The reason I chose McDonald’s stock is that it has seen an improvement over the years. The Company’s stock had gained tremendously by 9th November 2018 since 1st January 2003 with over 600 percent increase (Bruce, 2016). It was in 2015 when McDonald recorded a high increase regarding its sales growth and earnings per share (EPS). It’s EPS increased by 28 percent annually. Furthermore, a study on McDonald’s stock established that the company had a consistent rate of growth over a ten-year period. It also increments of the free cash flow of over nine percent. Additionally, considering McDonald’s growth status, there is no indication that it will slow down anytime soon. Moreover, there are certain investment conditions that the McDonald’s stock has considerably met.
Firstly, the stock investment is easy to comprehend and implement. Its business model is also quite self-explanatory. It is important to note that there are certain stocks that are quite difficult to understand and a bit complicated (Johnson, 2016). As such, it is not wise to invest in them without having undertaken an exhaustive research as Warren Buffet advises. Secondly, McDonald’s is a “Best in Breed” company. Ideally, this means that the firm has well developed brands including others that are emerging. It has done so mainly through franchising. Its brands are greatly admired and envied upon in the business market especially in the hospitality category. Notably, all well doing stocks, including McDonalds, have one of the best brands in the business world. Warren Buffet asserts that a firm doesn’t have to have invested for more than ten years to be regarded as the best stock investment. The most important thing is to have greatly established brands. The other stock investment condition that McDonalds satisfies is that the company has recorded high performance standards in the past. Some investors may argue that past performance does not dictate future results. While this may be true, it is often misleading.
The McDonalds stock also pays its stakeholders handsomely. The reason is, it has consistently developed a tremendous shareholder value. Additionally, McDonald’s is an established company. It is the second private company currently employing the most significant number of workers worldwide. As such, it fits this stock framework. Warren Buffet postulates that if you are investing in a company with high profile brands, then it would be easy to follow this requirement to the latter (Bruce, 2016). Another advantage of McDonald’s offers dividends. Some great companies like Google do not provide bonuses though it meets some of the most vital stock investment requirements. As such, it is highly advisable to purchase stocks from McDonald’s mainly when the capital is developing from a broad consolidation foundation or a particular market pullback. William O’Neill, a Business investor, created this strategy, popularly known as the CAN SLIM. It is, however, essential to purchase stocks which are cheap from McDonald’s company.
For starters, McDonald’s is presently the world’s most celebrated firm in the hospitality industry. McDonald’s stock recorded a market capital of approximately 145 billion dollars. The company began as a restaurant in 1940, but of now it has become the largest franchiser in the restaurant industry. McDonald’s currently has over 36,899 branches in approximately 120 countries and serves over 68 million persons every day (Johnson, 2016). The individuals who bought 100 shares of the firm’s stock when it began to offer its initial public offering (IPO), they now enjoy an investment of over seven million dollars. Additionally, they are also receiving a dividend of eighty-five cents per every share or sixty thousand dollars annually. The company’s success was achieved through its first franchised restaurant. The industry was opened by Ray Kroc. While celebrating its tenth anniversary, the hotel created its first public stock investment at twenty-two dollars per share. The company further increased its public stock 30 dollars per share after declaring itself a publicly traded firm on 21st April 1965. As a result, the directors made millions.
Ratio analysis is a comprehensive analysis of data compiled in a firm’s financial statement. The ratio analysis at McDonald’s assesses its financial and economic performance. Ratio analysis is also referred to as fundamental analysis by most invest analysts. It also evaluates McDonald’s company to establish whether the company is improving or lagging behind regarding its financial health. Ratio analysis does this by comparing McDonald’s financial position with other companies to find out how the company holds up. Financial ratios help to promptly evaluate the company’s financial situation before delving into its financial statement. Price-earnings ratios give information about the valuation of the company (NASDAQ). Debt-covering rates, on the other hand, provide insights about possible liquidity uncertainties. McDonalds Gross profit increased from 10,455,700 dollars in 2014 to 10,620,800 dollars. Its operating expenses reduced to 1,068,100 dollars in 2017 from 2,506.500 dollars in 2014. The company raised its net income, which is also applicable to its shareholders, to 5,192,300 dollars from 4,757,800 dollars.
Ratio analysis exists in different types. One common type is profitability ratio, which is also known as the return on investment ratio. Profitability ratio gives details about the performance of McDonald’s administration (Bruce, 2016). It also shows the profits the company is making and its ability to increase its revenue. There are many factors. However, that will determine the profitability ratios. They include disparity in costs, expenses including debts and buying assets. Gross profitability, which is under the profitability ratios, evaluates the sales margin of the firm. It can be considered as a way of measuring McDonald’s effectiveness and efficiency market-wise. Net profitability, on the other hand, assesses the entire cost-effectiveness of the organization or how much net worth the company accumulates. However, high profitability operating with low profitability may signify an issue with operating expenses which are indirect, for instance, interest expenses. As such, net profitability will reveal the efficiency of McDonald’s management.
Another specific profitability ratio is the return on assets (ROA). It will show how effectively McDonald’s organization is utilizing its assets. If there is a low return on asset, then this indicates that the management is inadequately inefficient. A high ROA suggests proper management. As a result, McDonald’s management should avoid unnecessary expenses. Return on investment 1, also known as, Owner’s Equity will show how well McDonald management deploys its equity investment (NASDAQ). Leverage will cause this measure to be higher compared to return on assets. ROI is regarded as one of most remarkable indicators of profitability. To comfortably fund the growth of McDonald’s, it is advisable for the company to have an ROI percent in the range of 10 to 14 percent. A low ROI shows improper management while a high ratio indicates the firm’s performance standard is high.
Return on investment, will assess the profits or loss incurred by McDonald’s restaurant over a particular period. Earnings per share, on the other hand, will provide the company’s gains per share capital. It also helps in evaluating the cost of the stock in comparison to other firms. Investment turnover will then assess McDonald’s capability to deploy assets to enhance sales. A Low number shows that the company has not utilized its assets effectively. A high figure indicates that the assets have been implemented and generate significant sales. Sales per employee are yet another profitability ratio category (NASDAQ). It evaluates the productivity of the company. A high figure at McDonald’s will mean that the organization has excellent personnel management.
Liquidity ratios are another vital ratio of analysis. It will reveal McDonald’s capability to repay its debts. As such, the company should have enough cash to enable it to deal with its obligation. Considering its financial statement from 2014 to 2017, McDonald’s is capable of paying its debts without any hassles (Johnson, 2016). Low liquidity levels mean that the management is ineffective or that it requires more operating capital. Liquidity is influenced by seasonality, economic status, and sales timing. Hence, McDonald’s management should try to limit its debts and borrowing tendencies. The best strategies that McDonald’s should take into account is to first and foremost deploy current ratio. The current rate assesses the company’s ability to repay its long-term debts, usually within a year. The current ratio should be in the ratio 2:1. A high current ratio indicates that the organization has some funds that could be utilized while a lower rate means that the company may not be in a position to foot its bills.
Quick ratio, is another liquidity measure. It requires the company to pay its debt on the short-term basis. The rate, therefore, should be 1:1. A lower quick ratio means that the company depends too much on inventory to meet its debt. A higher ratio indicates that the organization handles a high amount of cash in hand or possesses a poor accounts receivable system. Cash to total assets, on the other hand, will examine McDonald’s stock in hand assets. Excess funds ironically indicate inefficiency but a realistic high amount shows security from creditor’s perspective. Sales to receivables, measures the account receivable’s turnover on a yearly basis (Neville, 2017). A high figure indicates a short duration of time between cash collection and sales while a low value means the collection process takes a long while. The ratio may change according to season. Additionally, Days’ receivable ratio measures the account receivables outstanding number of days. Cost of sales to payables reflects the account payables turnover on a yearly basis. Low figures reveal good performance standards. Cash turnover indicates the ability of McDonald’s to fund its present operations, the working capital efficiency and the creditors margin of security.
Leverage ratio as a ratio analysis, details the how much the company has relied on borrowed debts. As such, banks look closely on Leverage ratio. McDonald’s should compare its liabilities with its assets. A low leverage ratio doesn’t provide McDonald’s the ability to take risks while a high figure raises the possibility of a company to increase its risks and uncertainties. One leverage ratio measure includes the debt to equity ratio. It will measure McDonald’s invested capital. A low debt to equity ratio means the company is on the safe side. A high ratio may spell doom for the organization (NYSE:MCD). The debt should be at least sixty percent of equity. The debt ratio, on the other hand, should measure the borrowing capital of the restaurant. McDonald’s company may be considered to be having a negative net worth if its debt ratio is higher than 1:0. Still on Leverage ratio, fixed to worth ratio, measures the capital the owner has invested in fixed assets. However, only tangible ones like property, plant and cash are considered. Interest coverage, reflect how easily the company can deal with its interest payments. A high interest coverage indicates that McDonald will be in a position to take another debt if necessary.
Ratio analysis, still accounts for efficiency ratios. Efficiency ratios aid the director and managers to run the business effectively. The ratios reflect how McDonald’s restaurant is acquiring funds for its sales (Neville, 2017). The data collected reveal whether the credit terms of the organization are realistic. One of the measures of efficiency ratio includes the annual inventory turnover. It indicates how efficiently McDonald’s company handles its distribution, storage and manufacture of products. A high annual inventory turnover means that the company is doing well but an extremely high one reflects a small selection and thus lost possible sales. A low annual inventory turnover indicates that McDonald’s restaurant is in a position to store a large inventory. Inventory holding period, on the other hand is an efficiency ratio that works out the days that elapse during the manufacture of finished goods and sale of goods. Inventory to assets ratio measures the assets that are attached to inventory. A lower ratio in this case is worthwhile. Accounts receivables turnover on the other hand, provides a measure of how swiftly credit sales are changed into cash. Collection period 365, indicates the company’s outstanding number of days during the elapse of cash collection and credit sales.
Solvency ratios help in comparing the organization’s debts against its assets, profits, and equity to determine whether the company can sustain itself on a long-term basis. In this case, McDonald’s should be able to pay its long-term loans and debt interests. Debt-asset ratio is an example of a solvency ratio (NYSE:MCD). Coverage ratios, on the other hand, indicate McDonald’s ability to pay its interests and other debts. An example of a coverage debt is debt-service coverage ratio. However, market prospect ratios, for example, dividend pay-out ratio and earnings per share, establish what profits McDonald may earn from its investments and its future trend regarding stock investments.
Stock analysis is the assessment of a specific trading tool, an investment industry or the entire target market. It tries to predict the future of trade, exchange or a device. It is a technique that McDonald’s management should implement when making critical decisions. The stock analysis may be either fundamental analysis or technical analysis. While using the primary analysis, McDonald’s restaurant should focus on information obtained from various sources including assets, market share, financial reports and records (Neville, 2017). The management should also regulate its financial statement, including its cash flow and income statement. As a result, it establishes how much the restaurant has made regarding its revenue and expenses it has incurred. Fundamental analysis will help McDonald’s fast food restaurant company to find out opportunities for investing. Structural analysis may also be regarded as ratio analysis in that it indicates the firm’s organization’s liquidity, leverage, efficiency and profitability (Gibson, 2015). The quick and current ratio determine whether the organization will be in a position to pay its short-term debts.