Acca Obu Rap Thesis on Topic-8

8/18/2019 Acca Obu Rap Thesis on Topic-8

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An analysis and evaluat ion of

the business and f inancia lperformance of McDonalds over

a three year per i od of 2011-2013

Prepared by :

ACCA Registration no :

Word count : 7485 words

Submission Date :


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Table of ContentsPart One: ntroduction and O!era"" #ramewor$ o% t&e Researc&'''''''''''''''''''''''''''''''''4

ntroduction'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''4

(opic Se"ection and reasons %or its se"ection'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''4

Company se"ection and reasons %or its se"ection''''''''''''''''''''''''''''''''''''''''''''''''''''5

Aim o% t&e Researc& Report''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5

Researc& Ob)ecti!es'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5

Researc& *uestions''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +

Researc& Approac&''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''+

Part (wo: Data Sources and ,usiness and Accounting (ec&ni-ues'''''''''''''''''''''''''''''8

Sources o% in%ormation %or researc& wor$''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''8

Annua" Reports:'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8

On"ine "ibraries and Websites:''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''.

,oo$s and Academic /ourna"s:''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''.

0imitations %aced in in%ormation gat&ering''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''.

Company1s Websites and Annua" Reports''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''.

Web Searc& and ,oo$s2Academic /ourna"s'''''''''''''''''''''''''''''''''''''''''''''''''''''''''3

t&ica" issues %aced in accessing in%ormation'''''''''''''''''''''''''''''''''''''''''''''''''''''''3

Accounting and ,usiness tec&ni-ues used''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''3#inancia" (ec&ni-ues 6 Ratio Ana"ysis'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''33

0imitations o% Ratio Ana"ysis''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''33

,usiness Ana"ysis ode"s'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 33

SWO( Ana"ysis''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3

0imitations o% SWO( ode"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''3

PS(0 Ana"ysis ode"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 39

0imitations o% PS(0 Ana"ysis''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 39

#inancia" Ana"ysis''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 35

Description o% ,usiness:'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''35

Re!enue Ana"ysis''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''35

0i-uidity Ratios'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 37

Current Ratio'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 37

*uic$ Ratio''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 38


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(urno!er ratios'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3.

n!entory Processing Period''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3.

Assets (urno!er Ratio'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''3

Protabi"ity Ratios'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''

;ross Prot argin'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''


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Part One: Introduction and Overall Framework of the

Research

IntroductionIt is necessary to carry out a critical analysis of overall performance of an organization, so that

all the stakeholders may have a clear idea about future standing of the company. Two important

methods of accessing an organization for business analysis are (1 !inancial performance and ("

#usiness $valuation. $valuating financial performance of an organization tells about the

financial position of the organization whereas #usiness evaluation studies the business

environments in which the organization is operating. !or a comprehensive analysis of any

organization it is very vital that the organization be accessed not only for its financial

performance but in business conte%t as well. This because of the reason that financial

performance and business conte%t of an organization are interlinked to each other and effects of

any positive or negative change in the business conte%t can be felt in the financial performance

of the organization. Thus only a combination of both the techni&ues will help lead us to carrying

out a comprehensive and meaningful analysis of an organization. 'sers of financial statements

can be categorized as internal users and e%ternal users. ll stakeholders internal to the

organization can be termed as )internal users* of the financial statements i.e. employees,

managers at all tiers and e&uity holders etc. (bel, et. al., 1++. Internal users have a key

function to perform- manage and regulate the organization towards achieving its strategic goals.

n the other hand, customers, suppliers and creditors, being e%ternal to the organization, are

included in )e%ternal users* of financial statements (boody and /ev, 1++0. This research report

will make an endeavor to analyze my selected organization from the perspective of both internal

and e%ternal users of financial statements.

Topic Selection and reasons for its selection

!or undertaking this research proect I selected topic eight i.e. 2n nalysis and $valuation of

#usiness and financial performance of an organization over three recent years3. This is an

interesting topic to select because it is evaluation of not ust financial performance but evaluation

of business performance as well which thus makes it wholesome and a complete package in

itself. This was the topic which caught my eyes when I was going through the list of twenty

topics provided by %ford 'niversity. I have always had an inclination towards the subects of


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financial management4accounting and financial analysis. 5o it was very natural for me to select

topic 0 for my research and analysis proect. I felt as if I will truly be able to deploy the

knowledge and understanding of subect matter I gained during the course of my 66.

Company selection and reasons for its selectionIt seems as if there is no stopping to the growth of )!ast food* industry which is ever increasing.

Due to rapid tec&no"ogica" ad!ancements there has been a tremendous change not ust in

taste but also in the way fast food industry traditionally use to carry out their business operations.

#usinesses which adapted to this rapid and dynamically changing business environment

managed to seize a competitive advantage in the face of competition and flourished whereas

those businesses which could not keep up the pace with this rapidly changing business

environment now even cease to e%ist. 7c8onald*s is one among those who saw it coming and

thus adopted its procedures to new technologies which resulted in company*s growth and

increasing market share.

7c8onald*s is a fast food chain with its origin in 'nited 5tates of merica. It has many

franchises in '5 and other countries of the world being operative in 119 countries with over

;uggets, not to mention my personal favorite

7c8onald*s pple ?ie desserts (7orningstar, "


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Besearch obectives set for my research report are as follows:

• 6arry out an inCdepth study on financial performance of 7c8onald*s in comparison with

its closest competitor #urger @ing Aorldwide (#@A to check if it has been performing

better than #urger @ing Aorldwide in three recent years or otherwise.

• 5tudy the macro and micro business environments of 7c8onalds using analysis tools of

?$5T$/ and 5AT.

• 5uggest viable recommendations which can help further improve 7c8onalds* financial

and business performance.

Research "uestions

Besearch obectives set forth above logically led me to framing my research &uestions as

follows:

• Ahat is the financial standing of 7c8onald*s in comparison with its competitor #urger

@ing Aorldwide (#@AD

• Ahat are maor factors4features e%isting in 7c8onald*s internal and e%ternal business

environment affecting its business performanceD

• Ahat recommendations can be offered to 7c8onalds for further improving its

performanceD

Research pproach

s mentioned above that wholesome analysis of an organization can only be carried out by a

combination of financial and business performance analysis. This in turn necessitates use of both

&uantitative as well as &ualitative analysis techni&ues for evaluating financial and business

performance respectively. Euantitative analysis techni&ues incorporate use of numerical figures

and data whereas &ualitative techni&ues point to subective analysis (braham and 5idhu, 1++0.

Though there can be various techni&ues to measure financial performance of an organization yetthe most effective, if interpreted correctly, is the use of ratio analysis. few techni&ues to

conduct &ualitative analysis are 5AT analysis, 75T analysis, ?$5T$/ analysis, ?orter five

forces model etc. (dair, 1++;. It depends upon the circumstances and the research obectives

which dictate about the most appropriate &ualitative analysis tool to be used. I have thus resorted

to use of both &uantitative as well as &ualitative techni&ues for the purpose of my research report.


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Part Two: #ata Sources and $usiness and ccountin%

Techni&ues

Sources of information for research work Fathering authentic and valid data is first step to making a meaningful analysis. 8ata can be

collected from a number of sources however they can be categorized into primary data and

secondary data. ?rimary data is the first hand information collected and gathered by the

researcher himself and thus does not e%ist already. ?rimary data can be gathered by conducting

interviews, focus groups, surveys and &uestionnaire etc.(ffleck, et. l., 1++


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balance sheets of respective companies* annual reports downloaded from their official websites.

Income statements and balance sheets forms the basis for ratio calculation whereas the

27anagement discussion and analysis3 commonly known as )78* is a good source to finding

reasons for any numerical changes in the financial statement. Boots to financial performance of

an organization can be found in managerial decisions. Three years financial statements of

7c8onald*s and #urger @ing Aorldwide (#@A from "


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" 6hances of deliberate errors and omissions in financial statements are also common by

company*s management.

!inancial statements mostly tell about the financial performance of organization and only

limited &ualitative information is available.

= Euantitative data available in financial statements only depicts current and past data but

does not say anything about future financial performance.

; It is difficult to compare two company*s* with different accounting policy solely on the

basis of financial statements.

'eb Search and $ooks+cademic (ournals:

1 /arge array of data available online makes it difficult to scrutinize and settle on

information which is relevant, valid and authentic." Information available on even reliable websites can sometimes be tailored and

misleading.

,thical issues faced in accessin% information

$very researcher in some point of time during the course of research work confronts the

challenge of catering for )ethical issues* in one way or the other. ?rofessional ethics demand

highest degree of ethics e%hibited by researchers. s this research report relies on secondary

information therefore I attribute )professional ethics* to avoid plagiarizing. The highest degree of

dishonesty a researcher can resort to in his research report is taking credit of someone else*s

work. I believe that though there are different types of plagiarism yet the most common of all

generally committed by students is )accidental plagiarism* i.e. incorrect or incomplete citations

to original source (#arber and /yon, 1++. I have made deliberate efforts to avoid all types of

plagiarism in my research work. Ahen in doubt, who else could have been more appropriate to

approach than my mentor.

ccountin% and $usiness techni&ues used

ccounting and business techni&ues are used to evaluate financial and business performance of

organizations. It is only the combination of both the techni&ues that help better understand and

evaluate an organization*s overall performance and factors leading to it.


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Financial Techni&ues - Ratio nalysis

The most commonly used accounting techni&ue is ratio analysis. Batio analysis is a &uantitative

tool to convert information contained in financial statements in the form of ratios which can then

be interpreted and used to evaluate financial performance of an organization (?#, 1+9.

#arber and /yon, (1++9 stated that the relation between two numerical values given in financial

statement of a company is known as !inancial Batio. There are different types of ratios being

used however ratio calculation largely depends upon the purpose for which it is being calculated.

s mentioned before there are various users of financial statements and each user has a specific

agenda when analyzing financial statements. few maor benefits of using financial ratios

include its ease of use, ease of access from financial statements, companies with different sizes

can be evaluated ratios can be inferred in percentage and most importantly financial ratios can

help point to areas of management needing further improvement (#arberis, 5hleifer and Hishny,1++0. I have calculated four different types of financial ratios i.e. li&uidity ratios, solvency

ratios, activity ratios and profitability ratios, for 7c8onalds calculated over three years* time

period from "


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analysis techni&ues largely depend on the purpose of their use. I shall however restrict to using

only 5AT and ?$5T$/ analysis techni&ues for the purpose of this research report.

S'OT nalysis:

5AT analysis is an important techni&ue used to assess key internal and e%ternal factors

affecting company*s performance. 5AT stands for 5trengths, Aeaknesses, pportunities and

Threats. 5trengths and Aeaknesses are factors internal to organization whereas opportunities and

threats fall within e%ternal environments (#arefield and 6omiskey, 1+9;. 5AT analysis can be

a very useful tool for an organization to figure out way to add value and gain an edge over its

competitors by making best use of their core strengths, overcoming weaknesses as well as threats

and e%ploiting the opportunities offered in the e%ternal environments. 5AT analysis can

especially be very helpful in following cases (8e#ondt and Thaler, 1++;:

1 $%ploring opportunities available for introducing new products-

" 8eciding on future strategies-

?ointing to areas needing further improvement-

= ligning core strengths with the opportunities offered can help gain competitive edge

over competition (Foodrich, "


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P,ST,) nalysis .odel

Gistory of ?$5T analysis can be traced back to !rancis guilar when he introduced $T?5 i.e.

$conomical, Technological, ?olitical and 5ocial environment (#arth, 1++1. $T?5 was a

strategic tool to scan e%ternal business environment. /ater, rnold #rown introduced his version

of e%ternal environmental scanning tool called 5T$? with same four environmental factors

(8echow, @othari and Aatts, 1++0. ?$5T$/ analysis points to macro factors e%isting in

e%ternal business environment and how they can impact business performance. 7acro factors are

attributed to e%ternal environments. ?$5T$/ stands for ?olitical, $conomic, 5ocial,

Technological, $nvironmental and /egal factors and can have significant effects on the overall

performance. ?$5T$/ analysis is a strategic analysis tool which can help identify those factors

which shape and influence the business environments (Freig, 1++".. ?$5T$/ analysis is simple

to perform, provides a platform to analyze cross functional skills, helps identify opportunities toenter new markets and helps overcome potential threats before they are able to significantly

affect business operations. Though there are many advantages to performing ?$5T$/ analysis,

yet it can be associated with few limitations as well. I have used ?$5T$/ analysis for a detailed

audit of e%ternal business environment of 7c8onald*s in which it operates.

)imitations of P,ST,) nalysis: (Fu and Au, ("


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= ?$5T$/ analysis only scans and monitors e%ternal environmental factors whereby

completely neglecting the factors internal to the organization. Gowever, business

performance of an organization cannot be comprehensively understood till both internal

and e%ternal factors are not being analyzed properly. This is why it is emphasized to

conduct 5AT analysis in addition to ?$5T$/ analysis so as to make the analysis

comprehensive in all respects.

; ?$5T$/ analysis conducted separately by two or more persons will result in different

analysis* results as no two persons view a thing similarly and there would always be some

difference.


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Financial nalysis

#escription of $usiness:Aith ;="+ restaurants in 11+ countries and < million customers daily visiting their restaurants,

7c8onald*s is rightly claimed the largest fast food chain of the world (6>>, "


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#evenue "9,


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interest rates and increased unemployment adversely affected the revenues for the company due

to a decreasing consumer spending trend for restaurant dining occasions(#urger @ing, "


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by ". in "


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The &uick ratio, or more commonly referred to as )acid test*, is the ability of the company to

meet its current liabilities with its most current assets i.e. e%cluding inventory and prepaid

e%penses etc. Ahen the share of 7c8onald*s lesser li&uid assets is subtracted out of the current

assets, the &uick ratio has declined to 1.


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McDonalds Burger ing !orld"ide

2011 2012 2013 2011 2012 2013Cost o ales 9=0.9 90=;." 9+0;.9 "=.+ =+9. ""

A!era*e n!entor" 11.; 11+."; 1"".9< 1.9< 1


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33 3 39

3

9

4

5

+7

8

5'4 5'5 5'+

87'5

+'5

Inventory Processin%

cDona"ds

,urger >ing

ssets Turnover Ratio:

(Amount in $ Million)


2011 2012 2013 2011 2012 2013-e!enues "9,


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which makes up 9


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is seen maintaining itself at 91.; in "


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>et profit margin points to the share of net income in revenues and thus serves as a tool to

measure the earning shareholders should e%pect on their investment in the company. >et profit

margin for 7c8onalds falls by ".; in "ing

RO,:


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2011 2012 2013 2011 2012 2013/et #roit ;;


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)on% Term Solvency Ratios: /ong term solvency ratios determine the ratio held

between debt financing and e&uity. It also shows the capacity of an organization to pay long term

debt along with interest e%penses on debts.

#ebt to ,&uity Ratio:



2011 2012 2013 2011 2012 2013ebt 1";


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33 3 39

5

3

35

5

9

8+'8 8.'3 88'

8+'.

47'

3.

#ebt to ,&uity

cDona"ds

,urger >ing

Interest covera%e ratio:



2011 2012 2013 2011 2012 2013eratin* #roit 8529.7 8604.6 8764.3 362.5 417.7 522.2

nterest &'ense 492.80 516.6 521.9 226.7 223.8 200

+a' Co!era*e 17.3 16.6 16.8 1.6 1.9 2.6

Interest coverage ratio points to the ability of the company to meet its interest liabilities out of

the operating profit. The coverage ability of 7c8onalds decreases by = in "


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"


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'eaknesses

• ver the past few years, the company has received a lot of negative publicity on account of being

unhealthy leading to obesity from a very early age (6>>, "


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There are a number of groups within the 'nited 5tates as well as $urope that have talked

publicly about the harmful effects of consuming fast unk foods, referring to increasing

cholesterol and the rising rates of obesity as reference (Besearch and 7arkets, "


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Technolo%ical Factors

7c8onalds has been benefiting from advancements in technology and is evident not only in the

products they offer but also by visiting their website online which itself is multi facet. The

company spends huge amounts on television advertisements focusing mainly on the younger

generations and baby boomers (Besearch and 7arkets, "1


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• 7c8onalds should incorporate use of healthier oil and foods on its menu i.e. fresh fruits

and vegetables as well as avoid using additives and preservatives.

• Gigh turnover rate of its employees can aggravateissues for 7c8onalds and thus

immediately needs to work on reducing it by offering attractive incentives and salary.

• 6ost of sales as well as operating e%penses for 7c8onalds have been increasing over

years. 7c8onalds should therefore work on reducing its direct as well as indirect costs

which will help further lower its product prices and fetch e%tra market share.

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