The success of an organization is portrayed through its financial position, represented by its Financial Statements. Analysis of Financial Statements is the analytical tool normally used to assess the performance of the company. While it is easy to calculate it partially explains the appeal widely, their interpretation is problematic, especially when two or more ratios provide conflicting signals. Interpretation of ratios is highly subjective and may differ with the level of expertise involved. It can be used for analysing past performance, extrapolating future prospect of a company and to compare with other companies operating in a similar industry but one of their limitation is they need to be analyse along with non financial data to present more meaningful and effective assessment. A comprehensive financial analysis of the Financial Statement of Mc. Donald’s corporation is detailed below. The analysis shows a great deal of success story in the Hamburger Industry.
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To consider the topic effortlessly, let’s consider the example of Mc. Donald’s corporation. Mc. Donald’s have its presence in 119 countries with an employee base above 400,000 worldwide. To its added advantage Mc. Donald’s is listed in the NYSE giving it room for more growth through access to an enormous fund pool. I have selected Mc. Donald’s because of its transnational presence and its information being publicly available due to the NYSE listings. Its Mission Statement reads as follows: (Financial Statement 2011)
"McDonald's brand mission is to be our customers' favourite place and way to eat. Our worldwide operations are aligned around a global strategy called the Plan to Win, which centre on an exceptional customer experience – People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers' experience". (Mc. Donald’s Official Website)
When considering the company’s mission it becomes quite clear as to how important a Mission to an organisation. The mission of Mc. Donald’s clearly details its purpose of existence and by the progress of the organization it is evident that the company continues to satisfy its existence. Its geographical reach advocates its popularity and acceptance worldwide. It seems that Mc. Donald’s has satisfied its customers by providing exceptional services. Similarly the shareholders should be much obliged when considering the corporations performance. Mc. Donald’s have said to increase its dividends regularly since 25 years. Although the mission statement does not specify any thing regarding the shareholder’s wealth maximization, it can certainly be assumed that through customer satisfaction in its grips, the corporation has severely maximised its earning potential.
By the analysis of the Mc. Donald’s corporation, one could conclude that, well defined Mission with clear objectives, is a definite key to an organisations success. Where there is lack of clarity and communication of the company’s Mission to its employees, such companies are more than likely to drift away. The clarity of an organization Missions create a great deal of competitive advantage over companies with poorly defined Missions.
Financial Analysis of Mc. Donald’s Corporation
As Mc. Donald’s corporation is registered in the NYSE, let’s take a glimpse of its financial statistics to assess the company’s strengths and its powerful standing in front of its competitors. Following are the six year graphical representation of Mc. Donald Corporations worldwide statistics in term of revenue growth, earnings per share, cash generated from operation and the increase of its franchises. The information has been extracted from the Financial Statement of Mc. Donald Corporation: (Financial Statements 2009 - 2012). Financial ratios are helpful indicators of a company's performance and financial position. We can calculate the ratios of most of the information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the company's financials to those of other company. All calculations for all ratios and financial highlights are mentioned in Annexure - A
In the four year trend analysis of Mc. Donald’s in terms of revenue and cash generation, evident growth can be witnessed. Due to its magnificent reach across the world it’s the Corporations revenues has kept on climbing. Despite the obvious hurdles faced by the company socially, it has still managed to come up with such remarkable results. Even under extreme economic recession, the company has maintained its strategic position as the market leader in Fast Food Industry. Realizing revenues above $27,000 Million and supportive with a cash inflow of $7,000 Million the Corporation has maintained its standard of providing quality service and an employment opportunity to over 400,000 individuals across the world.
PROFITABILITY RATIOS FORMULAE
Net Profit Ratio Net Profit/Sale
Gross Profit Ratio Gross Profit/Sale
Return on Total Assets Net Profit/Total Assets
Return on Equity Net Profit/Equity
Profitability is a utensil to assess the final result of the company. As ratios include in Profitability are computed by use of Sales and profits and it also includes ROA, ROI and ROE ratios that’s why potential Customers, Investors, Creditors, Regulatory and Government Bodies and Go, owner and all other stakeholders of the company have vital interest in Profitability analysis.
The company’s profitability analysis shows a slight decline as compared to the past performance.
GROSS PROFIT MARGIN
This ratio illustrates a relationship between the net sales and the gross profit of the organization. Gross profit is an income statement item while the net sales are also concern with the income statement. Generally higher this ratio better it is for the organization. When we compare with the previous year’s margin we found that there is a very slight deterioration but it has never been below 20% in the last 4 four years. Possible explanation may be increase in operating expenses and sales growth is 2.1% which is significantly lower than that of previous years i.e. 12.2% and 5.8% for 2011 and 2010 correspondingly.
RETURN ON ASSETS
This ratio presents a general relationship between the average total assets and net income of the company. Net income concerns with the income statement of the corporation while the average total assets are concern with the balance sheet of the corporation. As this ratio decreases to almost half from year 2009 to 2010 (30% to 16%) but remains almost unchanged since 2010 to 2012. At present it seems reasonable but it might be troublesome for future as the company had once achieved 30% return on its asset so it will be possible if attention is directed towards the root cause of severe decline. It can be argued that company is under utilizing its assets as we witnessed 7.3% growth in its asset whilst the return on asset is not in line with the asset growth.
We will identify spontaneous assets as those assets which increase proportionally with sales. For the purposes of our analysis we will identify Cash and Equivalents, Accounts and Notes Receivable, and Inventories as assets which are spontaneous. We will identify Prepaid Expenses and Other Current Assets as well as Other Assets as Non-Spontaneous and therefore fixed.
RETURN ON TOTAL EQUITY
This ratio depicts the co relation between total equity and net income. The net income is related with the income statement while the equity is equity is associated with the balance sheet. It shows the percentage earned on equity. If this ratio increases it is good signal for organization. When we see this there has been a decreasing trend from 2009 (64.9%) to 2012 (36.8%) which is a cause of concern for the company as the trend continues, the company might face some difficulties. If we analyse further we observed that shareholder’s equity has a declining trend over the period and now stands at 43.2% (2012) which was 46.4% (2009) four years before but the total liabilities have increasing trend which suggests that Mc Donald’s Corporation is relying more on its debt than equity.
Liquidity ratios provide information about an entity’s capacity to meet its current financial obligations (short-term). It is of particular importance to the short-term credit provider of the company. Two liquidity ratios that are frequently used are current ratio and quick ratio.
Following the Liquidity analysis of Mc Donald’s Corporation we may suggests that the overall liquidity position is enhanced as compare to its preceding years and it presents encouraging results. Short-term creditors have a preference of high current ratio as it mitigates their risk of non payment. Higher current ratio means less the creditors and current liabilities hence short term creditors will be paid quickly.
LIQUIDITY RATIOS FORMULAE
Current Ratio Current Assets/Current Liabilities
Quick Ratio Quick Assets/Current Liabilities
Cash Ratio Cash/Current Liabilities
Current Ratio illustrates an entity’s ability to meet its current liabilities with its corresponding current assets. Current ratio is more than one from 2009 to 2012 which shows a healthy position for the company and it increases from 1.14 times (2009) to 1.45 times (2012). Contributing factor for a healthy current ratio might be the cash balances which remain on an average at $2300 million over the last three years and other assets have been increased by almost 100% (1.5% to 3.1%). Further analysis of other assets may depict more clear liquidity position of the company.
The quick ratio also known as "acid-test ratio" illustrates a company's potential to fulfil its current obligations with its most liquid assets. The higher this ratio is, the healthier will be the liquidity position of the company.
There has been an increasing trend in quick ratio 1.41 times (2012) and 1.11 times (2009). Quick ratio is nearly the same as current ratio which suggests that Mc Donald’s Corporations is efficiently managing its inventory and maintaining its inventory to a possibly low level. Inventory management is of prime importance for fast food restaurant. As we can see that the company is maintaining its inventory at an average rate of 3.5% of total assets over the period of four years
The proportion of an entity's cumulative cash and cash equivalents to its short term liabilities. Cash ratio is widely used as a tool to assess company’s liquidity position. It can determine how quickly, the company can repay its short-term debt. A better cash ratio is helpful to creditors for deciding credit worthiness and credit limits of the company.
Over the period of four years Mc Donald’s Corporation has able to maintain a satisfactory cash ratio which is evident by the fact that cash balances are kept at $ 2,300 million during last three years. Cash ratio over 0.5 times suggests a healthy financial position but the company has maintained a cash ratio of above 0.6 times during 2009 to 2012.
Activity ratios indicate of how resourcefully an entity is utilizing its assets. Activity ratios are also known as turnover or efficiency ratios, it measure how effectively and efficiently the company is utilizing its assets. Activity ratios are also known as management ratios. Primarily we will be more focused about how successfully the company is controlling two major group’s i.e. receivables and inventories.
Inventory Turnover Cost of Goods Sold/Inventory
Inventory Turn Over In Days 360*Inventory/Cost of Goods Sold
Debtor Turnover Sales/Trade Debtor
Debtor Collection Period 360*Receivable/Sale
Fixed Asset Turnover Sales/Fixed Assets
INVENTORY TURN OVER IN DAYS
This ratio depicts a connection between inventory and the cost of goods sold. Inventory is an item from balance sheet while the cost of goods sold (COGS) is coming from the income statement of the company. It tells us how frequently a company places an order for the inventory.
By comparing it with the prior years we found that this year Mc Donald’s Corporation is placing fewer orders than the previous years. It means there is decreasing trends compared to last year however; it has been increased by 10 days from 2010 to 2011 and was standing at 143 days. Historically, McDonald's inventory turnover has been substantially higher than the industry average. Many times this is a reflection of insufficient merchandise to meet customer demand. In this case, we find this notion irrelevant due to Just-In-Time inventory techniques used by McDonald's which keep inventories low relative to sales.
DEBTOR COLLECTION PERIOD
This is the general relationship between the gross receivables and the net sales of the year. This ratio illustrates how economically the company is administering its receivables. Lesser this ratio is the more better it is.
When we compare Day’s Account Receivable Ratio from years 2010 to 2012 the average days sales account receivable is decreases to 20.34 days in the year 2012 and remains unchanged in 2011 and 2010 standing at 21.5 days. It means that company is monitoring its credit sale properly which results in constant decrease in this ratio and there is less chance of bad debt. The collection period will tell us how long it takes McDonald's to collect cash after making a credit sale. Historically, the collection period for the company has been around four days less than the industry average, making them relatively more efficient.
FIXED ASSET TURNOVER
This ratio presents a relationship between net sales to fixed assets. This ratio depicts a company's potential to generate net sales from fixed-asset A higher fixed-asset turnover ratio demonstrates that the company has been more successful in utilizing the investment in fixed assets to earn revenues.
When we compare this ratio over the period of four years (2009 to 2012) we found that there has been an increasing trend since 2009 to 2011 without any significant addition to fixed assets but in the last year it has been declined to 1.12 times (2012) which were 1.18 times (2011).
The solvency ratios assess business risk, which explains the capability of the business to pay its long term liabilities. Investors are very much concerned in these ratios because they signify the amount of debt a company can hold. They also signify the amount of investment in the company
SOLVENCY RATIOS FORMULAE
Times Interest Earned EBIT/Interest
Debt Ratio Total Debts/Total Assets
TIMES INTEREST EARNED
This ratio shows how many times the company is capable to compensate the amount of interest for loans. If it increases then it is satisfactory for business. The investors show more confidence.
When we examine this ratio for Mc Donald’s Corporation from 2009 to 2012 there is decreasing trends from 2011 to 2012 and increasing trend from 2009 to 2011 because the cost of the goods sold were increased resulting an increase in interest expense.
This ratio indicates the company long term debt paying ability and also indicates how many assets are financed by creditors; it helps to tell how much creditors are protected in case of solvency. The creditors are not well protected the company is not position to issue new long term debt from the perspective of long term debt paying ability. The lower this ratio is the more better it is.
If we look at the trends of this ratio from 2009 to 2012 there is increasing trend it means company has acquired more and more debt and more assets are financed by debt results an increased in this ratio. Increase in debt component is in conjunction with increase in interest expense.
Let us briefly consider the element of competition affecting the corporation’s financial results and market share. For the purpose i have considered the example of KFC, a non listed company but with a very powerful geographical reach to challenge Mc. Donald’s.
Competition drives the market dynamics of an industry. Different strategies are to be effective in diversified market competition scenario. Business managers have an eager eye on the current and potential competition prevailing in the environment. For this purpose, let’s consider Kentucky Fried Chicken (KFC) as an example of competition in the fast food restaurant industry. Similar to Mc. Donald’s, KFC is also amongst the oldest and the most diversified chain of Fast Food restaurant in the world. It operates correspondingly through a chain of restaurants, company operated and franchised across the world.
Michael Porter presented a framework for analyzing competitor. The key aspects that Porter discussed are Competitors objective, Competitors assumptions, Competitors strategy and his Capabilities. In simple terms one should analyze his competitor’s strengths and weaknesses to draft his own strategy. Although both the fast food giants belong to the same family, but have specialization in different nature of products served. Mc. Donald’s are famous for their Hamburgers and other’s in the Burger family, while KFC specializes in fried chicken. Both the corporations have the same geographical reach in the world and strong brand recognition. To its added advantage Mc. Donald’s is listed in the NYSE giving it room for more growth through access to an enormous fund pool. (Mc. Donald’s Official Website), (Michael Porter)
KFC is a private corporation and is not listed as Mc. Donald’s; its financial results are unavailable. Still its magnificent power can be witnessed as it is present in almost similar capacity and has maintained its strength in the Fast Food sector all over the world. It can be advocated that KFC’s policy of slow expansion or its ability to have its corporate presence in many countries without being listed, is in itself a remarkable achievement. There is a huge possibility that such policy might change and in a situation of a price war between the giants, KFC has definitely the ability to challenge Mc. Donald’s on all fronts.
The show of strength, between the two Titans of fast food has been witnessed clearly in the area of advertising. KFC has shown to the world that when it comes to selling its fried chicken, its capabilities are second to none. After the death of Sander's in 1980, he remained a symbol for the company for its advertising and branding campaigns. In the advertisements we saw Sander's licking his fingers and talking about his secret recipes. Then onwards from 60's, 70's and 80's saw its rise to great popularity with the KFC brands featuring in television shows and movies. The most famous featuring includes the Peter Seller's vehicle in 1968, Superman 2 in 1980's, Jerry Lewis's Big Mouth in 1967 etc. In 2007 the Kentucky Fried Chicken name was resurrected and started featuring on its Buckets. It can easily be assumed; by the way KFC has moved on throughout its lifetime since 50's, that it is one of the Best Fast Food restaurants in the world. Its exclusive and excessive advertising campaigns have proven fruitful in its strategic growth and have given it a competitive edge over its rivals. Although KFC smaller in size than Mc. Donald's, its capacity to produce enormous revenues cannot be overshadowed. It has its own success stories to tell, and the fact that KFC just keeps on getting bigger and bigger. It is so rightly said by the KFC corporation that its Chicken is "Finger Lickin' Good" (before 2006), "Follow your taste" (2006-2010) and "So Good" (2010-Present).