McDonalds Corporation (Essay Sample)

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McDonalds Corporation
Financial statements are a means of communication to the users and hence the information contained communicates well if interpreted. The figures in the financial statement convey a message, but more insight may be attained by use of ratio analysis. By ratio analysis, the trend of the company is traced, and the results compared to define the Company’s performance. Therefore, this paper presents a three-years ratio analysis of the McDonalds Corporation to provide a personal opinion regarding the performance of the company as a potential investment opportunity.
Ratios are divided into different sets. These include the following.
Profitability ratios
ROCE( Return on capital employed) =
Profit before interest and taxation x 100%
Capital employed
This ratio indicates the profit relative to the size of the business. In other words, this ratio tells the users on how the company is using its resources to generate profit. The higher the ratio the better it is for the business. From the 2010, 2011, and 2012 financial/annual reports of McDonalds Corporation, the following ratios are computed.
2012: 8605 2011: 8530
35386 - 13633 = 0.396= 39.6% 32990 – 12500 = 0.416=41.6%
2010: 7473
31975 – 11505 = 0.365=36.5%
From the calculation, the ROCE decreased in 2012 from its rate reported in 2011. However, this does not mean or imply a bad indicator but may be caused by the evident increase of selling, general, and administrative expenses of the Company (McDonald’s Corporation 16).
Nonetheless, a higher increase is noted between year the 2010 and the year 2011.
Profit margin =
Profit before taxation and interest x 100%
Turnover
Drawing from the annual reports of 2010, 2011, and 2012, the following computations were determined.
2012: $8605 2011: $8530
$27567 = 0.312=31.2% $27006 = 0.315 =31.5%
2010: $7473
$24074 = 0.310 =31%
This ratio explains the profit generated from the sales. Despite a recorded sales increase in the year 2012, the ratio decreases, and this provides a clear indicator that the expenses may have increased thus weakening the ratio. The 2012 McDonalds annual report outlines the total operating costs together with the expenses for 2010, 2011, and 2012 as $16,601.5 million, $18, 476.3 million, and $18,962.4 million respectively (McDonald’s Corporation 28).
Return on equity =
Profit after tax x 100%
Equity shareholders’ funds
Using values from the McDonald’s 2010, 2011, and 2012 annual reports, the following ratios for return on equity are computed.
2012: $5465 2011: $5503
$15294 = 0.357 =35.7% $14390 = 0.382= 38.2%
2010: $4946
$14634 = 0.338 =33.8%
This ratio shows the profit generated in relation to equity, and it shows how efficiently equity is used to make a profit. This is a very important ratio for investors. From the analysis, the ratio seems to have decreased, and it is a point of concern. However, the Bloomberg Magazine reports the 2013 value of 38.5% an indication of an improvement in the performance of the company (Bloomberg L. P).
Liquidity Ratios
These are ratios that show how the working capital is managed by a company. The rations additionally indicate whether the company is liquid to deal with the short-term needs of the business.
Current ratio =
The Current Assets (divide by)
The Current Liabilities
This is the ratio or fraction that measures the adequacy of liquid cash to cover up the short term liabilities. In other words, it outlines how well the company is able to settle its bills as they fall due. A current ratio of 1.5 is a benchmark for a company to maintain its creditworthiness, though this depends with the industry. The computed values of these ratios for McDonald’s Corporation are as outlined.
2012: $4922.1 2011: $4403.0
$3403.1 = 1.45 $3509.2 = 1.25
2010: $4368.5 = 1.48
$2947.7
The ratio increase is an indicator that the company is quite liquid and thus can be able to settle its daily bills with ease. However, from the calculations, the liquidity of McDonald’s Corporation in 2011 was low, but in 2012, it resumed to a good level.
Receivables days =
Receivables x 365 days
Sales
2012: 1375.1 x 365 days 2011: 1334.7 x 365 days
27567 =18 days 27006 =18days
2010: 1179.1 x 365 days
24074.6 =18 days
The values indicate that the company has been able to maintain its receivable days. The company’s credit policy will most likely be within 18 days.
Net working capital ratio =
Current assets – current liabilities
2012: 35386 – 13633 = $21753 Million 2011: 32990 – 12500 = $20490 Million
2010: 31975 – 11505 = $20400 Million
The increase in the net working capital upwards from 2010 to 2012 is a clear indication or sign that the company’s performance is commendable.
Market value ratios
Earnings per share (EPS) =
Profit distributable to the ordinary shareholders
The weighted average quantity or number of shares
This is a fundamental ratio that is used by most companies for analysis and comparison to measure the company’s value for money. The diluted EPS for McDonald’s in the year 2012 was $5.36 while that of was $5.27 and 2010 reported as $4.58. An increase is notable, which is a good indication that the company has increased its value for money.
Gearing / leverage ratios
These ratios give the relationships between the shareholders’ funds and the fixed or long term debts.
Debt / equity ratio =
Total liabilities x 100%
Shareholders fund
This ratio is used to compute the gearing of a company. A company is regarded as being highly geared if the total liabilities are higher than the shareholders’ funds. In case a company is fully funded by the equity shares then the gearing of the company/firm is supposed to be nil.
2012: 13633 X 100% 2011: 12500 X 100% = 87%
15293.6 = 89% 14390.2
2010: 11505 X 100% = 79%
14634
McDonalds gearing is very efficient and commendable.
Dividend yield =
Dividends per share x 100%
Market price per share
2012: $2.87 X 100% = 3.25 2011: $2.53 X 100 = 2.52
$88.21 $100.33
2010: $2.26 x 100% = 2.94
$76.76

This ratio is very vital to a potential investor because it shows the relationship between the gross dividend and the market price (Bloomberg L. P). The computations show that the ratio decreased in 2011, but increased in 2012. Out of the three years, the year 2012 is seen as the best year for the company.
Dividends cover =
Earnings per share
The dividends per share
This is the ratio that shows the relationship be...