Introduction
This paper provides a comprehensive analysis of McDonald’s SEC-10K report for the fiscal year ended December 31 2016. This analysis covers differet aspects of the company’s financial report; income statement, balance sheet, statement of changes in equity, and statement of cash flow.
Income Statement
Category 1: Revenue and Net Income
Total Revenue
In the fiscal year ended December 31 2016, McDonald’s reported a total revenue of $ 24,621.9 million (McDonald’s Corporation, 2017). Revenues for the year were attributable to two major categories; sales by company-operated restaurants and revenues from franchised restaurants. Sales from restaurants operated by McDonalds amounted to $ 15,295 million while revenues attributable to franchised restaurants amounted to $ 9,326.9.
McDonald’s revenue have been declining over the past two years as reported in its annual reports. In 2014, the company reported a total revenue of $ 27,441.3 million. In 2015, a total revenue of $ 25,413 million was reported (McDonald’s Corporation, 2017). The revenues reported in the 2016 annual report indicated a decline of 3.1% of the total revenues reported in 2015. In 2015, total revenues had declined by $2,028.3 million which is an equivalent of 7.4%.
Summary of the changes in total income from 2014 to 2016 can be represented in the table below;
| Year | 2016 | 2015 | 2014 |
| Total Income ($ million) | 24,621.9 | 25,413 | 27,441.3 |
| Percentage Increase/Decrease | (3.1)% | (7.4)% | – |
Net Income
In the financial year ended December 31 2016, McDonald’s net income amounted to $ 4,686.5 million. This was a slight increase from the $ 4,529.3 million reported in 2015. In 2014, the company’s net income was $ 4,757.8. From 2015 to 2016, McDonald’s net income increased by $ 157.2 million which is an equivalent of 3.5%. The net income reported in 2015 indicated a decline of $ 228.4 million, which is an equitant of 4.8%, of the income reported in 2014.
Summary of the changes in net income from 2014 to 2016 can be represented in the table below;
| Year | 2016 | 2015 | 2014 |
| Net Income ($ million) | 4,686.5 | 4,529.3 | 4,757.8 |
| Percentage increase/decrease | 3.5 % | (4.8) % | – |
Category 2: Irregular Items
Change in Accounting Policy and Irregular Items Reported
McDonald’s did not make changes in any accounting principles that would have called for a retrospective adjustments to the financial statements. The accounting principles used to prepare the annual report for the fiscal year ended December 31 2016 are consistent, thus no need for retrospective adjustments. The financial statements were prepared in accordance with the generally accepted accounting principles in the U.S. (McDonald’s Corporation, 2017). Similarly, the company did not report any irregular items in its financial statement. There were no discontinued operations reported as well as an extraordinary items that would have necessitated disclosure.
Although the company is holding some businesses for sale, they should not be reported as irregular items (Arvidsson, 2011). McDonald’s buys and sells businesses with the aim of achieving an optimal marketing and ownership mix in various markets. Since this is done as a recurring part of the company’s business, the resulting gains and losses out of the sale of these businesses are reported under operating income and losses. Doing this is in conformity with the U.S. Generally accounting principles.
Category 3: Analysis
Horizontal Analysis
Comparative Horizontal analysis of McDonald’s Income Statement
For the Fiscal Years ended December 31 2016 and 2015
2016 2015 Increase/Decrease
Amount Percent (%)
Total revenues 24,621.9 25,413.0 (791.1) (3.1)
Operating Costs and Expenses 16,877.4 18,267.5 (1,390.1) (7.6)
Operating Income 7,744.5 7,145.5 599 8.4
Interest Expense 884.8 638.3 246.5 3.9
Non-operating interest expense (6.3) (48.5) (42.2) (87)
Income before taxes 6,866.0 6,555.7 310.3 4.7
Provision for income taxes 2,179.5 2,026.4 1,746.9 8.6
Net income 4,686.5 4,529.3 157.2 3.5
In the above analysis, 2015 is used as the base year. Key items in the statement of income that recorded a decline compared to the figures reported in 2015 included; total revenues, operating costs and expenses and non-operating interest expense. The company’s operating income, interest expense, income before taxes, and net income all recorded a positive change from 2015 to 2016.
Balance Sheet
Category 1: Stock Market
Key Facts about the New York Stock Exchange (NYSE) Market
McDonald’s stocks are traded in the New York Stock Exchange market with its stock traded as NYSE:MCD. The NYSE has been very instrumental in shaping the financial history of the U.S. by serving as the county’s leading stock exchange for over 225 years. Despite its popularity, the stock exchange has some fascinating facts that most people do not know of. The following are some key facts about the NYSE;
Listing Cost: If a company desires to be listed in the NYSE, it comes with a cost. A company is required to pay $ 25,000 as application fee. After the shares have been listed in the stock exchange, a company is also required to pay $ 50,000 as a one-time special charge. Issuer of stock should pay a fee of $ 0.004 per share, which is subject to a maximum amount of $ 295,000 (Waverly, 2017). There are also other costs that are associated with NYSE listing. A minimum of $ 59,500 is paid for a single class of common shares annually. A company is also required to pay an extra $ 1,050 for every 1 million shares listed in the stock exchange (Waverly, 2017). The maximum total fee payable is capped at $500,000 per year.
The NYSE is not the oldest stock exchange market in the U.S.: As opposed to what many people think, the NYSE is not U.S.’ oldest stock exchange. NYSE was formed in 1972 when the ‘Buttonwood Agreement’ was signed by brokers (Waverly, 2017). The credit for the oldest stock exchange in the country goes to the Philadelphia Stock Exchange (PSE), which founded in 1790.
The NYSE is now a publicly traded company: For most part of its history, the NYSE has been owned by its members. In 2005, however, the stock exchange announced its intention of merging with Archipelago, owned by the Intercontinental Exchange (Waverly, 2017). In December 6 the same year, the merger was realized, making the NYSE a publicly traded, for-profit company.
Category 2: Assets and Liabilities
McDonald’s Investments and Intangible assets
The company has invested in various investments. For instance, McDonalds has invested heavily in assets, key among them being property and equipment which was valued at $ 34,443.4 million (at cost) as at December 31 2016. The company has also invested in inventories, which were valued at $ 58.9 million as at the same date. Assets of the business held for sale were valued at $ 1,527 million. Also key among the company’s investments is investment in and advances to affiliates, which was valued at $725.9 million as at December 31 2016.
The main intangible asset owned by McDonald’s is goodwill, which was valued at $ 2,336.5 million as at December 31 2016. Goodwill is an indicator of the excess of cost over the company’s tangible and intangible assets of the restaurant businesses acquired by the company. In cases where a restaurant is sold within 24 months of its acquisition, its goodwill is entirely written off.
Significant changes in Assets and Liabilities
In the fiscal year ended December 31 2016, McDonald’s experienced significant changes in some individual assets and liabilities accounts. One of the assets that changed significantly over the two years was Cash and cash equivalent. As at December 31 2015, McDonald’s reported a cash and cash equivalent amounting to $ 7,685.5 million (McDonald’s Corporation, 2017). As at December 31 2016, the company reported cash and cash equivalent amounting to $ 1,223.4. This represents a decrease of $ 6,462.1 million which is an equivalent of 84.1%. Changes in cash and cash equivalent are attributable to a number of factors, with the common ones being payments and receipts. Cash is a liquid asset hence the amount reported on its account is expected to change frequently.
The figure reported for property and equipment (at cost) also changed significantly over the two years. As at December 31 2015, McDonald’s reported property and equipment worth $ 37,692.4 million. As at December 31 2016, the amount reported for the same account reduced to $ 34,443.4 million. This represents a decrease by $ 3,249 million, which is an equivalent of 8.6%. Decrease in the value of assets reported can be attributed to different factors, with the common ones being writing off, and sale or disposal. Since McDonald’s is a manufacturing entity, it is expected that its property, and equipment will change significantly over the year.
Category 3: Vertical Analysis of Balance Sheet
Vertical Analysis of McDonald’s Balance Sheet
As at December 31 2016
2016
Amount ($ million) Percent (%)
Assets
Current assets 4,848.6 15.63
Investment in and advances in affiliates 725.9 2.34
Goodwill 2,336.5 7.53
Miscellaneous assets 1,855.3 5.98
Property and Equipment (net) 21,257.6 68.52
Total Assets 31,023.9 100%
Liabilities
Current Liabilities 3,468.3 11.18
Long term liabilities 29,759.9 95.93
Total Liabilities 33,228.2 107.11
Shareholders’ Equity
Common stock 16.6 0.05
Additional paid-in capital 6,757.9 21.78
Retained earnings 46,222.7 148.99
Accumulated other comprehensive income (3,092.9) (9.97)
Common stock in treasury (52,108.6) (167.96)
Total Shareholder’s equity (2,204.3) (7.11)
Total Liabilities and Shareholder’s equity 31,023.9 100%
From the vertical analysis of McDonald’s balance sheet, the following inferences that be made; Property and equipment accounts for the highest value of the company’s total assets. In the fiscal year ended December 31 2016, property and equipment (net value) accounted for 68.52% of the total assets owned by McDonald’s. It can also be deduced, from the analysis, that McDonald’s assets are funded by liabilities, both short term and long term. This is due to the fact that the total liabilities account for 107% of the total liabilities and shareholders’ equity. The company has a negative shareholder’s equity. The treasury stock held by McDonald’s accounts for a whopping 167.96% of the total liabilities and shareholder’s equity.
Statement of Stockholders Equity
Category 1: Capital Stock
Common Stock
Authorized number of shares: Authorized shares represent the number of shares that a company is allowed, legally, to issue (Hanks, 2011). The number of shares issues must always be equal or less than the authorized shares. McDonald’s authorized shares are 3.5 billion shares, each with a par value of $ 0.01. This means that the company’s authorized share capital is $ 35 million.
Par value per share: The par value per share for McDonald’s common stock shares is $0.01. This is the amount that appears on the company’s stock certificates. The market value of shares is often different from the par value.
Issued number of shares: This represent the total number of shares that are currently being held by McDonald’s shareholders. A company is at liberty to issue new shares at any time provided that it does not exceed its authorized number of shares (Hanks, 2011). As at December 31 2016, the total number of shares issued by McDonald’s was 1,660.6 million.
Outstanding shares: This represent the difference between the issued shares and treasury shares. As at December 31 2016, McDonald’s common stock in treasury shares were 841.3 million. Outstanding shares for the company, therefore, was 819.3 million.
Treasury stock: Treasury stock represents the portion of a company’s shares that are kept in its own treasury (Fuller & Blau, 2010). Such shares may result from buyback of shares or from repurchase. The treasury stock for McDonald’s as at December 31 2016 was 841.3 million, which is an equivalent of $ 52.108.6 million.
Category 2: Retained Earnings
Retained Earnings Equation
The retained earnings balance of a company are affected by prior adjustments, net income, retired treasury stock, and dividends. The movement of McDonald’s retained earnings over the last two years is illustrated using the following equation;
Retained earnings, beginning balance + Prior period adjustments = Retained earnings, adjusted balance + Net Income – Retirement of Treasury stocks – Dividends = Retained earnings, ending balance
$(millions)
Retained earnings as at December 31 2015 44,594.5
Prior period adjustments 0
Net income 4,686.5
Common stock dividends 3,058.2
Treasury stock repurchases 0
Stock Option exercise 0.1
Retained earnings balance as at December 31 2016 46,222.7
The equation will therefore appear as follows;
$ 44,594.5+ (0+4,686.5-0.1-3,058.2) = $46,222.7
$ 46,222.7= $ 46,222.7
Therefore, the equation holds.
Category 3: Analysis
Ratios
| Ratio | Formula | 2016 | 2015 |
| Return on Stockholder’s equity | Net income/shareholder’s equity | 4686.5/16.6
=282.32 |
4,529.3/16.6
=272.85 |
| Earnings per share (EPS) | (Net income-dividends on preferred stock)/average outstanding shares | 4686.5/853.64
=5.49 |
4,529.3/939.69
=4.82 |
| Price-earning (PE) ratio | Market value per share/earnings per share | 123.80/5.49
=22.55 |
113.56/4.82
=23.56 |
| Payout ratio | (Dividends per share/ earnings per share)*100 | 3.61/5.49
=0.67 |
3.44/4.82
=0.71 |
Generally, McDonald’s shares are relatively doing well when compared to industry averages. Consumer services industry’s average ROE in the U.S. is 95%. McDonald’s ROE for the financial year ended December 31 2016 was 282.32. The price per earning ration for consumer services was 22.79 in 2016. Compared to McDonalds P/E of 22.55, the company is doing relatively well.
Statement of Cash Flows
Category 1: Operating Activities
Direct or Indirect Method
A cash flow statement is an important financial report as it shows whether the company has enough cash to sustain its operations. Essentially, the statement shows how the transactions in statement of income and balance sheet affect the company’s cash and cash equivalent (Dickinson, 2011). By analyzing a statement of cash flow, one is able to understand how cash flow in and out of the company. Companies use either direct or indirect method when preparing their statement of cash flow.
McDonald’s statement of cash flow is prepared using the indirect method. In this method, the net income is adjusted to reconcile transactions to cash provided by the company’s operations. To achieve this, non-cash transactions such as depreciation are added back to the net income. Adjustments for changes in some company’s current assets, such as inventory and accounts receivables, and current liabilities are made (Dickinson, 2011). Adjustments made by McDonald’s in its statement of cash flow fall into two main categories; adjustments for charges and credits, and changes in working capital items. Specific adjustments made under the changes and credits category include depreciation and amortization, share-based compensation, and deferred income taxes. Working capital items adjusted in the statement of cash flow include; accounts receivable, income taxes, accounts payable, inventories, and prepaid expenses.
If the statement of cash flow was prepared using the direct method, there would be no need for adjustments. Rather, cash from operating activities would have included amounts from account lines such as cash paid to vendors and cash collected from customers (Fuller & Blau, 2010). Under the direct method, it would be necessary to provide a reconciliation of the cash from operating activities to the net income. This reconciliation is, however, automatically achieved in the indirect method.
Category 2: Investing Activities
Investments Reported in McDonald’s Statement of Cash Flows
In the annual report for the fiscal year ended December 31 2016, McDonald’s has reported 5 different categories of investments. Investment activities responsible for cash outflow include capital expenditures, purchases of restaurant businesses, and others. Investing activities that brought in cash within the fiscal year include sales of restaurants.
In 2016, capital expenditures, with $ 1,821.1 million, were responsible for the highest amounts of cash outflow among all investing activities. Capital expenditures incurred by McDonald’s included construction of new restaurants, and upgrading the existing ones. This was followed by purchases of restaurant businesses, and other investing activities, with each responsible for a cash outflow of $ 109.5 million.
Sale of restaurants was McDonald’s largest source of cash inflow out of its investing activities. This was followed by sale of property, responsible for a cash inflow of $ 82.9 million. Ordinarily, a business can always dispose its properties, such as vehicles and machinery. Cash raised from such activities is reported under the investing activities.
Summary of the changes in investing activities from 2014 to 2016 is represented in the table below;
| Year | 2016 | 2015 | 2014 |
| Capital expenditures | (1,821.1) | (1,813.9) | (2,583.4) |
| Purchases of restaurant business | (109.5) | (140.6) | (170.5) |
| Sale of restaurant businesses | 975.6 | 341.1 | 403.1 |
| Sale of property | 82.9 | 213.1 | 86.8 |
| Others | (109.5) | (19.7) | (40.9) |
| Total | (981.6) | (1,420.0) | (2,304) |
From the trend above, cash used by McDonald’s for investing activities has been declining from 2014 to 2016. From 2014 to 2015, cash used in investment activities reduced by $ 884.9 million, which is equivalent to 38.4%. From 2015 to 2016, a decline of $ 438.4 million, which is equivalent of 30.87%.
Category 3: Analysis
Free Cash Flow for McDonald’s
Free cash flow (FCF) represents the amount of cash that a company can generate after spending what is required to maintain or expands its assets (Dickinson, 2011). FCF allows a company to pursue investment opportunities that can enhance the value of shareholders.
FCF=operating cash flow –capital expenditure
McDonald’s FCF for 2015 and 2016 is as follows;
| 2016 | 2015 | |
| Free cash flow ($ million) | 6,059.6-1,821.1
=4,238.5 |
6,539.1-1,813.9
=4,725.2 |
McDonald’s FCF is positive, showing that the company is able to take up opportunities that increase the value of shareholders. With a FCF of more than $ 4,000 million, the company is performing way above most of its competitors in the industry.
Conclusion
This paper has analyzed McDonald’s annual report for the fiscal year ended December 31 2016. In the statement of income, the company’s total revenue and net income have been analyzed. Horizontal analysis of the income statement has indicated that some accounts increased while others decreased over the last two fiscal years. Analysis of key items in the statement of cash flow, statement of changes in equity and balance sheet has also uncovered significant trends in movement of account balance figures over the years.
References
Arvidsson, S. (2011). Disclosure of non-financial information in the annual report: A management-team perspective. Journal of intellectual capital, 12(2), 277-300.
Dickinson, V. (2011). Cash flow patterns as a proxy for firm life cycle. The Accounting Review, 86(6), 1969-1994.
Fuller, K., & Blau, B. M. (2010). Signaling, free cash flow and “nonmonotonic” dividends. Financial Review, 45(1), 21-56.
Hanks, J. J. (2011). Legal Capital and the Model Business Corporation Act: An Essay for Bayless Manning. Law and contemporary problems, 74(1), 211-230.
McDonald’s Corporation (2017). U.S. SEC Form 10-K. Annual Report for the Fiscal Year ended December 31 2016. Retrieved from https://www.sec.gov/Archives/edgar/data/63908/000006390817000017/mcd-12312016x10k.htm#s1A53D3CFBC595772B22DE6C28CEA0F55
Waverly, J. S. (2017). New York Stock Exchange Facts. Bizfluent. Retrieved from https://bizfluent.com/about-6683121-new-york-stock-exchange.html