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McDonalds Company Evaluation and Financial Analysis
McDonalds Cash Flows
The factors that could contribute to McDonalds cash flows include inventory, accounts payable, sunk costs, low profits, and over-investment. The McDonalds menu consists of more than 200 food items, and introducing the Create Your Taste burgers implies that all the ingredients necessary to produce the burgers must be available. McDonalds risks accumulating excessive inventory since some of the elements may remain unused or expire, thus resulting in losses.
McDonalds also must increase the amount it spends on paying its suppliers for various raw materials, and this increases the companys accounts payable. Installing the new ordering system could result in sunk costs if the customers consider them ineffective or irrelevant. The sunk costs would arise because McDonalds would find it difficult to install the redundant systems in its future programs or projects. McDonalds is facing stiff competition from other businesses, and introducing the new system could further reduce the companys profit if the system does not appeal to customers. McDonalds also risks over-investing by introducing its new system into 2,000 restaurants simultaneously.
The impact of introducing the Create Your Taste burgers to 2,000 restaurants will increase the competitiveness of the company as it competes with companies such as Starbucks and Burger King. The companys management acknowledges the need to attract younger consumers, and its new IT system will improve McDonalds image among its consumers of different age groups. However, the new system also increases the risk of the company to make more losses if the targeted consumers have negative feelings about the system. McDonalds can increase its cash flows by advertising the new system to create awareness among the consumers since this will reduce consumers rejection or apathy to Create Your Taste burgers. The McDonalds should also reduce the number of outlets where it will introduce the Create Your Taste burgers because this will reduce losses due to overstocking various ingredients.
McDonalds Positive Growth Expectations
McDonalds continues to lead in the fast-food industry due to the companys response to the demands of its consumers and franchisees. Previously, consumers required a high diversity of meals offered by fast-food restaurants, and McDonalds responded by increasing the available foods in its menu to 200. McDonalds also realized that most of its consumers needed affordable, fast foods, and the company responded by introducing a wide variety of cheap meals. However, the companys management realized that many complications arose from so many foods on the menu, and McDonalds sought to respond by reducing its menu without compromising on quality. McDonalds has also succeeded in developing positive growth expectations by incorporating various innovations within its operations. For instance, the new ordering system promises to revolutionize the fast-food industry and increase McDonalds competitiveness.
The positive growth rate expectations on McDonalds have helped improve the companys value for many decades. The company enjoys strong investor confidence, although it has endured some turbulent periods in the past. The strong investor confidence arises due to McDonalds impressive cash flow, and this has assisted the company in withstanding turbulent times due to economic challenges and competition from other businesses. The company also engages in aggressive refranchising of restaurants, and this has allowed McDonalds to grow rapidly. However, McDonalds can reverse the factors that have improved the value of its business if it does not institute a proper marketing plan that would ensure its new ordering system becomes effective. Poor implementation of the new system could result in losses to the company and damage its reputation further due to declining sales. Inaccurate records on the impact of the new system may result in bad judgments by McDonalds management.
McDonalds Cost of Capital
The cost of capital for McDonalds could increase due to various factors such as the prevailing economic conditions, the companys dividend policy, an increase in tax rates, and the amount of financing needed for the new ordering system. Worsening economic conditions due to recessions or increased competition will reduce the returns on McDonalds investment and increase the cost of capital incurred. McDonalds has consistently increased the dividend it offers its shareholders, and if the new system does not increase the companys profit margins, the cost of capital for McDonalds will increase. The increase in tax rates would reduce the companys profits.
Since McDonalds will invest in installing the new ordering system, the companys cost of profit will be high. The cost of capital will also increase if the amount of financing needed to install the new ordering system is high.
The possible factors that would decrease the cost of capital for McDonalds include advertisement, a reduction in tax rates, and improvement of economic conditions. An advertisement will increase consumer awareness of the companys system and encourage them to visit McDonalds outlets to try the system. A reduction in tax rates will enable the company to realize higher profit margins, thus reducing the cost of capital. An improvement in the economic conditions would allow McDonalds customers have more disposable income, and this will result in an increase in the consumption rates of McDonalds products. The factors affecting the companys cost of capital have a direct impact on the value of McDonalds since the company is valuable if it realizes greater profit margins. An increase in the cost of capital reduces the value of the company, while a reduction in the cost of capital increases McDonalds value.
Enhancing McDonalds Value
McDonalds has several options to improve its value. For instance, ensuring that the new ordering system operates flawlessly will encourage more consumers to use it, and this will improve the companys competitiveness. McDonalds can adopt vigorous advertising to ensure that its consumers are aware of its new products and services. Lack of awareness may make the consumers less appreciative of McDonalds efforts to improve its operations. A Proper advertisement will help increase McDonalds sales volumes, reduce the companys cost of capital, and make McDonalds valuable. The company should also invest in improving its brand name by responding to the criticisms leveled against it. McDonalds currently faces an arduous test in redeeming its image after damning shows such as Super Size Me and Food, Inc. that criticized the company.
Such shows have made McDonalds products less attractive to young and health-conscious consumers. McDonalds also faces criticisms from other sources such as health activists who argue that the company uses dangerous preservatives in its products. Labour unions also point out that McDonalds exploits its employees in different ways, such as offering low minimum salaries and threatening the employees. Addressing such concerns will enable the company to restore its image among its consumers. One of the methods McDonalds can use to minimize the risk of shareholders as investors are ensuring that the companys strategic decisions maximize its value. McDonalds should ensure that the new ordering system improves the companys service provision.
Investment Decisions
As an analyst, I would encourage investors to hold their shares in McDonalds because the company has consistently offered high dividends to its shareholders for many years. McDonalds is a resilient company that has managed to withstand several challenges to remain the leading fast-food restaurant in the United States. McDonalds is a global brand, and this guarantees its investors of improved performance in the future. McDonalds rebounded from poor performance during the 2002-2003 financial year, and the company has an opportunity to experience similar improvements despite the current poor performance.
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