Financial Analysis of McDonald's

Eighty-five percent of the restaurants are independently owned and operated, with company-run stores making up the other 15%. Stock increased by 16% in 1994, and 25% of all McDonald's stock is owned by employees, licensees, and suppliers (Hoover's Online, 1999).

McDonald's is a large owner of real estate, since its policy as established by founder Ray Kroc, was that if the company owned the land, it became the landlord, and could evict the tenant at any time, a situation that helped establish a good guarantee of quality control.

The franchise owner only "owns" a 20-year agreement, renewable at the company's option. Under that agreement, the franchisee agrees to equip and run a restaurant and pay McDonald's 12.5% of gross sales in royalty and rent. Other restrictions apply. McDonald's storeowners can not operate any other business, they are not given an exclusive territory, and they take most operating instructions from the Corporate headquarters in Oak Brook, Ill. Franchisees spend a minimum of 4% of sales for marketing (Catain, 1999).

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96  54.25  41  45.38   1995  48  28.63  45.13   1994  31.38  25.56  29.25   1993  29.56  22.75  28.50   1992  25.19  19.13  24.38   Observations The rise in revenues from 1994 to 1995,1224 to 1427 without a significant change in the margins does not justify the leap in the company's stock price from $29.25 to $45.13 (closing). Therefore, we must look to other situations. One possible assumption is that the continued worldwide expansion brought more investor confidence. Another possibility, according to the franchisee quoted before, is that the company changed advertising agencies and went back to aggressive price advertising instead of institutional (Catain, 1999).  Stock P/E History Year  High P/E  Low P/E   1997  24  18   1996  25  19   1995  25  15   1994  19  16   1993  21  16   1992  20  15   Observations The spread between the P/E ratios suggest that the stock was undergoing normal market fluctuations. When an investor buys a stock or a bond he is buying it based on a number of expectations. The most important is that he will get money (dividends) in addition to the money he invested. The percentage of money earned above the money invested is known as rate of retu
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