Introduction to the Company

McDonald's Corporation is one of the leading multinational companies that has over 30 thousand locations in 100 countries (Our Company, n. d.). McDonald's history started in 1940 with a small Bar-B-Q restaurant in California. Today, its shares are traded at USD 120 at the New York Stock Exchange that provides the market capitalization of the corporation of USD 99.65 billion (McDonalds Corp, n. d.). The main business of the company represents franchised restaurants that provide locally adjusted fast food menus. Through its global network of franchisees, McDonalds employs over 420 thousand people and accounts for both 7.2 % of the informal eating out sales worldwide and 3.6 % of all the restaurant industry around the globe. Further, the paper provides the analysis of the corporations financial position in terms of liquidity, profitability, financial leverage and activity efficiency. The research paper concludes with the overall assessment of the McDonalds financial performance, financial health and the detailed discussion of the reasons to invest in this company.

Liquidity Analysis

Calculation of the companys liquidity measures is presented in table 1 below.

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Table 1

Liquidity

Ratio

Formula

2015

2014

Working capital

Current assets - Current liabilities

9,643.0 - 2,950.4 = 6,692.6

4,185.5 - 2,747.9 = 1,437.6

Current ratio

Current assets / Current liabilities

9,643.0 / 2,950.4 = 3.27

4,185.5 / 2,747.9 = 1.52

Acid test

(Current assets - Inventory) / Current liabilities

(9,643.0 - 100.1) / 2,950.4 = 3.23

(4,185.5 - 110.0) / 2,747.9 = 1.48

Sources: (Brigham & Ehrhardt, 2014); (McDonalds Corporation, 2016).

In fact, overall liquidity position of the corporation is rather strong. McDonalds has high and positive working capital on its balance available for regular business operations. Moreover, the current ratio of the company indicates that the company was able to cover all its short-term liabilities by more than 3 times in 2015, which was higher than the industrys average. The ratio has significantly improved from 1.5 times in 2014. Actually, inventory represents a minor part of the firms current assets. Respectively, the corporation is able to cover current liabilities by more than 3 times just with its monetary assets; thus, there is no need to sell off inventory quickly and, probably, at discounted prices. The ratio was also higher than the industrys average of 1.6 in 2015, but it was much lower in 2014.

Working capital of an entity relates to the remaining part of current assets after the deduction of all its short-term liabilities (Epstein, 2014). Consequently, the firms with positive working capital have readily available funds to finance everyday operations. Besides, positive working capital predicts that the company will have current ratio higher than 1.0, as its measures the relationship of total current assets to short-term liabilities.

Profitability Analysis

Profitability ratios of McDonalds Corporation are summarized in table 2 below.

Table 2

Profitability

Ratio

Formula

2015

2014

Net profit margin

Net profit / Sales revenue

4,529.3 / 16,488.3 = 27.47 %

4,757.8 / 18,169.3 = 26.19 %

Total assets turnover

Sales revenue / Average total assets

16,488.3 / ((37,938.7 + 34,227.4) / 2) = 0.46

18,169.3 / ((34,227.4 + 36,626.3) / 2) = 0.51

Return on investment (ROI)

Net profit margin * Total assets turnover

27.47 % * 0.46 = 12.64 %

26.19 % * 0.51 = 13.36 %

Return on equity (ROE)

Net profit / Average total shareholders equity

4,529.3 / ((7,087.9 + 12,853.4) / 2) = 45.43 %

4,757.8 / ((12,853.4 + 16,009.7) / 2) = 32.97 %

Price / earnings ratio

Market price per share / Basic EPS

118.14 / 4.82 = 24.51

93.70 / 4.85 = 19.32

Dividend payout ratio

Annual dividend per share / Basic EPS

3.44 / 4.82 = 0.71

3.28 / 4.85 = 0.68

Dividend yield ratio

Annual dividend per share / Market price per share

3.44 / 118.14 = 2.91 %

3.28 / 93.70 = 3.50 %

Sources: (Brigham & Ehrhardt, 2014); (McDonalds Corporation, 2016); (McDonalds Corporation, 2015); (McDonalds Corp, n. d.).

Although the corporation has generated very high net profit margin that is almost three times higher than the industry average, its total assets turnover is also three times lower, when compared to other companies in the same industry, as McDonalds has generated only about 50 cents on each dollar of its total assets. The corporation maintained net property, plant and equipment of over 23 billion US Dollars and had more than 7.6 billion US Dollars in cash in 2015. Respectively, the return on investment in both 2014 and 2015 was slightly above the industry average of 15 %. At the same time, large shares buy out in 2015 resulted in extremely high return on equity ratio that amounted to 45 % in 2015 when compared to industry average return on equity of only 20 %. As a result of strong profitability position, the corporation enjoys high price to earnings ratio that provides the positive investor perception towards the company. McDonalds price to earnings ratio amounted to 24.5 in 2015 compared to the average in the restaurants industry of 14.0. Similarly, the investors praise the corporation for high proportion of dividend payout. Actually, the McDonald's dividend payout was near 70 % in the past two years even though other companies in the industry paid out only 40 % of their net profits in the form of dividends.

Due to high market price of a company, its dividend yield is still low: 2.9 % in 2015 and 3.5 % in 2014. As the shares of average companies in the industry earn 5 % dividend yield, the investors of McDonalds should not be satisfied with the corporations dividend yield. However, low dividend yield is largely compensated by capital gains with strong growth of the companys market price per share. Higher return on investment would naturally improve dividend yield ratio if the company generates even more net profit in the future periods. Still, the projections are not favorable for McDonalds, as its net profit has significantly decreased over the past three years from 5.6 billion US Dollars in 2013 to 4.5 billion US Dollars in 2015.

Financial Leverage

Financial leverage ratios are provided in table 3 below.

Table 3

Financial Leverage

Ratio

Formula

2015

2014

Debt ratio

Total liabilities / Total assets

30,850.8 / 37,938.7 = 0.81

21,374.0 / 34,227.4 = 0.62

Debt to equity ratio

Total liabilities / Total shareholders equity

30,850.8 / 7,087.9 = 4.35

21,374.0 / 12,853.4 = 1.66

Sources: (Brigham & Ehrhardt, 2014); (McDonalds Corporation, 2016).

 
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The corporation utilizes high financial leverage that makes its solvency position risky. The company financed two thirds of its total assets with debt in 2014 and over 80 % in 2015. Moreover, financial leverage of the company increased from 1.66 in 2014 to 4.35 in 2015 due to large stocks buy out. In fact, a riskier capital structure of a firm is directly related to higher return on equity (Warren, Reeve, & Duchac, 2014). Consequently, it is expected that the industry average has lower financial leverage and total debt ratio with lower return on equity. In this sense, the return on investment ratio is more revealing, as it incorporates the influence of debt financing on the profitability of a firm. Respectively, a higher degree of financial leverage would result in higher percentage difference between the return on investment and the return on equity ratios.

Activity Measures

Activity measures are presented in table 4 below.

Table 4

Activity Measures

Ratio

Formula

2015

2014

Accounts receivable turnover

Sales revenue / Average accounts receivable

16,488.3 / ((1,298.7 + 1,214.4) / 2) = 13.12

18,169.3 / ((1,214.4 + 1,319.8) / 2) = 14.34

Days sales in accounts receivable

365 / accounts receivable turnover

365 / 13.12 = 27.82

365 / 14.34 = 25.45

Inventory turnover

Cost of sales / Average inventory

8,924.7 / ((100.1 + 110.0) / 2) = 84.96

9,272.0 / ((110.0 + 123.7) / 2) = 79.35

Days sales in inventory

365 / inventory turnover

365 / 84.96 = 4.30

365 / 79.35 = 4.60

Sources: (Brigham & Ehrhardt, 2014); (McDonalds Corporation, 2016); (McDonalds Corporation, 2015).

What is important, McDonalds Corporation has strong activity measures. The receivables on credit sales are turned into cash within 25-27 days that is less than one month. However, the ratio slightly deteriorated in 2015, as the accounts receivable turnover figure was lower in 2014. At the same time, the inventory turnover ratio has improved from 79 to 85 times. Consequently, the companys inventories turn into sales every 4.3 days that is a very positive indicator. In fact, restaurant industry on average is expected to have similar accounts receivable turnover ratio, as most sales in the industry are paid in cash. Still, the inventory turnover at McDonalds can be higher than the industry average, as it represents a fast food company with a high daily turnover and a very low inventory balance. On overall, both customer credit and inventory policies at McDonalds are believed to be rather effective, as they provide the corporation with strong activity efficiency. Accompanied by strong liquidity position, the inventory policy of the corporation provides it with positive outlook on asset quality and efficiency of operations.

Overall Assessment and Conclusions

Such shares as MCD (McDonalds Corporation) are usually highly recommended to buy and hold. The company represents one of the market leaders and is believed to grow further as long as people eat fast food. Naturally, its business is influenced by the competitors pressure and raw materials pricing. Still, most corporations of such a size have high market power and the ability to generate positive cash flows and profits irrespectively of the overall state of the economy and customer preferences. The following are the most important reasons to invest in McDonalds nowadays: high dividends; recent stock buy outs; high liquidity position; growing price per share; and high efficiency of operations that result in the ability to generate cash and sales revenues.

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In fact, the level of dividends payout is especially important for the investors, who aim to hold the shares of the company. McDonalds provides more than 70 % of dividends payout ratio that results in a very significant amount of cash proceeds along with the billions of net profit. Respectively, the investors of the corporation have beneficial position of obtaining high annual volume of cash dividends, thus, having notable return on their equity investment in a monetary form.

Recent stock buyouts represent another strongly positive sign for the current investors of McDonalds. Stock buyout resulted in the increase of the companys share quote and, thus, in higher capital gains for the investors. Moreover, a lower number of stocks outstanding and trading in the market provides the shareholders of the corporation with both higher voting rights per stock and a higher return of investment and return on equity ratios.

High liquidity position indicates safety of the individual investor, when buying stocks of McDonalds corporation. Obviously, the company with high liquidity position will be able to provide cash dividends on consistent basis and will not substitute them by stock options or other non-cash instruments. Besides, strong liquidity position ensures the ability of the company to fulfill its own obligations and, thus, remain stable on the market with favored terms from both the suppliers and creditors. Such a favorable situation provides both elimination of the bankruptcy risk and obtaining higher profit margins for the observable future.

In addition, the growing price per share of MCD is another important sign to invest in McDonalds with available $ 5,000 funds. With the assumption of the existence of efficient markets at least in the stock exchange market, the modern market has a positive perception towards McDonalds performance that allows its shares to increase in price. Respectively, an individual investor is better to believe the overall market assessment and buy shares that consistently grow in quotes.

Moreover, high efficiency of operations is an important issue, when deciding on the investment in a company. With very efficient operations achieved through adequate customer credit and inventory management policies, the company is able to maintain sustainable sales and generate positive cash flows from operating activities. As the amount of cash flow from operating activities is normally used for supporting daily operations and paying dividends to the shareholders, the investors are usually highly concerned about the operating cash flows and activity measures, as their predictors.

To conclude, it is highly recommended to invest in McDonalds shares today. Such an investment opportunity is especially interesting for the long-term purchases of shares, as McDonald's provides both stable dividends and capital gains to its shareholders. The safety of investing money in MCD shares is supported by strong liquidity and asset efficiency measures of the corporation over the past two years.

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