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CFO Project – McDonalds Corp



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The global financial crisis of 2008 has put the role of regulators, auditors and

management under increased scrutiny by investors. Managers are challenged as never before

to address a multitude of issues that goes far beyond the single profit motive. Over the past

decade, there has been an increasing debate on the topics like sustainability, social

responsibility, environmental reporting, disclosure, corporate governance and accountability.

Financial statements and disclosures made under the traditional financial reporting paradigm

is subject to increased objection by the users. Consequently, financial reporting standards are

revised and updated – requiring companies to disclose detailed information about their

business affairs. This has also increased the importance of the role of BOD.

This paper attempts to perform the detailed financial statement analysis of McDonalds

Corporation and assess the readiness of its corporate governance structure. Detailed trend and

ratio analysis will be conducted to determine how the company is performing in different

areas (liquidity, profitability, solvency, market position) over time and as compared to the

industry level. Based on the analysis, the areas where the company may be vulnerable to

potential SEC action shall be identified and a recommendation will be made to improve the

performance. The second part of paper deals with assessing the corporate governance rigor of

McDonalds Corporation. This involve assessing the independence of BOD, audit committee

and linking their compensation with the performance to determine whether or not there are

instances where top management may be induced to commit fraud.

McDonalds Corp. is a fast food chain of restaurants. It operates more than 6,900

locations in over 100 countries. Headquartered in Illinois, United States, the company is

among one of the top fast food sellers in the world – with average annual revenue of about

$24 billion and market capitalization of $124 billion (SEC.GOV)


Forensic Financial Analysis

Financial Statement Analysis involves thoroughly assessing the liquidity, profitability

and solvency position of a business to determine whether or not the management has created

value for stakeholders i.e., one of the outcome of effective corporate governance is the

increase in value (net worth) of the organization – represented by the present value of future

cash flows discounted at the firm’s cost of capital. Although financial statement analysis

useful insights about the company’s performance, but at the same time, the published

accounts are also subject to fraudulent adjustments. For instance, accountants may exploit the

loopholes in financial reporting standards to their advantage i.e., boosting profits through fair

value adjustments, reducing profits through recording of provisions, recording fictitious

liabilities and revenues, charging significant amounts to other comprehensive income /

expense etc. and other similar methods used to “dress-up” the financial statements so that

they can give the desirable view to investor and other regulatory bodies.

Forensic financial analysis focuses on detecting irregularities in financial statements,

whether due to fraud, error or other secret motives. Identifying key trends and analysing them

to find out deviations over time will greatly help in spotting key areas where the company

might be vulnerable to fraud and thus, a likely SEC action. The research attempts to analyse

both financial and non-financial indicators to determine whether or not McDonald’s liquidity,

profitability and overall solvency position warrants a sustainable growth in revenues, market

share, geographical presence and overall portfolio.

An analysis of the financial statements, ratios and related notes of McDonalds reveals

some inconsistencies and irregularities that could be a sign of potential fraud or concealed

misstatement. Discussion regarding past 05 year key business ratios (KBR), industry

comparison and trend analysis appears below. Ratios are reflected in Appendix-2.

Ratio and Trend Analysis

 Liquidity & Efficiency: Cash and cash equivalents as a percentage of total assets

remained, on an average, in the range of 6% – 7% of total assets over the past 05 years

except 2015 and 2016. The 2015’s closing balance was up almost 270% from 2015 and

consequently, cash declined by 84% from 2015. Part of this can be attributed to increase

in long-term loan and treasury stock account as per balance sheet. Overall, the liquidity

position appears to be in-line with the industry average. However, receivables, inventory

and payables turnover have fluctuated significantly and are unusually over or below the

industry averages (See appendix-2).

 Profitability: ROIC and ROA ratio shows stable trend over the past 05 years. ROIC is in-

line with the industry trend but ROA is about 5% above from the overall restaurant

industry average. However, despite the fact that revenues have constantly declined on

year-on-year (YOY) basis since 2014, the net profit ratio remained broadly consistent

(within the range of 17% - 20%). Vertical analysis in Appendix-2 reveals that no other

operating cost and expense item has declined in the same trend that could explain this

anomaly. Overall, the ROE is negative since 2016 as net equity amount is negative

because of significant share repurchase arrangements.

 Debt management and solvency: Analysis of cash flow statement reveals that net cash

flow from financing activities is consistently negative since last 05 years. However, net

cash outflow from investing activities is only a very small fraction of net cash outflows

from financing activities. It implies that the most of the cash flow received from issuing

debt securities is used to repurchase the shares and up to some extent, to pay the

dividends and repayments of existing debt. This is also reflected in debt ratio i.e., the

percentage of interest bearing debt to total assets has increased from around 39% to 80%

over the past 05 years. However, despite this, the interest coverage remains consistent

with industry average as shown in Appendix-2. Overall, the debt position of McDonalds

has deteriorated constantly since last 05 years.

 Market & Valuation Ratios: Price to Earnings ratio (P/E) has improved since 2013 and

now sits above the industry average. Dividend yield has deteriorated during 2017 to 2.3%

as compared to 3.0% for 2016. However, the ratio was almost in-line with the industry

from 2013 to 2016. Dividend Pay-Out ratio of McDonalds is also above the industry

average and overall, the dividends declared per share has increased since last 05 years

according to the financial statements retrieved from SEC. Currently, the market cap of

McDonalds is about $124 billion (Yahoo Finance). As per 2017 financial statements the

outstanding shares (807.4 million) × current price ($157.6 per share) equals $127 billion

which is almost $3 billion above the book value – implying that the share price may be

subject to a slight upward adjustment if EMH apply (SEC.Gov).

Analysis of Accounting Policies

The notes to the financial statements of recent 10K annual report has been analysed

and following points are identified that may require attention and additional disclosure.

 During December 2015, the BOD of company approved a $15 billion share

repurchase program but in July 2017, the program was terminated and replaced with a

new share repurchase program, with no specified expiration date. The complete

break-down of the provision recognized under this arrangement is not disclosed.

 The operations of company requires it to maintain strict compliance with

environmental standards for food preservation, processing and packaging. However,

the notes to the financial statements of 10K report does not contain significant

information (such as carbon footprint) to determine whether or not the company is

following the best practices to ensure adherence with environmental laws.

 The company runs a complex share-based compensation program for its employees

and executives. During 2017, the company recognized about $345 million share based

compensation expense in other comprehensive income. However, the notes provide

explanation for only $131 million. The details of remaining $214 million ($345 -

$131) are not disclosed.

 McDonalds record certain assets and liabilities at fair value and management exercise

judgement to determine estimates regarding the measurement of certain items such as

employee benefits, businesses held for sale, impairment, litigation accruals, certain

derivate assets, liabilities and hedges. During 2017, a debit entry of $167 million in

derivate Miscellaneous Other Assets (non-hedging) and $76 million of loss in foreign

currency cash flow hedges is recognized in Other Comprehensive Income. No

additional details about the former entry are provided whereas the loss recognized is

more than 200% as compared to the previous year. However, no other details

showing the break-up for this value is provided in notes.

 For the year 2017, a gain of $1600 million is recognized in Other Comprehensive

Income relating to net investment hedges of foreign currency denominated debt as

compared to the gain of $654.9 recognized in 2016. Explicit reasons for this unusual

changes are not explained in the financial statements and related notes.

 Finally as per proxy statement, the company has increased its tax liability further to

the assessment recently completed by IRS. This could lead to paying of amounts that

are uncertain. However, the effect of this is not stated in financial statements

Contingencies and Commitment notes.


Vulnerabilities Identified

 Significant fluctuation in cash and cash equivalents: Cash and cash equivalent account

shows significant fluctuation over the past three years. As depicted in the below figure,

cash rose by almost 270% in 2018 and then declined by 184% in 2016.

Cash and equivalents (% Change YOY)

-25.8% 2014

269.9% 2015

-84.1% 2016

101.4% 2017

-150.0% -100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0%

Unusual change in the cash balance is one of the red flags that may indicate fraud i.e.,

significant amount of cash moved out to subsidiaries as a loan near the year-end may be

to conceal the unrecorded revenues and to bring the cash balance in-line with revenue

growth and receivable turnover. Conversely, unusual increase may be done to ordinarily

improve the liquidity position in order to get loan from bank (Singleton, 2010).

 Scrupulous entry in “Other Operating Income / Expense”: Financial statements for the

year ended 31st December 2017 show an entry of $1,163 million as other income which

relates to the sales of company owned restaurants. Although the company has been

reducing owned restaurants and using franchising since last 05 years, but the addition of

this amount results in improving the net profit margin.


-$247.20 2013

$18.60 2014

$209.40 2015

$75.70 2016

-$1,163.20 2017

-$1,500 -$1,000 -$500 $0 $500

Other operating (income) expense, net

Putting significant amounts in other liabilities, other income / expense and other

miscellaneous accounts is one way to conceal scrupulous non-cash provisions with the

objective to keep profit margins in agreement with the trend (Singleton, 2010). Therefore,

this area is vulnerable to SEC action.

 NP ratio remains stable despite declining revenues: As discussed in ratio analysis, the

revenues of McDonald has declined consistently since last 05 years. However, net profit

ratio remained relatively unchanged.

Revenue Growth VS Net Profit Ratio





-10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Net Profit Ratio Revenue Growth

Such a situation points out to “earnings management” which is a technique

accountants use to manipulate financial statements so that it gives a desirable view to the

users of financial information i.e., lenders (Robinson, 2008).



 Adequate disclosures and reporting should be made regarding the environment i.e.,

the waste management, food processing and preservation practices should be

explained in the notes to financial statements. The note shall explicitly describe the

company strategy for environmental protection, its workplace health and safety policy

and corroborate it with the facts and figures. Environmental audit and attestation fees

are rarely disclosed. Thus, it is recommended to disclose this if any (Gray, 2004).

 A detailed break-down of significant amounts reported in other assets / other income

(expense) and comprehensive income items should be given in the notes to financial

statements. This will contribute towards greater transparency and enable investors to

better analyse the financial statements.

 Capitalized interest amount is disclosed but the proportion of interest attributable to

each different item (like debt, hedging, leasing) is not provided. It is recommended

that currency translation impact on interest expense should be separately disclosed.

 A 2008 study conducted by Association of Certified Fraud Examiners (ACFE)

reported that only 7% companies in food processing industry hires the Certified Fraud

Examiner. It implies that organizations are most vulnerable to SEC action when their

management, accounting and security controls are weaker. Therefore, it is

recommended to get the internal controls audited from an external, independent fraud

examiner certified from the recognized institution like ACFE (Singleton, 2010). The

report of external auditor will reduce the probability of SEC action.

 Finally an effective strategy to manage foreign currency exposure should be devised.

The company earns a substantial portion of revenue in Non-USD currency and thus,

effective foreign exchange management is highly important (Robinson, 2008).


Corporate Governance Assessment

The trust of investors and other users of financial statements has deteriorated

significantly after the global financial crisis of 2008. For instance, the Enron scandal has

focused the attention of public from companies to auditors and regulators and board of

directors who are responsible for designing and implementing an effective corporate

governance system which investors (as well as lenders, trading partners, customers and

employees) can depend on. The goal of corporate governance is to ensure that management

should act in the best interest of shareholders. An effective corporate governance model

should foster the spirit of transparency, a culture of accountability and the participation of

people of integrity in the corporate reporting process (DiPiazza, 2002).

This section is dedicated to the assessment of McDonald’s corporate governance

structure and management’s adherence with applicable regulations such as SOX act,

environmental laws and other industry practices. In addition, the independence of audit

committee and board of directors shall be assessed. An effective corporate governance model

should results in increased transparency in reporting of financial information and disclosure

of economic substance in transactions (DiPiazza, 2002). A summary of corporate governance

practices for McDonald Corporation (as per proxy statement) is as follows;


Board Structure, Executive Compensation and Audit Committee

According to the most recent proxy statement, McDonalds Board of Directors is made

up of 12 individuals and 06 other executive officers. Except for Easterbrook, the CEO of

company, all other directors are independent. However, all of the six (06) executive officers

are non-independent (Morning Star). The board has established the following Committees

i.e., (a) Audit & Finance (b) Compensation (c) Governance (d) Public Policy & Strategy (e)

Sustainability & Corporate Responsibility and (f) Executive. All board committees, except

for the executive committee, are chaired by the independent directors. The company separates

the role of chairman and CEO so that the Chairman can focus on providing leadership to the

Board and in corporate governance matters while the CEO may focus on providing direction

regarding the management of company’s day-to-day business.

The company only pay compensation to the non-management directors. For the year

ended December 31, 2017, executive compensation for 06 personnel totalled $44.94 million

of which $4.17 million (9.28%) was attributable to salary, $18.50 million (41.15%) to equity

based compensation and remaining to other non-equity based compensation which include

short-term cash incentive (STIP – 16.29%) and company’s contribution under 401K plus

deferred compensation plan (12.46%). Break-up of remaining 20.82% is undisclosed.

Executive payouts are dependent on performance targets that are linked with certain financial

metrics including operating income growth, net income growth, return on incremental

invested capital (ROIIC), and total shareholder return (TSR) (Proxy Statement).

Ernst and Young (E&Y) served as an independent auditor of the company for the year

ended December 31, 2017. The lead audit partner changes every five years and the Chair of

audit committee is directly involved in the selection of engagement partner. Audit committee

is made up of four independent, non-executive directors who are solely responsible to assess

the auditor’s independence and determine fees to be paid for audit and other ancillary

services. Fees for audit and other related services totalled $12.5 million and $14.2 million for

the years 2017 and 2016 respectively. Audit and Finance Committee meets with the lead

partner (without involving other members of management) and conduct executive session

(with only the Committee members present) to assess the firm’s effectiveness and

independence. The same auditor has served the company since 1964 (Proxy Statement)

Stock Option Policy,

McDonalds maintain share-based compensation plan for its executives and directors. The

number of shares reserved for issuance under this scheme is 51.5 million at December 31,

2017 whereas the no. of shares was 31 million for 2016. Increase in the number of shares to

be issued under stock option plan and a consistent increase in treasury stock may indicate the

warning sign i.e., executives may be tempted to initiate programs to buy back shares in order

to reduce the equity (denominator) which will lead towards improving some performance

ratios like return on equity (ROE), ROIC and other shareholder ratios.

Pension Fund Policy etc.

The company operates a defined benefit pension plan for its employees. Under this

arrangement, the company has recognized the gain of $16.3 million during 2017. However,

during the previous year, a loss of $47.1 was recognized. Details are not sufficient to

determine whether this change is due to the change (curtailment or settlement) in plan. The

company also entered into derivate contracts to hedge market driven changes in some of his

employee benefit liabilities. This involves making judgements regarding the fair value of

defined benefit scheme which is subject to manipulation by management.


Weaknesses Identified

 Executive pay and compensation is linked with certain key metrics including ROIC,

growth operating margin growth and net profit growth which provide them an opportunity

to play “earnings game” which involves ordinarily boosting those measures of

performance to achieve assigned targets and thus, earn more money accordingly. For

example, since the revenue from franchised restaurants is recognized after the receipt of

initial fee, the management may use accruals to manipulate the timing of recording the

revenue which directly impact the profit margins (DiPiazza, 2002).

 One of the directors, Ian Borden, has served both as a president of foundational markets

and also as a CFO of McDonalds, Asia Pacific. However, segregation of duties and

control is one of the most important feature of effective corporate governance. For

example, a person in charge of cash should not be given the control of accounting and / or

book-keeping (Branson, 2001).

 As per the proxy statement, one of the shareholders required details of charitable

contributions. Accordingly, the board of directors recommended to vote against this

proposal on the grounds that it will incur unnecessary expense without providing any

meaningful benefit to shareholders and citing that the company have effective checks in

place that provide oversight of charitable contributions at limit the amount of contribution

at the management and Board levels. However, disclosure of corporate political

contributions is listed as one of the corporate governance practice in the same proxy

statement. Therefore, this is in conflict with the management’s action.

 Executive compensation totalled $44.9 million for the year 2017. However, the break-up

of 20.82% of this amount is not disclosed in the proxy statement.


 The company’s CEO, Mr Easterbrook holds the highest number of common stock

(320,817) in the company. Therefore, any decrease in the share price will effectively

reduce the net worth and reputational capital of the CEO. Therefore, it may induce him

to take decisions which results in increase of share price even though it may involve

fraudulently adjusting the financial statements to give a favourable view about company’s

valuation (Farber, 2005).

Implication of SOX Act

 SOX prohibits corporations to extend credit to executive officers or directors unless (a)

the loan terms are same as offered to general public and (b) the company is a financial

institution that issue credit in the ordinary course of business. However, although this is a

good initiative, but empirical studies indicate that this will cause organizational politics to

play role in demotivating the executives (Romano, 2004).

 Both SOX act and International Standard on Auditing (ISAs) requires the auditor to

communicate to the audit committee and the board about the scope and limitation of

audit, going concern uncertainties, changes in accounting policies, risk exposure and

other items requiring disclosure. Since E&Y is the company’s auditor since 1964, the

independence of auditor can be seriously questioned. Effective corporate governance

requires that internal audit function should be outsourced as it improves the auditor

independence and lead towards enhanced economic bonding (Abbott, 2007).

 Firms reported that the cost of being public has more than doubled since the introduction

of SOX – increasing, on an average, from $900,000 to $1.95 million. The increase is

primarily attributable to higher audit, assurance and compliance fees. Overall, although

the SOX has contributed towards improved corporate governance (benefitting investors)

but adversely affected small firms (Romano, 2004).


Most of the accounting activities and other business operations at Starbucks are ethical

and involve the contribution and analysis by other shareholders. The company has a set of

strict rules that curb fraudulent activities and misconduct among its accounting team,

which have improved confidence among the shareholders. However, to ensure adequate

compliance with the Sarbanes-Oxley Act of 2002, Starbucks employ an external audit

team to assess its accounting systems annually to identify and counteract potential fraud

in timely manner (Haloulakos, 2012). Nonetheless, the company should ensure that the

audit team is free from influence by any its parties and stakeholders. Starbucks should

further comply with the SOX act provisions by disclosing and remitting its financial

statements to its stockholders, government and other concerned stakeholders without

prior manipulation of the statements.


A well‑structured corporate governance compliance program should provide a holistic

framework for adherence with legislations and regulations. Given the weaknesses identified,

the following recommendations can be made to improve the situation;

 Part of the executive pay should be linked to the aspects of corporate governance i.e.,

adherence with SOX, community involvement, environment management etc.

 Build a culture of transparency and integrity i.e., executives should ask hard questions

and demand adequate answers. The BOD is charged with the responsibility to

determine which information stakeholders need and which information shall be

provided by management so that it will contribute towards reducing information gap

— the gap between what stakeholders believe is important for them to know and what

companies are willing to provide (DiPiazza, 2002).

 Recruit and retain quality staff. This will provide multiple benefits i.e., (a) reduced

risk of non-compliance, (b) trigger of early warning signals (c) allowing the

organization to qualify for favourable treatment in cases that would otherwise result in

imposition of fines and penalties etc.

 Carry out the surprise inspection of internal audit function and implement multiple

authorizations to approve a particular financial transactions (Romano, 2004).

 Continuously assess the independence of non-executive directors and their association

with other firms that do business with McDonalds. Relationships with other firms can

provide the opportunity for insider trading.

 Finally the audit committee should not be given the whole responsibility for risk

management and oversight. Instead, some aspects of risk management shall be

assigned to other related department / team.


Analysis of financial statements and accounting policies (in the spirit of forensic

analysis) reveals that there are some areas like share repurchase arrangements, significant

amounts charged to other comprehensive income, other operating income and gains

recognized on sale of the business in Hong Kong in China may indicate the potential fraud

i.e., since sales are falling, other income may be fraudulently increased through fair value

adjustment (window dressing) to present a favourable view of financial performance. The

topic of convergence of accounting standards will provide streamlining many of the country

specific GAAP with IASs – thus providing an integrated framework for financial reporting.

The inadequacy of disclosures is one of the most frequently cited problem in the current

paradigm. Hence, the company should consider giving more detailed disclosures.

An assessment of corporate governance structure provided useful insights about the

company’s top management philosophy and strategy. SOX and other related regulations has

made it mandatory for the board of directors to design and maintain an effective system for

internal control which identify and report deviations (whether due to fraud or error) in an

orderly manner. The deficiencies identified in company’s corporate governance structure

include lack of attention towards environmental management, keeping the same auditor since

1964, in-house internal auditing function which is not independent and complex executive

compensation arrangements involving RSU (Restricted Stock Units), Short-term Cash

Incentive Plans (STIP) and Stock Option schemes the details of which are not fully disclosed.

Therefore, corporate governance should be improved by considering the points listed in

recommendation section.

Overall, the financial statements of McDonalds cannot be said as completely free of

misstatements and neither the corporate governance is fully efficient.


DiPiazza Jr, S. A., & Eccles, R. G. (2002). Building public trust: The future of corporate
reporting. John Wiley & Sons.

Singleton, T. W., & Singleton, A. J. (2010). Fraud auditing and forensic accounting (Vol.

11). John Wiley & Sons.

Robinson, T. R., Hennie van Greuning, C. F. A., Henry, E., & Broihahn, M. A.

(2008). International financial statement analysis (Vol. 22). John Wiley & Sons.

Gray, R., & Milne, M. (2004). Towards reporting on the triple bottom line: mirages, methods

and myths. The triple bottom line: Does it all add up, 70-80.

Branson, D. M. (2001). The very uncertain prospect of global convergence in corporate

governance. Cornell Int'l LJ, 34, 321.

Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter?. The

Accounting Review, 80(2), 539-561.

Romano, R. (2004). The Sarbanes-Oxley Act and the making of quack corporate

governance. Yale LJ, 114, 1521.

Abbott, L. J., Parker, S., Peters, G. F., & Rama, D. V. (2007). Corporate governance, audit

quality, and the Sarbanes-Oxley Act: Evidence from internal audit outsourcing. The

Accounting Review, 82(4), 803-835.


Appendix-1: Vertical and Horizontal Analysis


Vertical Analysis (Years Ended 31st December)

Consolidated Income Statement
2017 2016 2015 2014 2013
Sales by Company-operated restaurants 64.9% 62.1% 55.7% 66.2% 67.2%
Revenues from franchised restaurants 35.1% 37.9% 44.3% 33.8% 32.8%
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Food & paper 21.8% 19.9% 17.7% 22.3% 22.6%
Payroll & employee benefits 17.3% 16.8% 15.5% 17.3% 17.2%
Occupancy & other operating expenses 15.8% 14.9% 12.5% 16.0% 15.6%
Franchised restaurants-occupancy expenses 6.5% 7.0% 7.8% 6.2% 5.8%
Selling, general & administrative expenses 9.6% 9.7% 9.8% 9.1% 8.5%
Other operating (income) expense, net 0.8% 0.3% -5.1% 0.1% -0.9%
Total operating costs and expenses 71.9% 68.5% 58.1% 71.0% 68.8%
Operating income 28.1% 31.5% 41.9% 29.0% 31.2%
Interest expense-net of capitalized interest 2.5% 3.6% 4.1% 2.1% 1.9%
Nonoperating (income) expense, net -0.2% 0.0% 0.3% 0.0% 0.1%
Income before provision for income taxes 25.8% 27.9% 37.6% 26.9% 29.2%
Provision for income taxes 8.0% 8.9% 14.8% 9.5% 9.3%
Net income 17.8% 19.0% 40.8% 17.3% 19.9%

Horizontal Analysis
Consolidated Income Statement
2017 2016 2015 2014
Sales by Company-operated restaurants -16.8% -7.2% -9.3% -3.7%
Revenues from franchised restaurants 8.3% 4.5% -3.7% 0.4%
Total revenues -7.3% -3.1% -7.4% -2.4%
Food & paper -17.6% -11.8% -9.4% -3.6%
Payroll & employee benefits -14.7% -6.0% -7.5% -1.4%
Occupancy & other operating expenses -22.4% -8.9% -8.6% 0.2%
Franchised restaurants-occupancy expenses 4.2% 4.3% -3.0% 4.5%
Selling, general & administrative expenses -6.4% -2.0% -2.2% 4.3%
Other operating (income) expense, net -1636.6% -63.8% 1025.8% -107.5%
Total operating costs and expenses -21.4% -7.6% -6.3% 0.8%
Operating income 23.3% 8.4% -10.1% -9.3%
Interest expense-net of capitalized interest 3.9% 37.7% 12.4% 9.2%
Nonoperating (income) expense, net -1019.0% -87.0% -6162.5% -97.5%
Income before provision for income taxes 24.9% 4.7% -11.1% -10.1%
Provision for income taxes 55.1% 7.6% -22.5% -0.2%
Net income 10.8% 3.5% -4.8% -14.8%

Vertical Analysis (Years Ended 31st December)

Consolidated Balance Sheet
2017 2016 2015 2014 2013
Current assets
Cash and equivalents 7.3% 3.9% 20.3% 6.1% 7.6%
Accounts and notes receivable 5.8% 4.8% 3.4% 3.5% 3.6%
Inventories, at cost, not in excess of market 0.2% 0.2% 0.3% 0.3% 0.3%
Prepaid expenses and other current assets 2.5% 1.8% 1.5% 2.3% 2.2%
Assets of businesses held for sale 0.0% 4.9% 0.0% 0.0% 0.0%
Total current assets 15.8% 15.6% 25.4% 12.2% 13.8%
Other assets
Investments in and advances to affiliates 3.2% 2.3% 2.1% 2.9% 3.3%
Goodwill 7.0% 7.5% 6.6% 8.0% 7.8%
Miscellaneous 7.6% 6.0% 4.9% 5.1% 4.8%
Total other assets 17.8% 15.9% 13.6% 16.0% 15.9%
Property and equipment
Property and equipment, at cost 108.4% 111.0% 99.4% 114.3% 110.2%
Accumulated depreciation and amortization -41.9% -42.5% -38.4% -42.6% -39.9%
Net property and equipment 66.4% 68.5% 60.9% 71.7% 70.3%
Total assets 100.0% 100.0% 100.0% 100.0% 100.0%
Current liabilities
Accounts payable 2.7% 2.4% 2.3% 2.5% 3.0%
Income taxes 0.8% 0.9% 0.4% 0.5% 0.6%
Other taxes 0.8% 0.9% 0.8% 1.0% 1.0%
Accrued interest 0.8% 0.8% 0.6% 0.7% 0.6%
Accrued payroll and other liabilities 3.4% 3.7% 3.6% 3.4% 3.5%
Current maturities of long term debt - 0.2% - - -
Liabilities of businesses held for sale - 2.2% - - -
Total current liabilities 8.6% 11.2% 7.8% 8.0% 8.7%
Long-term debt 87.4% 83.4% 63.6% 43.6% 38.6%
Long-term income taxes 7.0% 3.3% 0.0% 6.0% 4.6%
Other long-term liabilities 3.4% 3.4% 5.5% 4.7% 4.5%
Deferred income taxes 3.3% 5.9% 4.5% 0.0% 0.0%
Shareholders' equity (deficit)
Common stock - Par Value 0.0% 0.1% 0.0% 0.0% 0.0%
Additional paid-in capital 20.9% 21.8% 17.2% 18.2% 16.4%
Retained earnings 143.0% 149.0% 117.5% 126.5% 114.0%
Accumulated other comprehensive income -6.4% -10.0% -7.6% -4.4% 1.2%
Common stock in treasury, at cost; 866.5 and 841.3 million shares -167.2% -168.0% -108.5% -102.8% -87.9%
Total shareholders' equity (deficit) -9.7% -7.1% 18.7% 37.6% 43.7%
Total liabilities and shareholders' equity (deficit) 100.0% 100.0% 100.0% 100.0% 100.0%

Horizontal Analysis (YE 31st December)

Consolidated Balance Sheet
2017 2016 2015 2014
Current assets
Cash and equivalents 101.4% -84.1% 269.9% -25.8%
Accounts and notes receivable 34.1% 13.5% 6.9% -8.0%
Inventories, at cost, not in excess of market -0.2% -41.2% -9.0% -11.1%
Prepaid expenses and other current assets 46.6% 1.2% -28.7% -3.1%
Assets of businesses held for sale -100.0%
Total current assets 9.9% -49.7% 130.4% -17.1%
Other assets
Investments in and advances to affiliates 49.6% -8.4% -21.1% -16.9%
Goodwill 1.8% -7.1% -8.0% -4.8%
Miscellaneous 38.1% -0.7% 7.1% -0.1%
Total other assets 22.6% -5.0% -5.6% -5.9%
Property and equipment
Property and equipment, at cost 6.3% -8.6% -3.7% -3.0%
Accumulated depreciation and amortization 7.5% -9.5% 0.0% -0.3%
Net property and equipment 5.6% -8.0% -5.9% -4.6%
Total assets 9.0% -18.2% 10.8% -6.5%
Current liabilities
Accounts payable 22.3% -13.6% 1.7% -20.8%
Income taxes -0.5% 72.6% -7.2% -22.6%
Other taxes 3.4% -13.8% -6.4% -13.9%
Accrued interest 12.5% 6.2% -0.3% 5.5%
Accrued payroll and other liabilities -1.1% -15.9% 19.1% -8.4%
Current maturities of long term debt -100.0% - - -
Liabilities of businesses held for sale -100.0% - - -
Total current liabilities -16.7% 17.6% 7.4% -13.3%
Long-term debt 14.1% 7.3% 61.5% 5.7%
Long-term income taxes 134.6% -100.0% 23.8%
Other long-term liabilities 9.6% -49.2% 27.7% -1.4%
Deferred income taxes -38.4% 6.6% - -
Shareholders' equity (deficit)
Common stock - Par Value - - - -
Additional paid-in capital 4.7% 3.4% 4.7% 4.1%
Retained earnings 4.5% 3.7% 3.0% 3.7%
Accumulated other comprehensive income -29.6% 7.4% 89.5% -455.4%
Common stock in treasury, at cost; 866.5 and 841.3 million shares 8.4% 26.5% 17.1% 9.3%
Total shareholders' equity (deficit) 48.3% -131.1% -44.9% -19.7%
Total liabilities and shareholders' equity (deficit) 9.0% -18.2% 10.8% -6.5%

Horizontal Analysis
Consolidated Statement of Cash Flows
2017 2016 2015 2014
Operating activities
Net income 10.8% 3.5% -4.8% -14.8%
Charges and credits:
Depreciation and amortization -10.1% -2.5% -5.4% 3.7%
Deferred income taxes -93.2% 38371.4% -98.5% -459.9%
Share-based compensation -10.5% 19.4% -2.5% 26.6%
Net gain on sale of restaurant businesses 272.0% 89.6% - -
Other 157.8% 19.4% -7.6% 1278.7%
Changes in working capital items:
Accounts receivable 114.3% -12.0% -768.9% -52.0%
Inventories, prepaid expenses and other current assets -232.7% -37.4% -1016.3% -89.0%
Accounts payable -166.5% -698.7% -79.9% 23.1%
Income taxes -333.6% -363.5% -2051.5% -102.1%
Other accrued liabilities -481.3% -90.0% -2778.3% -220.2%
Cash provided by operations -8.4% -7.3% -2.8% -5.5%
Investing activities
Capital expenditures 1.8% 0.4% -29.8% -8.5%
Purchases of restaurant businesses -29.7% -22.1% -17.5% -5.8%
Sales of restaurant businesses -0.1% 186.0% -15.4% -8.4%
Proceeds from sale of businesses in China and Hong Kong
Sales of property 101.2% -61.1% 145.5%
Other 124.6% 455.8% -51.8% -62.2%
Cash provided by (used for) investing activities -157.3% -30.9% -38.4% -13.8%
Financing activities
Net short-term borrowings 267.0% -148.5% 15.5% -373.7%
Long-term financing issuances 25.1% -63.0% 563.4% 8.7%
Long-term financing repayments 100.4% -22.0% 92.4% -21.2%
Treasury stock purchases -58.1% 83.2% 90.7% 79.9%
Common stock dividends 1.0% -5.3% 0.4% 3.3%
Proceeds from stock option exercises 52.6% -5.6% 34.7% 0.9%
Excess tax benefit on share-based compensation -100.0% -27.9% -23.4%
Other 583.3% -94.9% 358.6% 8.5%
Cash provided by (used for) financing activities -52.8% -1631.7% -115.9% 14.2%
Effect of exchange rates on cash and equivalents -354.6% -58.0% -53.2% -999.3%
Cash and equivalents increase (decrease) -117.0% -212.1% -878.0% -255.8%
Change in cash balances of businesses held for sale -200.0%
Cash and equivalents at beginning of year -84.1% 269.9% -25.8% 19.8%
Cash and equivalents at end of year 101.4% -84.1% 269.9% -25.8%
Supplemental cash flow disclosures
Interest paid 1.3% 36.3% 11.8% 7.6%
Income taxes paid 16.7% 20.3% -16.9% -6.2%

Appendix 2: Ratio Analysis

Description of ratio 2017 2016 2015 2014 2013
Liquidity & Efficiency
Current ratio 1.84 1.40 3.27 1.52 1.59 1.74
Cash to current liabilities 0.85 0.35 2.60 0.76 0.88 0.68
Cash Flow from operations (CFO) to revenue 24.3% 24.6% 25.7% 24.5% 25.3% 20.5%
CFO to total assets 16.4% 19.5% 17.2% 19.7% 19.4% 14.8%
Receivable Turnover (Times) 6.4 10.4 12.7 15.0 14.3 31.4
Inventory Turnover (Times) 68.6 83.1 55.5 55.7 51.4 42.9
Payables Turnover (Times) 4.4 6.5 6.3 7.1 5.9 12.1

Return on Assets (ROA) 15.4% 15.1% 11.9% 13.9% 15.3% 10.4%
Return on Equity (ROE) -158.9% -212.6% 63.9% 37.0% 34.9% 33.3%
Return on Invested Capital (ROIC) 23.5% 23.5% 16.4% 19.2% 20.4% 21.0%
Net profit to gross profit 27.6% 23.8% 22.8% 22.3% 25.7% 23.7%

Gearing / Solvency
Debt ratio 87.4% 83.7% 63.6% 43.6% 38.6% 80.7%
Financial leverage (10.34) (14.07) 5.35 2.66 2.29 3.93
Debt to equity (9.12) (11.85) 3.44 1.18 0.90 1.24
Interest coverage 6.6 6.3 8.0 9.3 11.6 6.1

Market & Valuation Ratios

P/E ratio 26.4 21.6 23.0 17.3 15.2 21.9
Dividend yield 2.3% 3.0% 3.1% 3.9% 3.7% 3.9%
Payout Ratio 59.6% 65.8% 71.4% 67.6% 55.8% 43.1%
Market to Book (M/B) Ratio (42.0) (46.0) 14.7 6.4 5.3 5.5

* Retrieved from IBIS, D&B, CSI Markets, Yahoo Finance and Morning Star.