case study-mcdonalds

McDonaldsBy: Tara ArdLauren BakerBrad KruezingerPayal PatelJessica Rivero

Presentation Overview•Assessing the Business Environment• Company• Industry

• Franchise Industry• Suppliers/Customers• Bargaining Power

• Economy• Boom• Recession

•Read Study the Financial Statements & Footnotes• Audit Report• Significant Transactions

•Assessing Earnings Quality• Comparing the numbers to

management’s biases•Analyzing the Financial Statements• Ratios

•Predicting Future Earnings/Cash Flows• Future Earnings• Future Cash Flows• Estimates of Stock price

• Over/under priced

• Began in 1940 by brothers in San Bernardino, California• In 1948 the “Speedee Service System”• In 1955 McDonalds was sold to Ray Kroc• Public Company• Mainly a franchiser

– Over 31,000 locations• 25,465 are franchised and the rest are company owned

• Locations– 119 countries

• Customer Base– Serve 47 million daily

• Employee Base– Currently employ 1.5 million people– 1 in 8 persons have worked at McDonalds

Company History & Facts

McDonald’s Business ModelRevenue

Rent

Logo

Sales

Investments

• According to Hoovers– Main Competitors are:• Burger King• Subway• Yum! (a.k.a. Taco Bell)

McDonald’s Competitors

• New Competitors emerging out of McDonald’s new McCafe line:– Starbucks– Dunkin Donuts

McDonald’s Competitors

McDonald’s Globalization

McDonald’s Audit Report•2008 Financial Statements:• Report of Independent Registered

Public Accounting Firm-Ernst & Young

• Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting-Ernst & Young

Significant Transactions• Discontinued Operations

– Boston Market– Prêt a Manger– Chipotle Mexican Grill

• Other– LATAM Transaction

Assessing Financial Statements & Footnotes

•Net Income 2007• $2,395.1 million

•Operating Income 2007• $3,879 million

•Total Shareholder’s Equity 2007• $13,382 million

•Net Income 2008• $4,313.2 million

•Operating Income 2008• $6,442.9 million

•Total Shareholder’s Equity 2008• $15,729.8 million

•Property, Plant, & Equipment are recorded at cost and are depreciated using the straight-line method• Buildings up to 40 years• Equipment range 3 to 12 years

•Goodwill• Comes from the purchases of restaurants from franchisees

•Cash Equivalents• Short-term, highly liquid investments with an original maturity of 90 days or less

McDonald’s FootnotesContinued

•Contingencies• Policy is to determine likelihood

of any outcomes or judgments and the probable loss• After careful analysis any

needed accruals are made• Currently-McDonald’s

does not believe that any current matter will have a material affect on their financial statements

•Inventory• McDonald’s does not disclose

which inventory cash flow assumption they use because the inventory reported on the balance sheet does not have a material impact

• Management’s Letter• December 31, 2008 Facts

Earnings Quality

• Profitability Ratios– Return on Equity• December 31, 2008=32.23

– Return on Assets• December 31, 2008=15.15

– Return on Sales• December 31, 2008=0.20

Analyzing Financial Statements

• Leverage Ratios– Common Equity Leverage• December 31, 2008=0.92

– Capital Structure Leverage• December 31, 2008=2.02

– Debt/Equity Ratio• December 31, 2008=1.02

– Long-term Debt Ratio• December 31, 2008=0.36

Analyzing Financial Statements

• Solvency Ratios– Current Ratio

• December 31, 2008=1.39– Quick Ratio

• December 31, 2008=1.20– Interest Coverage

• December 31, 2008=11.88– Accounts Payable Turnover

• December 31, 2008=27.51

Analyzing Financial Statements

• Asset Turnover Ratios– Receivables Turnover• December 31, 2008=37.8

– Inventory Turnover• December 31, 2008=115.89

– Fixed Assets Turnover• December 31, 2008=1.14

– Total Asset Turnover• December 31, 2008=0.94

Analyzing Financial Statements

• Other Ratios– Earnings per Share

• December 31, 2008=3.77– Price/Earnings Ratio

• December 31, 2008=16.5– Dividend Yield Ratio

• December 31, 2008=0.026– Stock Price Return

• December 31, 2008=0.08

Analyzing Financial Statements

• Future Earnings-• Cash Flows-• Stock over/under priced-

Predicting Future EarningsAnd Cash Flows

• McDonalds is strong enough to withstand recession and still payout dividends and create revenue

• McDonalds will continue to grow worldwide

• Etc.

Overall Conclusion ofAnalysis