Acca Obu Rap Thesis on Topic-8
Transcript of 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)
McDonalds Burger ing !orld"ide
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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(Amount in $ Million)
McDonalds Burger ing !orld"ide
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:
(Amount in $ Million)
McDonalds Burger ing !orld"ide
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:
(Amount in $ Million)
McDonalds Burger ing !orld"ide
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.