucial factor in investment

decision making.

Investment horizon

How long can you keep the money invested? The longer the time-horizon, the greater

are the returns that you should expect. Further, the risk element reduces with time.

Investible surplus

How much money are you able to keep aside for investments? The investible surplus

plays a vital role in selecting from various asset classes as the minimum investment

amounts differ and so do the risks and returns.

Investment need

How much money do you need at the time of maturity? This helps you determine the

amount of money you need to invest every month or year to reach the magic figure.

Expected returns

The expected rate of returns is a crucial factor as it will guide your choice of investment.

Based on your expectations, you can decide whether you want to invest heavily into

equities or debt or balance your portfolio.

History of Jollibee Foods Corporation Philippines

Jollibee is founded by Filipino-Chinese Tony Tan Caktiong and his family began

as a two-branch ice cream parlor in 1975 at Cuba offering hot meals and sandwiches.

The original company name was Jolibe then Mr. Lumba next reformed the name Jolibe

to Jolly Bee and made the two words form a single name Jollibee. Almost 15 years

when Jollibee entered the industry but they rapidly became successful to other fast food

that came first. It was incorporated a 100% Filipino company 1978 with seven outlets to

explore the possibilities of a hamburger concept.

In 1984, Jollibee hit the P500 million sales mark, landing in the Top 500

Philippine Corporations. Their first international venture was at Singapore by 1985 and

they already have 31 stores by 1986. In 1987, barely 10 years in the business, Jollibee

landed into the country’s Top 100 Corporations. It became the first Philippine fast food

chain to break the P1 billion sales mark in 1989.

In 1993, Jollibee became the first food service company to be listed in the

Philippine Stock Exchange and the new Main Office site has been moved to Jollibee

Centre Building in Ortigas Center, Pasig. By 1994 he got Greenwich for Jollibee

expansion into the pizza-pasta segment and by the end of the year there has been

already 148 Jollibee stores nationwide. By 1995 Jollibee acquires franchise of

Delifrance and Jollibee successfully opens stores abroad. By 1996, the Far Eastern

Economic Review cited Jollibee as one of the leading companies in Asia. The Jollibee

Food Corporation has been serving us with their delectable collection of fast food

service and cleanliness offered by Jollibee is an advantage

History of McDonald’s

The birth of McDonald's began with Raymond Albert Kroc. Ray Kroc was the

exclusive distributor of a milk shake maker called the Multimixer. Meanwhile, two

brothers, Richard and Maurice McDonald owned and ran a hamburger restaurant in San

Bernadino, California, in the 1950s. Ray Kroc heard how well the McDonald brothers

were doing using his Multimixers to serve their customers. He met up with them and

acquired the franchising right from them to run McDonald's restaurants.

A great success story was in the making. In 1955, Ray Kroc founded the

McDonald's Corporation and opened the first restaurant in Des Plaines, Illinois. In 1961,

he bought out the McDonald brothers. McDonald's grew into the largest restaurant

organization in the world. Today, there are more than 33,000 McDonald's restaurants in

119 countries.

In the Philippines, George T. Yang opened the first two McDonald’s restaurants

in Morayta and New Frontier in 1981. Since 1982, the restaurants branched out to

different parts of the country like Greenhills (1982); Dau, Pampanga (1983); Roxas

Boulevard (1985); Makati (1988); Subic (1989); Tarlac (1991); Baguio (1991); Cagayan

(1992); Cebu, (1992); and Marikina (1997), the 100th store of McDonald’s in the

Philippines. In 2005, McDonald’s Philippines became a 100% Filipino-owned Company.

At present, approximately 300 stores are now operating in the Philippines. Previously

under the supervision of McGeorge, McDonald’s stores in the Philippines are now under

the tutelage of Golden Arches Development Corporation (GADC).

STUDY

The basis of financial planning analysis and decision making is the financial

information. Financial information is needed to predict, compare and evaluate a firm’s

earning ability. It is also required to aid in economic decision making investment and

financing decision making. The financial information of an enterprise is contained in the

financial statements.

Financial statement according to V. S Gavtam (2005) is defined as financial

information which is the information relating to financial position of any firm in a capsule

form.

Financial statement according to J. A Ohison (1999) was defined as a written

report that summarizes the financial status of an organization for a stated period of time.

It includes an income statement and balance sheet or statement of the financial position

describing the flow of resources, profit and loss and the distribution or retention of profit.

Financial statement according to Academic of organization Dictionary is a

document which sets out the assets, income, expenses and debts of a company to

allow a third person to assess that company’s health.

Financial statement can also be defined as the process whereby information

relating to the organization as a whole is reported to the outside world. They are reports

on management and not to management. It deals with most external financial

transactions of the organization.

The Role of Financial Statement in Making Investment Decisions

The aim of financial statement is to provide financial information about an entity

to interested parties. The information contained in the reports, however, it can only

become meaningful through financial interpretations derived from the analysis of the

reported data. This interpretations and decision unveils the essence of financial

statements as the major custodian of financial information necessary for any investment

decisions. Investment decisions are not made on a vacuum hence; there are bedrocks

on which they will stand.

One major tool for these investment decisions is the ratio analysis. Ratio analysis

is the judgmental process which aims at evaluating the current and past financial

positions and the results of an entity the primary objectives of determining the best

possible estimateabout the future conditions and performances.

Types of Ratio and Their Uses

The ratio analysis involves comparison of useful interrelated figures over a

number of years to establish a trend. There is no common ratio that can serve the

purpose of assessing the financial statement of a company for as banks. As a matter of

fact, ratios have been chosen and applied by various banks according to its nature of

business and purpose.

1. Liquidity ratios – measure Company’s capability to pay its payable current

liabilities.

2. Leverage ratios – measure how the company is financed from creditors’

resources.

3. Activity ratios – measure how efficiently company uses its own resources.

4. Profitability ratios – measure the return of the invested capital and show the

highest managerial efficiency.

DuPont Analysis

The DuPont Analysis also called the DuPont model is a financial ratio based on

the return on equity ratio that is used to analyze a company's ability to increase its

return on equity. In other words, this model breaks down the return on equity ratio to

explain how companies can increase their return for investors.

The DuPont analysis looks at three main components of the ROE ratio.

Profit Margin

Total Asset Turnover

Financial Leverage

Based on these three performances measures the model concludes that a company

can raise its ROE by maintaining a high profit margin, increasing asset turnover, or

leveraging assets more effectively.

Formula

The DuPont Model equates ROE to profit margin, asset turnover, and financial

leverage. The basic formula looks like this.

Since each one of these factors is a calculation in and of itself, a more explanatory

formula for this analysis looks like this.

Every one of these accounts can easily be found on the financial statements. Net

income and sales appear on the income statement, while total assets and total equity

appear on the balance sheet.

Analysis

This model was developed to analyze ROE and the effects different business

performance measures have on this ratio. So investors are not looking for large or small

output numbers from this model. Instead, they are looking to analyze what is causing

the current ROE. For instance, if investors are unsatisfied with a low ROE, the

management can use this formula to pinpoint the problem area whether it is a lower

profit margin, asset turnover, or poor financial leveraging.

Conceptual Framework

The framework of the study delves on the analysis of financial statements (Ratio

Analysis) in making investment decision. Simply put by U.S Gavtan (2005) ratio analysis

is a process of determining and interpreting the relationship between the items of

financial statement to provide a useful understanding of the performance, solvency and

profitability of an enterprise.

Figure 1 shows the framework for the study. The analysis of the financial

statements requires computing for Profitability ratios, Liquidity ratios, Activity ratios, and

Leverage ratios. After a thorough and careful analysis of the financial statements, the

users of the financial statements can make conclusions about the company’s

performance and investment decisions on these companies. . More so, for ratio to be

useful investment decision, significant literature will be used to complement the

outcome of the computed financial ratios and it must be compared with earlier periods

to indicate trends or compared with similar organizations in the industry to determine

strengths and weaknesses ideally compared with the industrial average and to see who

among them would be the right company to invest your money with.

Figure 1

Conceptual Framework on the Analysis of Financial Statements

Financial Statements of Jollibee and McDonalds

Ratio Analysis(Profitability ratios, Liquidity ratios, Activity ratios, and Leverage ratios)

DuPont Analysis

Benchmarking

Investment guidelines prior to investing between Jollibee and McDonalds

Sound Investment Decision

CHAPTER 3

RESEARCH METHODOLOGY

Methodology

The purpose of this chapter is to give the reader a better understanding of the

structure of our thesis and description of the way in which we proceeded with our

research. It also gives an idea of how and why we formulated and identified our

questions, and the choice of the specific case studies which illustrate our research topic.

We will first start with describing our research strategy and method. Then we will further

discuss the quality of the methods we chose. Finally, we explain how we chose and

collected data.

Research Design

The study adopted a comparative analysis (Acuna, et al., 2004) to establish a

comparison among the financial ratios of Jollibee and McDonalds. The financial ratios of

each company were subjected to a confrontation with average financial ratios of the fast

food industry to determine the extent of closeness of the company’s ratios with the

benchmark ratio. The discussion on the results of the financial analysis requires the use

of additional information provided by each company.

Respondents of the study

The respondents of this study were professionals and businessman in

Commonwealth Avenue, Quezon City with ages between 30-40 yrs old that can be a

prospective investor in the future.

Research Instrument

The sampling technique used is purposive sampling. The provided instruments

are the use of two types of questionnaires for surveys which are allotted to the random

professionals and businessman. Meanwhile, the use of financial statements, journals,

books, and other reliable host of related ideas are the foundation for the secondary

information. It is deemed that the combination of the survey and secondary information

can target both qualitative and quantitative approach in the study. The questionnaires

being used as the main material for interview are presented in the end of the study.

Data Gathering Procedure

The first step is to obtain the financial statements of both companies. After that,

the researcher will now compute their financial ratio and compare the two. Next is to

make a request letter. Upon approval, the researchers will now construct a

questionnaire and conduct an interview to the professionals and businessman that can

be prospective investors. We will seek for their opinion based on the result of the

financial ratios.

Statistical Treatment of Data

Responses to the questionnaire by the respondents were statistically analyzed.

Aside from that, the data gathered from the financial statements of both company were

treated through financial ratios analysis.

Survey Questionnaire

Occupation/ Business: ________________________________ Age: _______________

Kindly check ( ) box you feel appropriate for your feedback.

1. Fast food business is a good investment vehicle

2. The origin of the company, domestic or international does not affect the investors’ decision.

3. Assets of the company do significantly assist the effectiveness of investment decision making.

4. News, internet, and reading materials available are helpful in making your investment decision

5. Jollibee and McDonalds are accurate and prompt in providing their financial position to the public.

6. Reputation of the company play an important role in your choice

7. Availability or accessibility of the institutions or licensed brokers at your disposal affects the investors decision

8. The investment process is simple and uncomplicated for first time investors

9. Expected dividend affects the investors’ investment decision.

10. Past market trends affects the investors’ investment decision.

11. Investors’ risk appetite affects their investment decision.

12. Affordability of the investment tools affects the investors’ investment decision.

Strongly Disagree Disagree

Agree Strongly Agree