Question

Based on the company Mc Donalds

Describe the position of the company as of March of this year (Meaning tell me the Balance sheet or Income statement position) and show how they reflect the activity and financial condition of the company based on the Cash Flow Statement Explain the securities markets the company is traded with. Identify the company's strengths, weaknesses, opportunities, and threats of information technology for businesses.

Answer 1

The Company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages sold at various price points in more than 100 countries. McDonald’s global system is comprised of both Company-owned and franchised restaurants.

McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The business relationship between McDonald’s and its independent franchisees is of fundamental importance to overall performance and to the McDonald’s Brand.

This business relationship is supported by an agreement that requires adherence to standards and policies essential to protecting our brand.

The Company is primarily a franchisor, with more than 90% of McDonald's restaurants currently owned and operated by independent franchisees.

Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources.

The Company’s typical franchise term is 20 years. The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to ensure consistency and high quality at all McDonald’s restaurants.

Conventional franchisees contribute to the Company’s revenue through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise.

Revenue Growth: McDonald’s ended 2015 with $25.4 billion in revenues. As of 2019, the revenue flow decreased to approximately $21 billion. Further, this decrease has been steady over the last five years. This indicates that the organization is losing market share to competitors. Also, this may indicate that consumer trends are shifting away from unhealthy foods to more healthy choices. To mitigate continued revenue losses, the firm needs to reevaluate their target market needs and better align its menu selection with those needs.

Cost of Goods Sold: McDonald’s cost of goods, as compared to revenues, was about 22% in 2015, in the next several years, their cost of goods, as a percentage of revenues, would continually decline until it reached a 14.1% ratio in 2019. This shows that the organization is taking action to improve its gross profit margin. Changes may have included better-negotiating strategies with vendors. Also, the company may be eliminating the middleman and their supply chain by developing more supply stream activities in-house. For example, the firm may be purchasing warehouses or even farms to ensure low cost for their products.

Cash: McDonald’s cash position has fallen from $7.6 billion in $2015 to $898 million in 2019. There are a few possible reasons for the reduction in the cash position. First, the company may be exploiting its ability to generate cash flows from its restaurants on a continuous basis. These cash flows will enable the firm to pay its debt as it comes due. From this, having a lower cash balance may be a smart strategic move. A second reason for the reduced cash position could be that the firm is actually running out of cash because of their costs and lack of revenue growth. If I were a betting man, I would say their cash position reduction was more due to a strategic plan as compared to liquidity issues.

Accounts Receivable: In 2015, McDonald’s had an Accounts Receivable of $1.3 billion. Or 5.1% of sales. In the next several years, their Accounts Receivable would expand to $2.2 billion, or 10.6% of sales. One possible reason for the significant increase in accounts receivable is that the firm is using more franchises as compared to opening corporate restaurants. In doing this, the organization may need to wait for royalty payments and restaurant supply payments from their franchisees.

McDonald’s Current Ratio

Current Ratio: McDonald’s current ratio ended in 2015 at 1.0. In the realm of finance, a 1.0 current ratio is the optimal position to have. This shows that the company has enough current assets to cover its current liabilities in the next 12 months. In the next three years, their current ratio would increase to approximately 1.36. This shows that the firm has a bit too much current assets as compared to current liabilities. Fortunately, in 2019, the firm would reduce its current ratio to .98. In reviewing other organizations with significant cash flow such as McDonald’s, investors should expect the current ratio to decline over the next several years. By declining their current ratio, the company will be able to better utilize some current assets for investments, expansion, or even possible acquisitions.

McDonald's Total Asset Turnover

Total Asset Turnover: McDonald’s total asset turnover ended 2015 at .67. In the next two years, their total asset turnover would increase to .79 and then fall to .68. This shows that the firm improved its asset utilization. However, in the next two years, their total asset turnover would fall to .44 in 2019. This indicates that the company is significantly underutilizing all assets in their company. To mitigate this issue, the firm needs to sell some fixed assets that are underperforming.

McDonald's Return on Assets

Return on Assets: McDonald’s return on assets would end 2015 at 11.94%. In the next four years, the company would improve its return on assets to approximately 18%. This shows that the firm is making more money on a continuous basis with assets employed. However, in 2019, the return on assets would fall to 12.7%. If this negative trend continues, then the firm needs to examine opportunities for selling underperforming assets like underperforming restaurants or even land or building holdings.

McDonald's Debt Ratio

Debt Ratio: McDonald’s debt ratio ended 2015 at 63.6%. Over the next several years, the organization would peak with its debt at 94.7% in 2018. In 2019 though, the organization did reduce its debt load to 71.8%. As a mature company, the organization is expected to have significant debt. This helps the company drive up its return on equity. However, with the debt ratio of 71%, this is well above industry standards. Because of this, the firm should take continuous action to reduce its debt load to a more manageable level.

McDonald’s Strengths

The following factors are McDonald’s most potent aspects which have ensured the company’s profitability, development and universal brand image.

1. Tenth Most Valuable Brands

McDonald’s is the tenth most valuable brand in the world. With an incredible brand value worth, the company rules the restaurant industry regardless of the fierce competition.

2. Tasty Food

McDonald’s French fries are considered the best tasting fries in the fast food industry

3. McDonald’s – A Real Estate Company

Very few people know that apart from selling burger and fries, McDonald’s has a multi-billion real estate empire. Imagine having thousands of premium locations around the globe.

As of end of 2018, it has 37,855 restaurants in 120 countries, out of which 35,085 are franchises and rest are company-operated restaurants.

McDonald’s franchise works slightly differently. McDonald’s not only provides their brand name, recipes, ingredients, processes to franchisees but also owns the land and operates as a landlord and makes revenue through rent payments.

4. Technology Initiatives

McDonald’s is taking revolutionary technology initiatives to make their ‘Experience of the Future’ dream come true. Initiatives like implementing self-service with kiosks, mobile order and payment systems are benefiting McDonald’s image as the ‘restaurant of the future.’

McDonald’s Weaknesses

Here are some of the shortcomings of McDonald’s’ strategy and structured composition, which affects its overall growth.

1. The Franchise business model

McDonald’s is the best example of international franchising models. However, having this complicated web of franchised and company-operated restaurants expose the brand to certain risks.

The risks of financial deterioration, mismanagement, customer dissatisfaction, and low revenue generation. The company heavily depends on the franchises which works independently and hence they have no control over their day to day performance, but it affects the brand directly.

2. Supply chain interruptions

McDonald’s being one of the busiest food chains often faces issues due to disruption in the supply chain. Also, it limits the availability of products, which are critical to the operations.

Therefore, when a franchise experiences such interruptions, the operational expense increases, which there by results in reduce revenue and lower profitability.

3. Lack of Employee Satisfaction

Due to recent employee right revolutions worldwide and increased wage limits, many organizations have faced critical dissatisfaction from employees.

Recently McDonald’s has faced extreme backlash from their workforce. The workers went to several protests and strikes with a demand to increase their minimum wage to $15 an hour, causing the company reputational harm.

McDonald’s Opportunities

The following opportunity section for McDonald’s emphasizes the emerging chances of growth. It can help the company to improve its business performance, management structure, and strategic growth and other aspects.

1. Innovative Products

McDonald’s must put efforts to introduce new, innovative items on their menu to make customers choose them instead of the new fast food outlets.

Launching more items like this according to the geographical conditions and culture can help McDonald’s maintain their charm for a longer period of time.

2. Global Expansion

McDonald’s rules over the US, but it is often that it struggles in the international market. However, the company has high potential to continue its global expansion by focusing more on international markets rather than different states of America.

3. Rebuilding the Brand Image

While fast-food restaurants are struggling to fight the image of ‘junk producing centers’, McDonald’s can play it smartly by continuing its aggressive initiatives towards, healthy and customized offerings.

These developments have begun to show progress, with positive comparable sales leading to a growth in profits. The re- franchising mission have surely pushed the sales back, but in the long run, the healthy image of McDonald’s can continue to make bigger differences.

McDonald’s Threats

The threat factor is connected with the phenomenon which stops the company from taking full advantages of the benefits that can be derived from the available strengths. Therefore these are the few threat that McDonald’s faces.

1. Risky Investments on Technology Initiatives

Although the innovative changes done by McDonald’s have a positive outlook, the investment in technology is still risky.

The public pace of adapting new technologies may slow down the return on investment, and the results of enhancing customer experience may not generate the expected returns.

2. Fierce Competition from Competitors like Chick-Fil-A

We might think that burger giants like ‘Burger King’ are McDonald’s only competitors, but the table is beginning to turn.

3. Cultural Threat While operating in Various Countries

Being a global fast-food chain, McDonald’s has often faced multiple cultural threats in different parts of the world, causing harm to the image of the brand.