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McDonald’s Corp. (MCD)

Economic Value Added (EVA)

High level of difficulty

EVA is registered trademark of Stern Stewart.

Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.

Economic Profit
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

Economic Profit

McDonald’s Corp., economic profit calculation

US$ in thousands

	12 months ended	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Net operating profit after taxes (NOPAT)¹
	Cost of capital²
	Invested capital³

	Economic profit⁴

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

¹ NOPAT. See details »

² Cost of capital. See details »

³ Invested capital. See details »

<>⁴ 2018 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= hidden

–

Item	Description	The company
Economic profit	Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital.	McDonald’s Corp.’s economic profit increased from 2016 to 2017 and from 2017 to 2018.

Net Operating Profit after Taxes (NOPAT)

McDonald’s Corp., NOPAT calculation

US$ in thousands

	12 months ended	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Net income
	Deferred income tax expense (benefit)¹
	Increase (decrease) in deferred revenues, initial franchise fees²
	Increase (decrease) in equity equivalents³
	Interest expense, net of capitalized interest
	Interest expense, operating lease liability⁴
	Adjusted interest expense, net of capitalized interest
	Tax benefit of interest expense, net of capitalized interest⁵
	Adjusted interest expense, net of capitalized interest, after taxes⁶
	Net operating profit after taxes (NOPAT)

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

¹ Elimination of deferred tax expense. See details »

² Addition of increase (decrease) in deferred revenues, initial franchise fees.

³ Addition of increase (decrease) in equity equivalents to net income.

⁴ 2018 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= hidden × hidden = hidden

⁵ 2018 Calculation
Tax benefit of interest expense, net of capitalized interest = Adjusted interest expense, net of capitalized interest × Statutory income tax rate
= hidden × 21.00% = hidden

⁶ Addition of after taxes interest expense to net income.

Item	Description	The company
NOPAT	Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income.	McDonald’s Corp.’s NOPAT increased from 2016 to 2017 and from 2017 to 2018.

Cash Operating Taxes

McDonald’s Corp., cash operating taxes calculation

US$ in thousands

	12 months ended	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Provision for income taxes
	Less: Deferred income tax expense (benefit)
	Add: Tax savings from interest expense, net of capitalized interest
	Cash operating taxes

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

Item	Description	The company
Cash operating taxes	Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction.	McDonald’s Corp.’s cash operating taxes increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Invested Capital

McDonald’s Corp., invested capital calculation (financing approach)

US$ in thousands

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Current maturities of long-term debt
	Long-term debt, excluding current maturities
	Operating lease liability¹
	Total reported debt & leases
	Shareholders’ equity (deficit)
	Net deferred tax (assets) liabilities²
	Deferred revenues, initial franchise fees³
	Equity equivalents⁴
	Accumulated other comprehensive (income) loss, net of tax⁵
	Adjusted shareholders’ equity (deficit)
	Invested capital

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

¹ Addition of capitalized operating leases.

² Elimination of deferred taxes from assets and liabilities. See details »

³ Addition of deferred revenues, initial franchise fees.

⁴ Addition of equity equivalents to shareholders’ equity (deficit).

⁵ Removal of accumulated other comprehensive income.

Item	Description	The company
Invested capital	Capital is an approximation of the economic book value of all cash invested in going-concern business activities.	McDonald’s Corp.’s invested capital increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

Cost of Capital

McDonald’s Corp., cost of capital calculations

	Weights			Cost of capital
Equity²		÷	=		×		=
Debt obligations³		÷	=		×	× (1 – 21.00%)	=
Operating lease liability⁴		÷	=		×	× (1 – 21.00%)	=
Total capital:	Total weights:			Cost of total capital:

Based on: 10-K (filing date: 2019-02-22).

¹ US$ in thousands

² Equity. See details »

³ Debt obligations. See details »

⁴ Operating lease liability. See details »

	Weights			Cost of capital
Equity²		÷	=		×		=
Debt obligations³		÷	=		×	× (1 – 35.00%)	=
Operating lease liability⁴		÷	=		×	× (1 – 35.00%)	=
Total capital:	Total weights:			Cost of total capital:

Based on: 10-K (filing date: 2018-02-23).

¹ US$ in thousands

² Equity. See details »

³ Debt obligations. See details »

⁴ Operating lease liability. See details »

	Weights			Cost of capital
Equity²		÷	=		×		=
Debt obligations³		÷	=		×	× (1 – 35.00%)	=
Operating lease liability⁴		÷	=		×	× (1 – 35.00%)	=
Total capital:	Total weights:			Cost of total capital:

Based on: 10-K (filing date: 2017-03-01).

¹ US$ in thousands

² Equity. See details »

³ Debt obligations. See details »

⁴ Operating lease liability. See details »

	Weights			Cost of capital
Equity²		÷	=		×		=
Debt obligations³		÷	=		×	× (1 – 35.00%)	=
Operating lease liability⁴		÷	=		×	× (1 – 35.00%)	=
Total capital:	Total weights:			Cost of total capital:

Based on: 10-K (filing date: 2016-02-25).

¹ US$ in thousands

² Equity. See details »

³ Debt obligations. See details »

⁴ Operating lease liability. See details »

	Weights			Cost of capital
Equity²		÷	=		×		=
Debt obligations³		÷	=		×	× (1 – 35.00%)	=
Operating lease liability⁴		÷	=		×	× (1 – 35.00%)	=
Total capital:	Total weights:			Cost of total capital:

Based on: 10-K (filing date: 2015-02-24).

¹ US$ in thousands

² Equity. See details »

³ Debt obligations. See details »

⁴ Operating lease liability. See details »

Economic Spread Ratio

McDonald’s Corp., economic spread ratio calculation

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Selected Financial Data (US$ in thousands)
	Economic profit¹
	Invested capital²
	Performance Ratio
	Economic spread ratio³

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

¹ Economic profit. See details »

² Invested capital. See details »

³ 2018 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × hidden ÷ hidden = hidden

Performance ratio	Description	The company
Economic spread ratio	The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital.	McDonald’s Corp.’s economic spread ratio improved from 2016 to 2017 and from 2017 to 2018.

Economic Profit Margin

McDonald’s Corp., economic profit margin calculation

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Selected Financial Data (US$ in thousands)
	Economic profit¹
	Revenues
	Add: Increase (decrease) in deferred revenues, initial franchise fees
	Adjusted revenues
	Performance Ratio
	Economic profit margin²

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24).

¹ Economic profit. See details »

² 2018 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted revenues
= 100 × hidden ÷ hidden = hidden

Performance ratio	Description	The company
Economic profit margin	The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin.	McDonald’s Corp.’s economic profit margin improved from 2016 to 2017 and from 2017 to 2018.

	McDonald’s Corp.	Other companies (not purchased previously)
Financial Statements
Common-Size Financial Statements
Analysis of Financial Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis of Components of Financial Statements
Financial Reporting Quality

	All companies
Financial Statements
Common-Size Financial Statements
Analysis of Financial Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis of Components of Financial Statements
Financial Reporting Quality

McDonald’s Corp. (MCD)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Dec 31, 2018

Dec 31, 2017

Dec 31, 2016

Dec 31, 2015

Dec 31, 2014

Economic Spread Ratio

Economic Profit Margin