Forecasting and Key Ratios for Mcdonald's Corporation

McDonald’s Corporation

Analysis and Remarks by Garrett Nevious

Executive summary

In the first-pass forecast, we find that the liquidity position of the firm has declined sharply. The debt ratio has improved slightly, but is still relatively higher than the industry average. Efficiency measures including the average collection period and inventory turnover remains unchanged.

In subsequent iterations, we examine the result of altering the firm’s collection period, inventory turnover, and debt ratio in order to mirror their industry averages. In doing so, the firm’s collection period and inventory turnover become less efficient when set to the industry benchmark. The debt ratio will decrease relatively, increasing the long-term solvency of the firm. By setting the debt ratio to industry average, we land near the firm’s theoretical optimal capital structure, and the firm’s liquidity position relative to previous iterations.

By downwardly adjusting the firm’s debt ratio, we reduce the amount of external financing to be obtained through short and long-term sources of debt. McDonald’s would have to raise equity to finance the increased level of assets.

Next we re-run our first-pass forecast, but use trend-lines to project spontaneous accounts rather than the percent of sales method. We again see that the liquidity of the firm is severely weakened.

Considering the data from these forecasts, it may not be an optimum plan to grow and expand the firm by the suggested magnitude of a 50% increase in sales and fixed asset. The liquidity of the firm will be severely damaged by this growth. The relatively low inventory of the firm due to JIT techniques only exacerbates this problem.

In the final forecast, we take a look at the pro-forma balance sheet after it has been reconciled with the income statement. This iteration paints a much different picture of the financial position of the firm following a 50% increase in...