Mcdonalds Financial Analysis

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This paper seeks to analyze the financial statements of McDonald’s Corporation for the years 2005, 2006 and 2007 by computing some required measures and to make any conclusion from the computed measures.

2.1 The following measures are determined for Mc Donald’s Corporation.

2.2 The conclusions that can be drawn from the above measures are stated categorized in terms of liquidity, efficiency, solvency and profitability.

2.2.1 Liquidity

Mcdonalds Ratios

Liquidity connotes being able to meet a company’s currently maturing obligations. It is measured using the current ratio and the quick asset ratio. Current ratio comes from dividing current assets to current liabilities while quick assets ratio is almost the same except that the inventory and prepaid expenses are excluded from the current assets to have a new numerator while the denominator is the same (Meigs and Meigs, 1995).

Quick assets therefore normally contain cash, marketable securities and accounts receivable and the use of quick asset ratio is very much relevant for one intending to have higher form of measuring liquidity.

As applied to the McDonald’s Corporation, its current ratios are 0.80, 1.76, and 1.51 for the years 2007, 2006 and 2005 respectively.  A fluctuation in current ratios gets revealed by increasing first then decreasing afterwards. On the other hand, its quick asset ratios showed declining trend for two years since the current  its quick ratio of 1.23 in 2005 deteriorated for the following years with 0.

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99 in 2006 and further to 0.67 in 2007.  The fact that both ratios reached below 1.0 in 2007 indicates noticeable capacity to service its current obligations that may make the company bankrupt.

2.2.2. Efficiency

Accounts receivable turnover fluctuated a little with the increase in 2006 from 2005 to be almost restored by a slightly low decline in 2007.  Thus number of day’s receivables resulted within the narrow range of 24 to 26 days. Inventory turnover improved for the latest two years, thus the number of days inventory shortened from 2005 to 2006 and further in 2007.  This means that as far a collection is concerned there was just a slight improvement in 2007 based from 2005 level.  Faster collection period coincided with the faster movement of inventory. Hence the company exhibited better efficiency for the latter years compared with 2005 data as base.  The finding for efficiency appears to go against declined liquidity in 2007.

2.2.3 Solvency

Solvency for financial stability tells how McDonald’s could keep its long-term capacity to keep up it financial condition or health (Helfert, 1994). Being measured by the ratio of liabilities to stockholders equity or debt to equity ratio, solvency should comfort investors that the company will survive no the short term as measure in liquidity but it must be able to recover long term investments over period of more years to produce the needed returns. Its debt to equity ratios of o0.92, 0.87 and 0.98 for the years 2007, 2006 and 2005 respectively indeed indicate favorable financial condition since they are quite low. This ratio of below 1.0  for the three years under review means that the value the company’s investment per year is even greater than by what it borrows The ratio showed improvement in 2006 and then deteriorated a little in 2007 but since all the ratio are below 1.0, the company may still be considered solvent or possessing long-term health.

It good solvency also proves f good capital structure for McDonalds Corporation and further indication of capacity to provide for good dividends or capacity to resort to additional borrowings if there are plans for expansion of the company in the future. It can be deduced further that it long term health for the last three years could assure doubts that may be produced by lower than 1.0 liquidity and given the improvement in efficiency; the company still poses a good future risk to invest with.

2.2.4. Profitability

The rate earned on average total assets or returns on assets (ROA) for McDonalds Corporation show increased from 9% in 2005 to 12% in 2006 but was not maintained when it declined to 8% in 2007. A slight deterioration in profitability level from 2005 level is shown ad the same is confirmed by the behavior of rate earned on average stockholder’s equity or return on equity which started at 12%, increased to 15% and then down to 10%.  Despite the lower result of profitability in 2007 compared with 2005 level, the range of 10% to 15% return on equity still falls within the average earnings of investors in a healthy industry. This would mean that for every US$100 investment, the investors expect returns of about 10 to 15 US dollars. Using as basis the present situation in the economy and the interest rate by the US Federal Reserve Bank the rates of 10 to 15% are still profitable enough for the company.

The percentages of net income to sales or the net margins of the company for the years 2007, 2006 and 2005are reflected at 11%, 17% and 14% respectively.  Like the other ratios or measure of profitability, an increase in 2006 was evident but this was followed by a decline in 2007.  If one compares these rates with the ratios similar companies in the industry that of McDonald could still be considered high since if translates in simple terms, the company earns about 11 to 17 dollars for every 100 dollar revenues generated.

The profitability ratios such as return to equity, return on assets and net profit margin have the capacity to show historical profitability but investors could use them for their estimates of the future.

3. Conclusion

To sum up all the calculations together McDonalds Corporation has been liquid for the years 2005 and 2006 but a noted declined is reflected in 2007 but it was able to keep its debt to equity ratio of less than 1.0 for the last three years. Its shown efficiency improvement shows better management for the company but the same was not enough to prevent the decline of profitability in 2007. However, the decline in profitability could be considered not much to cause to company to be riskier than average.

References:

Helfert, E.  (1994), Techniques for Financial Analysis, IRWIN, Sydney, Australia

Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, New York, USA