The Analysis of McDonald’s and A&W Statements to Assess Financial Health

The Analysis of McDonald’s and A&W Statements to Assess Financial Health

The global fast-food industry will continue to grow tremendously for several years. The market is poised to witness massive growth due to the increase in the number of fast-food restaurants, change in consumer taste and preferences and increase in working women across the globe. Among the emerging economies, China, India, and Brazil dominate in fast food consumption because of the large population and the massive growth in fast food outlets such as McDonald’s, Burger King, Subway, and Dunkin’ Donuts. This paper analyzes the financial statements filed by McDonald’s and A&W for the year 2020. Subsequently, it proposes the healthier company of the two, which would be more viable for investment.

Industry and Company Overview

On a regional basis, North America is one of the principal markets for the fast-food industry. In 2019, it accounted for the maximum share in the global market (Businesswire, 2020). Such a trend results from the high consumption of fast food in the U.S., Canada, and Mexico. By 2022 the tendency of the fast-food industry is estimated to bloom from $533,244 M to $743,859 M at a 4.8% CAGR (Compound Annual Growth Rate) (Farooqui, 2019). However, factors such as the increased health concerns and the high cost of setting up fast-food restaurants could hamper the growth. According to Hruby and Hu, “if secular trends continue, by 2030 an estimated 38% of the world’s adult population will be overweight and another 20% will be obese” (2014, p. 2). There is also the mixed impact of the COVID-19 pandemic on the fast-food industry. For instance, the increased demand for takeaway food and the global economic decline may reduce demand for such products. Nevertheless, some companies, such as MCDONALDS and A&W, remain steadfast in their strategies to remain on top competitively.

McDonald’s

Ray Crocker founded McDonald’s in 1955. By 2017, the company had more than 37,000 restaurants in 120 countries globally, offering high-quality food and services to over 69 million customers daily (Wu, 2020). As described in Form 10-K, the company operates in 119 countries. Of the 39,198 restaurants by the end of 2020, 36,521 were franchised, 93% of McDonald’s restaurants (McDonald’s Corporation, 2020). The company is primarily a franchisor and believes franchising is key to delivering great-tasting food, locally relevant customer experiences, and driving profitability. The company’s revenues consist of sales by company-operated restaurants and fees from restaurants operated by franchisees. Others include technology fees paid by franchisees, revenues from brand licensing arrangements, and third-party revenues from the Dynamic Yield business. According to its Form 10-k details, the company states that it purchases food, packaging, equipment, and other goods from numerous independent suppliers. It has successfully established and enforced high food safety and quality standards. It offers many products including, but not limited to hamburgers and cheeseburgers, Big Mac, Filet-O-Fish, chicken sandwiches, fries, salads, and shakes.

A&W

A&W is another big brand in the industry, known for its original beverage: The A&W root beer and food quality. In 1919, Roy Allen decided to set up a drink stand at a parade honoring World War I veterans returning from California. He offered a new product called root beer. The decision became much successful such that he took on a business partner, Frank Wright. As a result, the two combined their initials to create brand millions of customers find irreplaceable in the industry. The company celebrated its 100th anniversary in 2019. The COVID-19 pandemic affected the company negatively in the 2020 second and third quarters because most restaurants at the time remained restricted to drive-thru operations, limited take-out, delivery, and mobile ordering only (A&W, 2021). The third quarter saw some steady improvements with several restaurants permitted to re-open. Food services have continued to grow new A&W restaurants, especially in the Ontario and Quebec markets. The company achieved a milestone in 2002 by opening the A&W’s 1,000th restaurant.

Overall Analysis

Sales Performance

McDonald’s global comparable sales decreased 7.7% in 2020 primarily because of COVID-19. Sales in the U.S. increased 0.4%, benefiting from average check growth and positive sales primarily at the dinner daypart. A&W’s same-store for its restaurants decreased by 9.3% for the fourth quarter of 2020 compared to the fourth quarter of 2019. Annual same-store decreased by 14.3% as compared to 2019. A&W attributed this decline to the COVID-19 pandemic. In overall sales, McDonald’s performed better during COVID-19 than A&W.

Cash Flow

McDonald’s

For McDonald’s, cash provided by operations totaled $6.3 billion in 2020, a decrease of $1.9 billion, an equivalent of 23%. Free cash flow was $4.6 billion in 2020, a decrease of $1.1 billion, an equivalent of 19%. Cash provided by operations decreased in 2020 compared to 2019 primarily due to a reduction in operating earnings caused by the COVID-19 pandemic. In 2019, cash provided by operations totaled $8.1 billion, an increase of $1.1 billion, an equivalence of 17% compared with 2018. Cash used for investing activities totaled $1.5 billion in 2020, a decrease of $1.5 billion compared with 2019. Cash used for financing activities totaled $2.2 billion in 2020, a decrease of $2.7 billion compared with 2019.

A&W

A&W had a net income and comprehensive income of $28,374,000 in 2020, compared to $32,558,000 in 2019. The dividends paid to non-controlling interest amounted to $6,811,000 in 2020 compared to $7,828,00 the previous year. The total cash used in financing activities amounted to $28,991,000 in 2020, compared to $32,519,000 the previous year. The amount spent by A&W on financing activities is way below that of McDonald’s. Investors often consider this as crucial information to indicate the health of a company because the focus is to put money on a growing business which indicates a high return on investments. A&W does not provide crucial information on investing activities and cash from various operations, which could be due to the product types and income sources. Overall, McDonald’s gives more information regarding cash flow.

Shareholder Value and Assets

McDonald’s total cash returned to shareholders amounted to $4,627,000 in 2020, compared to $3,582,000 in 2019. It includes $3,753 dividends paid in 2020, a slight decrease from $3,582,000 in 2019. The company has paid dividends on its common stock for 45 consecutive years and has increased the dividend amount every year. Total assets increased $5.1 billion or 11% in 2020 compared to 2019. When compared to A&W, McDonald’s performed way better. For instance, from January 1, 2020, to December 31, 2020, A&W’s total distributable cash generated for distributions and dividends was $30,009,000, compared to $33,143,000 in 2019. This annual decrease was attributable to the $4,048,000 decrease in royalty income and $203,000 increase in general and administrative expenses. In 2020, A&W had assets totaling to $352,976,000 compared to $322,717,000 in 2019. It was a considerable increase since the company operates on a smaller scale than McDonald’s.

The Overall investment decision

Comparing the two companies, McDonald’s is healthier. First, McDonald’s has better profitability as its annual revenue decreased by a small margin in 2020 compared to 2019 despite the COVID-19 pandemic. As an investor, profitability should always be the priority in deciding where to put the money, and in this case, McDonald’s wins. Second, in terms of operating efficiency, McDonald’s wins over A&W. Understandably, A&W is smaller in terms of market and overall reach than McDonald’s, but still means a lot to an investor. Notably, McDonald’s records the amount spent on financing and investing activities, and it is such a significant amount and advantage to its investors. Despite insufficient facts on A&W figures in this category, McDonald’s indicates that cash used for investing activities totaled $1.5 billion in 2020, a decrease of $1.5 billion compared with 2019. McDonald’s spent $2.2 billion in 2020 for financing activities, considerably higher than the $28,991,000 used by A&W. The focus on investing activities indicates that McDonald’s has more potential to grow in the future and earn more revenue. Finally, McDonald’s has more assets than A&W. A company with more assets indicates better management, leadership, more income, and competitive advantage. Therefore, I would invest in McDonald’s because there is more possibility of earning greater returns than in A&W given the above information.

Conclusion

Analyzing statements is a great way to gauge a company’s financial performance. Looking at Form 10-k for McDonald’s and A&W, it is possible to tell that the former has greater profitability, greater operating efficiency, and higher ability to pay any debts and compensate shareholders in time. These are crucial factors for investors because such companies often record high returns on investments and would always be the best choice when deciding where to put their money. Companies should always consider making annual reports public and not concealing them because they are vital in understanding their performance. Investors get crucial information from financial statements, and this is why the government requires corporations to file annual reports and make them public.

References

A&W. (2021). Annual Report. https://www.sedar.com/. https://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00017286

Businesswire. (2020, July 16). Fast food industry analysis and forecast 2020-2027 – ResearchAndMarkets.com. https://www.businesswire.com/news/home/20200716005498/en/Fast-Food-Industry-Analysis-and-Forecast-2020-2027—ResearchAndMarkets.com

Farooqui, M. (2019). Fast food trend analysis by evaluating factors leading to customer satisfaction. Journal of Marketing and Consumer Research. https://doi.org/10.7176/jmcr/55-06

Hruby, A., & Hu, F. B. (2014). The epidemiology of obesity: A big picture. PharmacoEconomics, 33(7), 673-689. https://doi.org/10.1007/s40273-014-0243-x

McDonald’s Corporation. (2020). McDonald’s Corporation Form 10-K. https://sec.report/. https://sec.report/Document/0000063908-21-000013/

Wu, F. (2020). An Analysis of McDonald’s Business Model Based on Business Ecosystem Theory. https://rsucon.rsu.ac.th/files/proceedings/inter2020/IN20-148.pdf