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Table of Contents Part One: Introduction and Overall Framework of the Research ................................................................. 4

Introduction .............................................................................................................................................. 4

Topic Selection and reasons for its selection ............................................................................................ 4

Company selection and reasons for its selection ..................................................................................... 5

Aim of the Research Report ...................................................................................................................... 5

Research Objectives .................................................................................................................................. 5

Research Questions .................................................................................................................................. 6

Research Approach ................................................................................................................................... 6

Part Two: Data Sources and Business and Accounting Techniques .............................................................. 8

Sources of information for research work ................................................................................................ 8

Annual Reports: .................................................................................................................................... 8

Online libraries and Websites: .............................................................................................................. 9

Books and Academic Journals: .............................................................................................................. 9

Limitations faced in information gathering .............................................................................................. 9

Company’s Websites and Annual Reports ............................................................................................ 9

Web Search and Books/Academic Journals ........................................................................................ 10

Ethical issues faced in accessing information ......................................................................................... 10

Accounting and Business techniques used ............................................................................................. 10

Financial Techniques - Ratio Analysis ................................................................................................. 11

Limitations of Ratio Analysis ............................................................................................................... 11

Business Analysis Models ........................................................................................................................ 11

SWOT Analysis ..................................................................................................................................... 12

Limitations of SWOT Model ................................................................................................................ 12

PESTEL Analysis Model ........................................................................................................................ 13

Limitations of PESTEL Analysis ............................................................................................................ 13

Financial Analysis ........................................................................................................................................ 15

Description of Business: .............................................................................................................................. 15

Revenue Analysis .................................................................................................................................... 15

Liquidity Ratios ........................................................................................................................................ 17

Current Ratio ....................................................................................................................................... 17

Quick Ratio .......................................................................................................................................... 18

Turnover ratios........................................................................................................................................ 19

Inventory Processing Period ............................................................................................................... 19

Assets Turnover Ratio ......................................................................................................................... 21

Profitability Ratios ................................................................................................................................... 22

Gross Profit Margin ............................................................................................................................. 22

Net Profit Margin ................................................................................................................................ 23

ROE ...................................................................................................................................................... 24

Long Term Solvency Ratios ..................................................................................................................... 26

Debt to Equity Ratio ............................................................................................................................ 26

Interest coverage ratio ........................................................................................................................ 27

Business Context Analysis ........................................................................................................................... 28

SWOT Analysis......................................................................................................................................... 28

Strengths ............................................................................................................................................. 28

Weaknesses ........................................................................................................................................ 29

Opportunities ...................................................................................................................................... 29

Threats ................................................................................................................................................ 29

PESTEL Analysis ....................................................................................................................................... 30

Political Factors ................................................................................................................................... 30

Economic Factors ................................................................................................................................ 30

Social Factors ...................................................................................................................................... 30

Technological Factors .......................................................................................................................... 31

Legal Factors ....................................................................................................................................... 31

Environmental Factors ........................................................................................................................ 31

Conclusion and Recommendations ............................................................................................................ 31

Part One: Introduction and Overall Framework of the Research

Introduction

It 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) Financial performance and (2)

Business Evaluation. Evaluating financial performance of an organization tells about the

financial position of the organization whereas Business evaluation studies the business

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

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

performance but in business context as well. This because of the reason that financial

performance and business context of an organization are interlinked to each other and effects of

any positive or negative change in the business context can be felt in the financial performance

of the organization. Thus only a combination of both the techniques will help lead us to carrying

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

can be categorized as internal users and external users. All stakeholders internal to the

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

managers at all tiers and equity holders etc. (Abel, et. al., 1996). Internal users have a key

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

On the other hand, customers, suppliers and creditors, being external to the organization, are

included in „external users‟ of financial statements (Aboody and Lev, 1998). This research report

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

and external users of financial statements.

Topic Selection and reasons for its selection For undertaking this research project I selected topic eight i.e. “An Analysis and Evaluation of

Business and financial performance of an organization over three recent years”. This is an

interesting topic to select because it is evaluation of not just 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 Oxford University. I have always had an inclination towards the subjects of

financial management/accounting and financial analysis. So it was very natural for me to select

topic 8 for my research and analysis project. I felt as if I will truly be able to deploy the

knowledge and understanding of subject matter I gained during the course of my ACCA.

Company selection and reasons for its selection It seems as if there is no stopping to the growth of „Fast food‟ industry which is ever increasing.

Due to rapid technological advancements there has been a tremendous change not just in taste

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

Businesses 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 exist. McDonald‟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.

McDonald‟s is a fast food chain with its origin in United States of America. It has many

franchises in US and other countries of the world being operative in 117 countries with over

35000 restaurants all over the world (Datamonitor, 2013). Though it offers a wide range of

products to its customers however, its four most famous fast food items are (1) Cheeseburger (2)

hamburger (3) French Fries and (4) McNuggets, not to mention my personal favorite

McDonald‟s Apple Pie desserts (Morningstar, 2013).

Such a large outfit was though challenging to analyze but then I wanted to select as dynamic an

organization as McDonalds which should also help me in my study of ACCA and future career

pursuits as well. Analyzing the financial and business performance of McDonalds would not

have been completed if it was not benchmarked against its closest competitor which led me to

select Burger King Worldwide (BKW) being the closest rival to McDonalds.

Aim of the Research Report Aim of my research project is to critically analyze the financial and business performance of

McDonald‟s over three recent years from 2011 to 2013, and be able to draw significant

conclusions and recommendations for its further improving.

Research Objectives:

Research objectives set for my research report are as follows:

Carry out an in-depth study on financial performance of McDonald‟s in comparison with

its closest competitor Burger King Worldwide (BKW) to check if it has been performing

better than Burger King Worldwide in three recent years or otherwise.

Study the macro and micro business environments of McDonalds using analysis tools of

PESTEL and SWOT.

Suggest viable recommendations which can help further improve McDonalds‟ financial

and business performance.

Research Questions Research objectives set forth above logically led me to framing my research questions as

follows:

What is the financial standing of McDonald‟s in comparison with its competitor Burger

King Worldwide (BKW)?

What are major factors/features existing in McDonald‟s internal and external business

environment affecting its business performance?

What recommendations can be offered to McDonalds for further improving its

performance?

Research Approach As 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

quantitative as well as qualitative analysis techniques for evaluating financial and business

performance respectively. Quantitative analysis techniques incorporate use of numerical figures

and data whereas qualitative techniques point to subjective analysis (Abraham and Sidhu, 1998).

Though there can be various techniques to measure financial performance of an organization yet

the most effective, if interpreted correctly, is the use of ratio analysis. A few techniques to

conduct qualitative analysis are SWOT analysis, MOST analysis, PESTEL analysis, Porter five

forces model etc. (Adair, 1995). It depends upon the circumstances and the research objectives

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

to use of both quantitative as well as qualitative techniques for the purpose of my research report.

Part Two: Data Sources and Business and Accounting Techniques

Sources of information for research work

Gathering authentic and valid data is first step to making a meaningful analysis. Data can be

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

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

researcher himself and thus does not exist already. Primary data can be gathered by conducting

interviews, focus groups, surveys and questionnaire etc. (Affleck, et. Al., 1990) Whereas

secondary data can be termed as „second hand data‟ not collected by researcher himself and is

open for subsequent use by all. Some of the important sources of collecting secondary

information include Internet, books, journals and newspapers etc. (Banz, 1981) Though a good

approach to collecting comprehensive information is a combination of primary as well as

secondary information but I will restrict to using only secondary information for the purpose of

this research report.

Analyzing an organizational financial and business performance basing on the secondary

information alone is a bit complicated affair as there is abundance of information available.

There are a few challenges to collection of secondary information. Firstly, shortlisting and

choosing relevant and valid data from such an abundant data appropriate to one‟s topic is thus a

real daunting task. Second challenge to collection of secondary data is reliability and biasness of

data so collected. It thus needs to be ensured that data is collected only from authentic sources

and that too only after having checked for its validity and relevancy. My mentor had been very

helpful in providing explicit guidelines in choosing reliable and authentic sources of secondary

information.

Sources of secondary information for this research report are limited to: (1) Annual Reports (2)

Online libraries and websites (3) Books and academic journals (4) published articles.

Annual Reports:

Annual report is a good source of collecting quantitative as well as qualitative data as it contains

numerical as well as subjective data. In view of the nature of the topic I have selected for writing

this research report, all the quantitative data has been extracted from the financial statements and

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

“Management discussion and analysis” commonly known as „MDA‟ is a good source to finding

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

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

McDonald‟s and Burger King Worldwide (BKW) from 2011 to 2013 were therefore considered

in this report.

Online libraries and Websites:

As mentioned before there is an abundance of data available online but there was a need to filter

relevant and authentic information from such heaps of available data. Therefore I have been very

careful to base my research report on „selective‟ data instead of trying to incorporate every bit of

information available online. To this end, official websites of both the companies proved really

helpful.

Books and Academic Journals:

Books and academic journals are good sources of collecting secondary information. However, as

each author can have a specific perception which leads to the error of biasness therefore I could

not base my research on any one of such source either. I tried to consult multiple journals before

forming any opinion. This also helped me cater for any potential chances of being biased in my

report.

Limitations faced in information gathering Though there are many benefits to using secondary sources of information i.e. less cost and time

as well as ease of access yet there are a few limitations attached to use of secondary information.

A few glaring have already been mentioned before which includes reliability, validity and

accuracy of secondary information. However, I shall now discuss a few limitations I came across

during the course of my research and specific to the secondary sources I have had used.

Company’s Websites and Annual Reports: Limitations attached to use of financial statements

are (Barber and Lyon, 1996):

1) The data may be exaggerated and biased because of the fact that companies usually resort

to “Window Dressing” in their financial statements.

2) Chances of deliberate errors and omissions in financial statements are also common by

company‟s management.

3) Financial statements mostly tell about the financial performance of organization and only

limited qualitative information is available.

4) Quantitative data available in financial statements only depicts current and past data but

does not say anything about future financial performance.

5) It is difficult to compare two company‟s‟ with different accounting policy solely on the

basis of financial statements.

Web Search and Books/Academic Journals:

1) Large array of data available online makes it difficult to scrutinize and settle on

information which is relevant, valid and authentic.

2) Information available on even reliable websites can sometimes be tailored and

misleading.

Ethical issues faced in accessing information Every 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. Professional ethics demand

highest degree of ethics exhibited by researchers. As 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 (Barber and Lyon, 1996). I have made deliberate efforts to avoid all types of

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

approach than my mentor.

Accounting and Business techniques used Accounting and business techniques are used to evaluate financial and business performance of

organizations. It is only the combination of both the techniques that help better understand and

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

Financial Techniques - Ratio Analysis

The most commonly used accounting technique is ratio analysis. Ratio analysis is a quantitative

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 (APB, 1973).

Barber and Lyon, (1997) stated that the relation between two numerical values given in financial

statement of a company is known as Financial Ratio. There are different types of ratios being

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

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

agenda when analyzing financial statements. A few major 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 (Barberis, Shleifer and Vishny,

1998). I have calculated four different types of financial ratios i.e. liquidity ratios, solvency

ratios, activity ratios and profitability ratios, for McDonalds calculated over three years‟ time

period from 2011 to 2013 and compared it with its competitor Burger King Worldwide (BKW)

over the same period.

Limitations of Ratio Analysis

Barclay, Gode and Kothari, (1999) highlighted some limitations attached to calculation of ratio

analysis:

1) As ratios are drawn from financial statements therefore interpretation of ratios can be

misleading should there be any flaw in the financial statements.

2) Companies with different accounting principles are difficult to be compared on the basis

of financial ratios.

3) Financial ratios provide information on quantitative aspects of the organization and do

not cover the qualitative aspects of financial statements.

Business Analysis Models:

Business analysis technique helps measure the intangible business environments of an

organization. There are various tools used to evaluate the business performance i.e. SWOT

analysis, Porter‟s five forces model, five Cs model and PESTEL analysis etc. Use of any of those

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

only SWOT and PESTEL analysis techniques for the purpose of this research report.

SWOT Analysis:

SWOT analysis is an important technique used to assess key internal and external factors

affecting company‟s performance. SWOT stands for Strengths, Weaknesses, Opportunities and

Threats. Strengths and Weaknesses are factors internal to organization whereas opportunities and

threats fall within external environments (Barefield and Comiskey, 1975). SWOT 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 exploiting the opportunities offered in the external environments. SWOT analysis can

especially be very helpful in following cases (DeBondt and Thaler, 1995):

1) Exploring opportunities available for introducing new products;

2) Deciding on future strategies;

3) Pointing to areas needing further improvement;

4) Aligning core strengths with the opportunities offered can help gain competitive edge

over competition (Goodrich, 2013).

Limitations of SWOT Model:

Dechow (1994) stated that SWOT analysis presents following limitations:

1) SWOT analysis is a time consuming process and needs updated information on all the

aspects of the organization which makes it prone to potential errors.

2) SWOT does effectively scans internal and external environments yet it does not offer any

possible solution to identified problems.

3) It is difficult to attach weights to identified issues in the internal and external

environments of the organization by using SWOT analysis tool and thus leaves

management to guess on their own about priority of countering them.

PESTEL Analysis Model

History of PEST analysis can be traced back to Francis Aguilar when he introduced ETPS i.e.

Economical, Technological, Political and Social environment (Barth, 1991). ETPS was a

strategic tool to scan external business environment. Later, Arnold Brown introduced his version

of external environmental scanning tool called STEP with same four environmental factors

(Dechow, Kothari and Watts, 1998). PESTEL analysis points to macro factors existing in

external business environment and how they can impact business performance. Macro factors are

attributed to external environments. PESTEL stands for Political, Economic, Social,

Technological, Environmental and Legal factors and can have significant effects on the overall

performance. PESTEL analysis is a strategic analysis tool which can help identify those factors

which shape and influence the business environments (Greig, 1992.). PESTEL analysis is simple

to perform, provides a platform to analyze cross functional skills, helps identify opportunities to

enter new markets and helps overcome potential threats before they are able to significantly

affect business operations. Though there are many advantages to performing PESTEL analysis,

yet it can be associated with few limitations as well. I have used PESTEL analysis for a detailed

audit of external business environment of McDonald‟s in which it operates.

Limitations of PESTEL Analysis: (Gu and Wu, (2000) stated following limitations of PESTEL

analysis:

1) Business environment of today‟s world is fast and rapidly changing owing to rapid

advancement in technology. PESTEL analysis is a time consuming process and in view

of the dynamic external environments, the analysis may itself become obsolete if not

completed quickly.

2) There is an enormous quantity of data that needs collected from the external

environments and then analyzed. Thus this not just proves to be a tedious time consuming

and costly affair but external factors need to be constantly monitored and updated as well.

3) As mentioned above that PESTEL analysis necessitates collection of an enormous data

which in itself becomes a limitation due to limited ability of its users to handle such vast

information and the users may lose sight of analysis‟ objectives. This is often referred to

as „paralysis by analysis‟.

4) PESTEL analysis only scans and monitors external environmental factors whereby

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

performance of an organization cannot be comprehensively understood till both internal

and external factors are not being analyzed properly. This is why it is emphasized to

conduct SWOT analysis in addition to PESTEL analysis so as to make the analysis

comprehensive in all respects.

5) PESTEL 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.

Financial Analysis

Description of Business: With 35429 restaurants in 119 countries and 60 million customers daily visiting their restaurants,

McDonald‟s is rightly claimed the largest fast food chain of the world (CNN, 2013). McDonald‟s

not just operates its own restaurants but also franchises and licenses it as well. McDonald‟s has

franchised or licensed a total of 28691 restaurants and operates 6738 restaurants (Datamonitor,

2013). The revenue is thus generated by its own operated restaurants as well the fees received

from its franchised restaurants. McDonald‟s franchise and license are usually granted on 20 years

term (McDonalds, 2013). The business operations have been segmented on the basis of different

geographical locations i.e. US, Europe, Canada, Latin America and APMEA consisting

Asia/Pacific, Middle East and Africa. US segment generates 31% of the annual revenue on

average whereas Europe and APMEA accounts for 40% and 23% of the revenues respectively

(McDonalds, 2013). UK, France, Germany and Russia are the biggest source of revenue

generation in Europe i.e. 67% of the revenues along with China, Australia and Japan accounting

for 54% of the revenue in APMEA (McDonalds, 2013). These seven markets together generate

75% of the total annual revenue for McDonald‟s and are thus referred to as „major markets‟

(McDonalds, 2013).

Burger King Worldwide, on the other hand, has a total of 13667 restaurants in 97 countries

around the world. 13615 restaurants are franchised and 52 are operated by the company itself

(Burger King, 2013). The business operations cover four major geographical segments i.e. 1) US

and Canada, 2) Europe, Middle East and Africa (EMEA), 3) Latin America and Caribbean

(LAC) and 4) Asia Pacific (APAC) (Burger King, 2013).

Revenue Analysis:

(Amount in $ Million)

McDonalds Burger King Wordwide

2011 2012 2013 2011 2012 2013

Revenue 27,006 27,567 28,105.7 2,339.9 1,970.9

1,146.3

Revenues for McDonald‟s have been increasing over the recent three years i.e. from 2011 to

2013. The revenues increased by 2% in 2012 and by 1.95% in 2013. If the revenue is analyzed

basing on the geographical segments just mentioned before, US contributed $8529 in 2011,

$8814 in 2012 and $8851 in 2013 of the total revenue for McDonald‟s (McDonalds, 2012 and

2013). Thus there has been 3.3% and 0.4% upward trend in the US market for 2012 and 2013

respectively. The revenues increased in 2012 mainly because of the positive comparable sales.

Revenues could not increase in 2013 per expectations of the company and there was just a

negligible increase in revenue mainly because the expansion and reimaging program of 700

restaurants in US did not fetch positive results, coupled with negative comparable sales

(McDonalds, 2013). Europe fetched $10886 of revenues in 2011, $10827 in 2012 and $11300 in

2013. Thus revenues for Europe slightly decreased by 0.54% in 2012 and increased by 4.4% in

2013. The decline in Europe‟s revenue for 2012 is attributed to weaker Euro and other

currencies, whereas the increase in revenue for 2013 is caused by positive sales in UK and

Russia and a stronger currency conversion of Euro partially offset by sales in Germany

(McDonalds, 2013). Revenues for APMEA have been $6019 in 2011, $6391 and $6477 in 2012

and 2013 respectively (McDonalds, 2013) thus increasing by 6.2% in 2012 and 1.4% in 2013.

Increase in revenue for 2012 is attributed to positive sales in China and Australia as well as

positive response from the customers to expansion program with 275 new restaurants opening in

China (McDonalds, 2013). Slight increase of 1.4% in 2013 is attributed to positive comparable

sales partially offset by the negative impact of foreign currency translation due to weaker

Australian Dollar and Japanese Yen as well as spread of Avian Influenza in China and other

APMEA regions (McDonalds, 2013).

Revenues for Burger King Worldwide, on the other hand, is seen declining over the three years

in consideration. The revenues declined by 16% in 2012 and 42% in 2013. Revenues based on

geographical segmentation reveals that revenues for all the segments declined from 2011 to 2013

less a slight increase of revenue amounting $6.3 million for Latin American and Caribbean

segment in 2012. The decrease in revenue is attributed to economic slowdown, inflation, rising

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

to a decreasing consumer spending trend for restaurant dining occasions (Burger King, 2013).

Liquidity Ratios: Liquidity ratios, as the name implies, points to the ability and ease of the

company to „liquidate‟ itself should there be a need.

Current Ratio:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Current Assets 4403 4922.1 5050.1 724.1 890.5 1074.4

Current Liabilities 3509.2 3403.1 3170 472.2 397 346

Current Ratio 1.25 1.45 1.59 1.53 2.24 3.11

Current ratio is the ability of the company to meet its current liabilities with its current assets.

Current ratio for McDonald‟s in 2011-13 can be seen rising from being 1.25 in 2011 to being

1.59 in 2013. The ratio has increased by 16% in 2012 because the current assets increased by

11.7% against a 3% decline in the current liabilities. The rise in current assets for 2012 is due to

$473 million increase in the prepaid expenses mainly due to derivative contracts of $256.1

million indexed to company‟s stock and market indices, included in the prepaid expenses for

2012 in an effort to hedge market driven changes (McDonalds, 2013). Current assets increased

by 2.6% in 2013 whereas the current liabilities further decreased by 6.8% thus there has been an

increase in current ratio by 9.6% in 2013. Increase in current assets for 2013 is due to $463

0

5000

10000

15000

20000

25000

30000

2011 2012 2013

27006 27567 28105

2339.9 1970.9 1146.3

Revenue Generation

McDonalds

Burger King

million increase in cash/cash equivalents which was required to repay $535 million debt

obligations in January 2014 (Datamonitor, 2013). The current ratio for Burger King is also

climbing @ 46.4% in 2012 and 38.8% in 2013 mainly because the current assets increased by

48% against decline in its current liabilities by 27% from 2011 through 2013. Current ratio for

Burger King is therefore better off compared to McDonald‟s.

Quick Ratio:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Current Assets 4403 4922.1 5050.1 724.1 890.5 1074.4

Inventory 116.8 121.7 123.7 13.7 6.7 1.2

Prepaid Expenses 615.8 1089 807.9 55.5 84.6 68.6

Current Liabilities 3509.2 3403.1 3170 472.2 397 346

Quick Ratio 1.04 1.09 1.29 1.38 2.01 2.9

The quick 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. excluding inventory and prepaid

0

0.5

1

1.5

2

2.5

3

3.5

2011 2012 2013

1.25 1.45

1.59 1.53

2.24

3.11 Current Ratio

McDonalds

Burger King

expenses etc. When the share of McDonald‟s lesser liquid assets is subtracted out of the current

assets, the quick ratio has declined to 1.04, 1.09 and 1.29 in 2011, 2012 and 2013 respectively.

The quick ratio has increased by 5% and 18.3% in 2012 and 2013 respectively due to an increase

in the inventories/prepaid expenses by 65% in 2012 and decrease by 23% in 2013. This 65%

increase in the prepaid expenses is attributed to hedging derivative contracts indexed to

company‟s stock and market indices (Research and Markets, 2013). Quick ratio can also be used

to measure this share of inventories etc. in the current assets of the company i.e. inventories and

prepaid expenses have been 16.6% of the current assets in 2011, 24.5% in 2012 and 18.4% in

2013. Quick ratio for Burger King has increased by 45.6% in 2012 and 44.2% in 2013. Quick

ratio for Burger King is better off when compared with McDonald‟s because the prepaid

expenses/inventory occupies just 9.5% of Burger King‟s current assets in 2011, 10.25% in 2012

and 6.5% in 2013.

Turnover ratios These ratios point to the ability of the company to turnover its assets and generating revenues out

of them.

Inventory Processing Period:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

0

0.5

1

1.5

2

2.5

3

2011 2012 2013

1.04 1.09 1.29 1.38

2.01

2.9 Quick Ratio

McDonalds

Burger King

Cost of Sales 7648.7 7845.2 7985.7 624.9 497.3 223

Average Inventory 113.35 119.25 122.70 13.70 10.20 3.95

Inventory Turnover

(times)

67.5 65.8 65 45.6 48.8 56.5

Inventory Processing

(days)

5.4 5.5 5.6 8 7.5 6.5

Inventory turnover points to the number of times inventory is turned over per business operating

cycle. On the other hand, inventory period indicates how many days inventory takes to be turned

over. Inventory turnover for McDonalds falls by 2.5% in 2012 as the cost of sales increased by

2.6% against an increase of inventory by 5.2%. Costs were negatively impacted in 2012 by

foreign currency translation of $97 million due to weaker Euro, low sales performance as well as

high labor charges in US and APMEA (McDonalds, 2013). The inventory turnover is further

pulled down by 1.2% in 2013 as the cost of sales increased by 1.8% whereas the average

inventory increased by 2.9%. A lower comparable sales performance and high commodity as

well as labor charges in 2013 particularly in US and APMEA, though partially offset by better

sales performance in Europe, affected the ability of the company to overcome cost pressure

(McDonalds, 2013). Inventory turnover for Burger King increases by 7% in 2012 as the cost of

sales decreased by 20.4% along with decline in inventory by 25.5%. The inventory turnover

further increased by 15.7% in 2013 as cost of sales decreased by 55% against fall of average

inventory by 61.2% in 2013.

Assets Turnover Ratio:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Revenues 27,006 27,567 28,105.7 2,339.9 1,970.9

1,146.3

Average Assets 32482.5 34188.9 36006.4 5633.3 5586.2 5696.25

Assets Turnover 83.1 80.6 78 41.5 35.3 20

Assets turnover tells us about the ability of the business to generate sales on each dollar of assets,

an increasing trend in assets turnover is thus appropriate. McDonald‟s assets turnover declined

by 3% in 2012 as the revenues for the company increased by 2% yet the assets increased at a

higher pace of 5.2% which pulled down the assets turnover by 3%. The increase in total assets of

the company in 2012 is attributed to a significant increase in its prepaid expenses owing to the

derivative contracts of $256.1 million, as explained above, and $1.8 billion increase in its

property and equipment due to extensive expansion program of the McDonald‟s particularly in

US and China (Financial Times, 2012). In 2013, the assets turnover further declined by 3.2%

because the revenues increased at 2% against a higher increase of 5.3% in average assets. Total

assets for the company increased in 2013 due to significant increase in cash/equivalents required

to meet debt obligations arising in January 2014, and increase in its property and equipment

0

1

2

3

4

5

6

7

8

2011 2012 2013

5.4 5.5 5.6

8 7.5

6.5

Inventory Processing

McDonalds

Burger King

which makes up 70% of its total assets increasing by $1.1 billion primarily due to capital

expenditures (Morningstar, 2013). Assets turnover for Burger King, on the other hand, decreases

consistently by 14% in 2012 and then by a significant fall of 53% in 2013. This point to poor

utilization of assets by Burger King in generating its revenues and places McDonald‟s at a much

better position than Burger King as far as asset management is concerned.

Profitability Ratios: Profitability ratio tells about the profitability aspects as well as

management efficiency of the company and are therefore closely watched over by the internal

management.

Gross Profit Margin:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Gross Profit 19357.3 19721.8 20120 1715 1473.6 923.3

Revenues 27,006 27,567 28,105.7 2,339.9 1,970.9

1,146.3

Gross Profit Margin 71.6 71.5 71.5 73.3 74.8 80.5

Gross profit margin is a measure to tell about the percentage of revenues which have been

converted into gross profit after taking out the cost of sales. Gross profit margin for McDonald‟s

0

10

20

30

40

50

60

70

80

90

2011 2012 2013

83.1 80.6 78

41.5 35.3

20

Assets Turnover

McDonalds

Burger King

is seen maintaining itself at 71.5% in 2012 and 2013 though it slightly fell from 71.6% in 2011

due to the fact that the gross profit increased by 1.88% in 2012 against 2% increase in revenues

thus pulling down the gross profit margin slightly to 71.5%. Cost of sales have been 28.2% of

total revenue in 2011, 28.4% in 2012 and 28.4% in 2013. Increase in cost of sales is attributed to

higher commodity as well as labor cost in US and APMEA (CNN, 2013). The gross profit

margin for Burger King is on the rise consistently by 2% in 2012 and then by 7.6% in 2013. This

increase in margin can be attributed to efficient and most prudent use of its direct costs which

have been declining by 20% in 2012 and then by 55% in 2013 (Burger King, 2013). The decline

in revenues is attributed to the net refranchising of Company restaurants and unfavorable foreign

exchange cost whereas the cost of sales reduced due to lower food, paper and product costs

(Datamonitor, 2013).

Net Profit Margin:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Net Profit 5503.1 5464.8 5585.9 88.1 117.7 233.7

Revenues 27,006 27,567 28,105.7 2,339.9 1,970.9

1,146.3

66

68

70

72

74

76

78

80

82

2011 2012 2013

71.6 71.5 71.5

73.3

74.8

80.5 Gross Profit Margin

McDonalds

Burger King

Net Profit Margin 20.3 19.8 19.8 3.76 5.97 20.4

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

measure the earning shareholders should expect on their investment in the company. Net profit

margin for McDonalds falls by 2.5% in 2012 as the net income decreases by 0.7% against 2%

increase in the revenues. Decrease in the net income in 2012 is attributed to negative impact of

foreign currency translation, higher effective tax rates and increase in selling and administrative

expenses (Business Recorder, 2013). Effective tax rate increased by 1.1% in 2012 due to

reinstatement of certain tax benefits by the US government which had already expired in 2011

(McDonalds, 2013). Selling and administrative expenses increased by 3% in 2012 because of

higher wages of the employees as well as sponsorship of London Olympics and cost of holding

owner‟s convention held worldwide (McDonalds, 2012). Net profit margin flattens at 19.8% in

2013 as the net income though increases at 2.2% yet offset by an equivalent 2% increase in the

revenues. Increase in the net income for 2013 is attributed to higher franchised margins as well

as lower administrative/selling expenses due to lower incentive based compensation (Business

Recorder, 2013). Net profit margin for Burger King increased by 59% in 2012 and then most

significantly by 241% in 2013. Net income increased in 2012 and 2013 due to higher comparable

sales, higher franchise and revenue on property as well as decrease in operating expenses i.e.

selling and administrative costs (Burger King, 2013).

ROE:

0

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10

15

20

25

2011 2012 2013

20.3 19.8 19.8

3.76

5.97

20.4

Net Profit Margin

McDonalds

Burger King

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Net Profit 5503.1 5464.8 5585.9 88.1 117.7 233.7

Average Equity 14512 14842 15652 1049.2 1112.1 1345.6

ROE (%) 37.9 36.8 35.7 8.4 10.6 17.4

Return on equity helps equity holders know the rate of return they can expect on their investment

in the company. ROE for McDonalds declines progressively by 3% in 2012 as the net profit

decreases by 0.7% against equity increase of 2.3%. The ROE decreased in 2012 primarily

because of the negative impact of foreign currency translation on net income. The ROE further

falls down by 3% in 2013 as the net profit increases by 2.2% only to be offset by a higher

increase of 5.5% in equity. Decline in ROE for 2013 is attributed to lower growth in operating

results (BBC, 2013). ROE for Burger King, on the other hand, is climbing consistently by 26%

in 2012 and then by 64% in 2013 attributed to significant and consistent increase in its net

income (BBC, 2013).

0

5

10

15

20

25

30

35

40

2011 2012 2013

37.9 36.8 35.7

8.4 10.6

17.4

ROE

McDonalds

Burger King

Long Term Solvency Ratios: Long term solvency ratios determine the ratio held between

debt financing and equity. It also shows the capacity of an organization to pay long term debt

along with interest expenses on debts.

Debt to Equity Ratio:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Debt 12500 13633 14130 3010.3 2905.1 2880.2

Shareholder’s Equity 14390 15294 16010 1049.20 1175.00 1516.20

Debt to Equity (%) 86.8 89.1 88.2 286.9 247.2 190

Debt to equity ratio is a very important ratio that can limit potentials of future debts to company

as financial institutions/lenders closely monitor this ratio before approving any debt for the

company. The gearing ratio for the McDonalds deteriorates in 2012 by 2.6% as the debt

increases by 9.1% against an increase of 6% in its equity. The net increase in debt for 2012 is

primarily because of the net issuances of $1.2 billion (McDonalds, 2012). The company however

still has the authority to borrow $5.4 billion from financial institutions as well as $2 billion on

account of committed and uncommitted line of credit agreements (McDonalds, 2012). The ratio

however improves by 1% in 2013 due to an increase in debt by 3.6% and a higher increase of

4.7% in its equity. Increase in debt for 2013 is attributed to $535 million net issuances

(Datamonitor, 2013). Moreover, 35% of the debt is denominated in foreign currency and thus

exchange rate in Australian dollar, Euro and British pound greatly affected the state of total debt

in 2013 (Financial Times, 2013). The gearing ratio for Burger King is surprisingly higher in all

the three years. Higher debt is attributed to losses on early extinguishment of debts and debt

refinancing initiatives to refinance the borrowed amounts under previous credit agreements

(Burger King, 2013).

Interest coverage ratio:

(Amount in $ Million)

McDonald’s Burger King Worldwide

2011 2012 2013 2011 2012 2013

Operating Profit 8529.7 8604.6 8764.3 362.5 417.7 522.2

Interest Expense 492.80 516.6 521.9 226.7 223.8 200

Tax Coverage 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 McDonalds decreases by 4% in 2012 as the

operating income increases by 1% against 4.8% increase in its interest expense. Interest expense

increased by 5% in 2012 as the debt increased by 9.1% thus the increase in interest expense is

mainly due to higher debt balances. The coverage decreases 1.2% in 2013 as the operating

income increased by 1.9% with interest expense increasing by 1% due to increase in the debt by

3.6%, and is attributed to fluctuations in foreign currency exchange rates (Financial Times,

2013). The company uses major capital markets, terminating swaps as well as derivatives to

reduce its interest liabilities. The interest coverage ability of Burger King, on the other hand, is

much lesser than McDonalds with an increase of 18.8% and 36.9% in 2012 and 2013

respectively. The interest expense for Burger King reduced by 1.3% in 2012 and by 10.6% in

0

50

100

150

200

250

300

2011 2012 2013

86.8 89.1 88.2

286.9

247.2

190

Debt to Equity

McDonalds

Burger King

2013 because the debt liability decreased by 3.5% and 1% in 2012 and 2013 respectively

(Business Recorder, 2013).

Business Context Analysis:

SWOT Analysis

Strengths

The company owns the largest percentage of the total sales of fast food all over the globe,

with a market capitalization of $101.1 billion (Datamonitor, 2013).

The company has a strong brand recognition and value around $40 billion (Euromonitor,

2013). This is the most popular brand name in the fast food industry. The company's mascot;

Ronald McDonald, is also hugely popular.

The company partners with some of the biggest brands in the world, such as Coca Cola,

Heinz Ketchup, Dannon Yogurt etc.

As mentioned above, 80% of the McDonalds operations are run by independent

franchises which allow the company to meet localized food requirements and ingenious

marketing campaigns.

The company targets children in its marketing campaigns from a very early age,

ultimately leading to increased consumer loyalty.

0

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4

6

8

10

12

14

16

18

2011 2012 2013

17.3 16.6 16.8

1.6 1.9 2.6

Interest Coverage

McDonalds

Burger King

Weaknesses

Over 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 (CNN, 2013).

The 'Mac Job' is seen as a very low paid and low skilled job, and as such isn't seen very

positively by employees (Morningstar, 2013). Ultimately, this leads to lower performance and an

increased employee turnover rate.

The company finds it difficult to differentiate itself from the numerous other fast food

chains on the market and the company opts to compete via setting very low price points.

Opportunities

The company can increase its sales by incorporating healthier food menus and items. This

will ultimately allow the company to not only increase its strengths, but also eliminate one of its

major weaknesses (CNN, 2013).

Change in consumer habits means that the business must open up new facets to meet

those needs. The company has already seen success with the McCafe, McStop and the

McExpress, and should introduce newer options that will allow it to truly tap in to a vast amount

of untapped consumers.

Threats

In most developed economies, the fast food industry is already so crowded that there's

very little space for the company to register any sort of growth (Financial Times, 2013).

The company faces a major threat from local fast food restaurants. Even though

McDonald's provides a number of localized food items on its menus, the amount of localized fast

food chains, which are run by natives are proving to be major competition.

A major portion of McDonald's income comes from foreign operations which means

fluctuations in currency exchange rates affects McDonalds profits. Because of the foreign

currency rate fluctuations, the overall profits in the year 2012 were significantly reduced

(McDonalds, 2012).

The company also faces threat related to spread of diseases in the animals whose meat is

being used in their products. McDonalds already saw a decline in their revenues for 2013 in

China and other APMEA regions due to spread of Avian Influenza in poultry (McDonalds,

2013).

PESTEL Analysis:

Political Factors

There are a number of groups within the United States as well as Europe that have talked

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

cholesterol and the rising rates of obesity as reference (Research and Markets, 2013). Also,

changes in the tax rate/policy directly affect companies like McDonalds. As mentioned above,

US government increased the effective tax rate by 1.1% in 2012 due to reinstatement of certain

tax benefits which had already expired in 2011 and thus had a direct effect on McDonalds‟ net

income (McDonalds, 2012).

Economic Factors

Whenever there's inflation within the economy where McDonald‟s franchises are based, the

companies/franchises faces negative trend in consumer‟s spending and even offsets its low

priced strategy. Also, as mentioned above, McDonalds often finds it difficult to deal with the

changes in the exchange rates. The revenues were affected by weaker Euro in 2012 and due to

weaker Australian dollar and Japanese Yen in 2013 despite of derivative contracts to hedge the

market (McDonalds, 2012).

Cost of sales increases due to high labor charges. As mentioned above, the increase in cost of

sales in 2012 and 2013 in the business segments of US and APMEA affected the revenues

adversely (Datamonitor, 2013).

Social Factors

The company establishes a positive mindset for their core consumers by introducing newer

options. The company has given the world an array of different dining needs and different types

of meals. It was also noted that people who are just below the age of thirty five are the most

frequent consumers of the McDonald's franchises (Research and Markets, 2013).

The company carries out market research in order to determine any changes in the needs and

wants of the target consumers. The company makes use of consumer behavior and product

personality in order to turn the market to its advantage.

The food menus of the company are set to meet the needs of the local consumers. The company

introduces localized food items in numerous different cultures to meet the needs and the tastes of

the local people (BBC, 2013).

Technological Factors

McDonalds 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 (Research and Markets, 2103). Because of the significant

improvements within the supply chain of the company as well as the inventory management

system, the company is able to perform well in the international market.

Legal Factors

Legally, the company is robust, though it is facing a constant slew of lawsuits in relation to the

methods used by the company to manufacture its food products, and more importantly, the

number of health food activists that are growing who are blaming McDonalds for increasing

obesity all over. The company has however addressed this issue by offering a number of

different healthy products, such as salads as well as apples on the menu. The company has begun

to release nutritional data of the food items that it has on the menu, which allows the company to

justify its ingredients.

Environmental Factors

The company pays lot of attention to their responsibilities related to environmental degradation.

This is why they have introduced the use of non- biodegradable substances for the glasses/cups

they use in an effort to decreasing the overall pollution (McDonalds, 2013). The company also

went over the issue of the use of Styrofoam in detail within its operations in Hong Kong and

Australia, in an attempt to address the issue at hand (Euromonitor, 2103).

Conclusion and Recommendations:

McDonalds‟ performance though can be seen higher than its competitor yet it needs to improve

upon a few of its facets to hold onto its market share which is threatened by its global

competitors as well as local fast food restaurants. Revenues are increasing but with declining

gross profit as well as net profit due to a host of factors mentioned above including the

increasing cost of sales, employees‟ high turnover rate as well as fluctuations in exchange rates

etc. Following suggestions are proffered to increase its business performance in the segments it

operates:

McDonalds 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.

High turnover rate of its employees can aggravate issues for McDonalds and thus

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

Cost of sales as well as operating expenses for McDonalds have been increasing over

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

which will help further lower its product prices and fetch extra market share.