Company Description
McDonald’s Corporation operates and franchises fast food restaurants that serve locally relevant food and beverages. The company’s franchises are owned and operated under a conventional franchise, developmental license, or affiliation. The company had 40,031 restaurants at the end of 2021, composed of 93% franchise restaurants. More than 37% of McDonald’s stores are located in the US. In 2021, France and Germany had the most McDonald’s restaurants of all European countries.
Products and Services
The McDonald’s menu comprises hamburgers, cheeseburgers, chicken sandwiches, burritos, chicken nuggets, shakes, ice cream, and apple turnovers. The menu also has breakfast items such as biscuits, sausage, bacon, and eggs, along with brown patties and hotcakes. Beverage products include McCafe beverages and Dunkin’ Donuts. The company’s services include Free Wi-Fi, McDonald’s Gift Card, McDelivery, and Mobile Order & Pay.
Industry and Customer Base
McDonald’s operates in the food services industry. Its target market is located globally in 120 countries in urban and rural areas and covers a broad age group, from kids to senior citizens. McDonald’s target age group is consumers from 6 to 70 years old, both male and female. They are loyal customers, visiting a McDonald’s restaurant an average of 44 times a year. McDonald’s target audience is mainly lower to middle-class consumers interested in fast, cheap, and convenient food. Mostly working-class people with an annual household income of $48,000 to $65,000.
Major competitors
McDonald’s competes with international, national, regional, and local retailers of traditional, fast casual, and other food service competitors. The company has many established and successful competitors. Restaurants Brand International and Wendy’s are McDonald’s most prominent competitors. Jack in the Box, Starbucks, and Dairy Queen are a few others that have similar menu items. McDonald’s also has to compete with other fast-food restaurants such as Pizza Hut, Zaxby’s, Popeye’s, Kentucky Fried Chicken, and Subway. Outside of the US, popular local brands such as Hungry Jacks (Australia), Sbarro (Russia), and Pret A Manger (UK).
Income
In 2021, McDonald’s earned core revenue from company-operated restaurants and franchise businesses amounting to $9.8 billion and $13 billion, respectively. The company generated transitory income from fees paid by franchisees amounting to $350 million. McDonald’s generated high-quality earnings given the net cash provided by operations was $9 billion while the net income was $7.55 billion, leading to a value of 1.21, which is greater than 1.
Cash Provided by Operating Activities
Cash provided by operating activities represents the money derived and used in the everyday activities of a company. In 2021, McDonald’s generated a net income of $7.55 billion from normal operations compared to $4.7 billion in 2020. Depreciation and amortization represented the major component of operating activities under adjustments for charges and credits. It earned the company $1.9 billion in the year compared to $1.8 billion in 2020. The cash provided by operating activities amounted to $9.1 billion in 2021 compared to $6.3 billion in 2020. The amount went up by $2.8 billion or 46 percent.
Cash Used in Investing Activities
McDonald’s continues to spend heavily on technology and modernization, order delivery, and digital engagement for better service delivery to customers. In 2021, McDonald’s incurred $2.17 billion in improving existing and opening new restaurants compared to $1.55 billion in 2020. A larger portion of the money, $1.2 billion, was spent on improving existing restaurants, while $829 million was spent on opening new restaurants. The expense of new restaurants focused on acquiring land, buildings, equipment, construction, and designs. The amount spent in 2021 represents an increase of $400 million from $1.6 billion in 2020. In addition, McDonald’s incurred $374 million in 2021 for purchasing restaurants and other businesses, while it earned $196 million from the sale of restaurant businesses and $106 million from the sale of property.
Cash Used for Financing Activities
Financing activities represent the movement and sources of funds used by a company. McDonald’s cash flow statement for 2021 indicates that the major financing activity for the year involved payments of ordinary stock dividends, which amounted to $3,918.6 million compared to $3,752.9 million incurred in 2020. The company has maintained a policy of dividend payments for 46 consecutive years, and the amount spent has constantly been increasing. The company paid a dividend of $5.25 per share for 2021. The second major financing activity involved the repayment of finances, where the company incurred $2,240 million, representing a slight decline from the $2,411.7 spent in 2020. Additionally, the company acquired $1,154.4 million in new financing for 2021, a considerable drop from the $5,543 million borrowed in 2020. The company incurred $5.6 billion in financing activities in 2021, representing a $3.3 billion increase from 2020. The $1.1 billion repaying debt caused a significant increase.
Horizontal Analysis
Horizontal analysis compares specific financial items over different accounting periods. Horizontal analysis of McDonald’s 2021 and 2020 balance sheets showed a significant increase in total shareholders’ equity, cash, and cash equivalents, and accounts payable. The amounts changed by $3.2 billion, $1.26 billion, and $265 million, representing 41.2%, 36.5%, and 35.8% change, respectively. A notable decline was observed in income taxes and total current liabilities. The figures decline by $380 million and $2.2 billion, representing 51.3% and 35%, respectively.
Common Size Analysis
Common size analysis of the statements of accounts involves comparing the separate components of accounts to one particular component in the same accounting period. The common size analysis was performed on McDonald’s balance sheet and income statement. In the balance sheet, specific items were evaluated against the total assets that are equal to the total liabilities at shareholders equity, representing 100%. The company’s total assets comprised property and equipment at 77.8% in 2021 compared to 78.8% in 2020. In 2021, retained earnings and long-term debt comprised the major components of McDonald’s total liabilities and shareholders’ equity at 106.8% and 66.2%, respectively. In the income statement, individual components were evaluated based on the total revenues, of which sales by company-operated restaurants contributed 42.1%, while revenues from franchised restaurants were 56.4%. In addition, total operating costs and expenses accounted for 55.4% of the total revenue, while operating income was 44.6%.
Ratio Analysis: Liquidity
Liquidity ratios mainly assess the ability of a company to honor its short-term debt obligations. The primary liquidity ratios are the current ratio and the quick ratio. In 2021, McDonald’s current and quick ratios were 1.78 and 1.64, respectively. The company outperformed its peers and industry current and quick ratios. Therefore, McDonald’s reported a more robust capability to pay its short-term debts compared to peers and industry performance.
Ratio Analysis: Solvency / Leverage
Leverage ratios are another measure of the company’s ability to honor its debt obligations. The common ratios include debt to total assets, debt equity, long-term debt to equity, and times interest earned. McDonald’s outperformed its peers and industry on debt to total assets and times interest earned while it performed dismally on debt-equity and long-term debt to equity.
Ratio Analysis: Efficiency
Efficiency or turnover ratios measure how well a company employs its assets or investments. Turnover is mainly calculated on inventory, fixed assets, total assets, and accounts receivable. McDonald’s posted strong efficiency in 2021 by outperforming its peers on inventory and total asset turnover. It performed worst on fixed asset turnover and ranked second on accounts receivable turnover and average collections after Restaurant Brands International.
Ratio Analysis: Profitability
Profitability ratios review earnings performance relative to the investment or revenue. The ratios assess the management’s capacity and the company’s actions in bringing in returns. The ratios considered include gross profit margin, operating profit margin, net profit margin, return on assets, return on stockholder’s equity, and earnings per share. In 2021, McDonald’s outperformed its peers and the industry on net profit margin and earnings per share. It performed below average industry on return on total assets but outperformed its peers. It posted the worst performance on the return of stockholder’s equity. The company had a negative operating profit margin below the industry average and Wendy’s performance.
Ratio Analysis: Market Value
Market value ratios are measures used to assess a firm’s overall market price. In 2021, the company had a book value per share of $-6.18. The price book ratio, price to earnings, price to operating profit, and price to sales were $-42.44, $24.25, $17.59, and $7.85, respectively. The market value of the company indicates that it is undervalued by the book value per share and price-book ratio.
Market Valuation
Market capitalization is represented by the total value of a company’s shareholding at the prevailing market prices. McDonald’s outstanding shares in 2021 were 752 million, valued at $262.19 per share. The total valuation was $197 billion. It is among the top 100 companies in the world for market capitalization. It is the only fast-food company in the top 100 list.
McDonald’s Strengths
McDonald’s has a global presence across 120 countries based on the success of the franchise and service models, providing a broad market. It has developed a strong competitiveness in 3Ds (Digital, Delivery, and Drive Thru). McDonald’s has a Famous Orders platform that adopts specific cultures. It is committed to chicken and beef delivery, which is at the core of the company’s operations. McDonald’s owns valuable intellectual property rights, trademarks, patents, copyrights, and business secrets. The company is well-known globally due to its strong brand.
McDonald’s Weaknesses
McDonald’s is exposed to laws and regulations across different jurisdictions that impact the business, particularly the revenues. Foreign exchange and interest rate variations across different markets affect the company’s revenue. The company faces the challenge of offering a uniform menu across different geographic and societal variations impacting customer preferences and tastes. The company’s vast supply network can be affected by global disruptions and pandemics, such as COVID-19. The supply chain makes it difficult to monitor quality and ensure food safety.
Future Prospects
McDonald’s seeks to continue expanding its restaurant business with projected revenue growth of 1.5%. Expenses are projected to rise by about 2.2% due to inflation, higher payroll, and increased technology demands, affecting cash flow. The projections are extrapolated to 2.5% based on the 5% growth in sales and other revenue in 2023 and 2024. The plans to increase its capital expenditures for 2022, with a projected increase of 10% in 2022 and 2% each year afterward. Other spending will increase by 3.5% in the coming years, with long-term debt expected to increase by 5%. Additional debt is expected to go up by 3.5%.
Business Biblical Worldview
Biblical worldview dictates society do what is right and not become accustomed to worldly comforts and temptations (Holy Bible). The world is continuously changing and producing a variety of reactions from people throughout. McDonald’s constantly adjusts its operations to meet the global demand under the applicable laws. The company is devoted to sustainable business operations by monitoring environmental regulations and stakeholder expectations. McDonald’s has developed codes of conduct to support ethical business practices. It has set quality and food safety standards to guarantee standardized business operations.
References
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Holy Bible: Containing the Old and New Testaments: King James Version. (n.d.). American Bible Society.
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