McDonald’s Corp. (NYSE:MCD)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited an initial increase followed by a decline and subsequent recovery. The cost of capital consistently increased throughout the period, while invested capital showed a more volatile pattern. Consequently, economic profit, the central metric, mirrored the NOPAT trend, with notable variations.

NOPAT Trend

Net operating profit after taxes increased significantly from US$6,162 million in 2020 to US$8,491 million in 2021. A subsequent decrease was observed in 2022, with NOPAT falling to US$7,131 million. The final two years, 2023 and 2024, showed a recovery, reaching US$9,274 million and US$9,207 million respectively, indicating a stabilization at a higher level than the initial reporting period.

Cost of Capital Trend

The cost of capital experienced a steady upward trend throughout the five-year period. Starting at 11.00% in 2020, it increased to 12.05% in 2024. This consistent rise suggests increasing financing costs or perceived risk associated with the company’s operations.

Invested Capital Trend

Invested capital initially increased from US$46,817 million in 2020 to US$47,779 million in 2021. A decrease followed in 2022, reaching US$45,461 million. A substantial increase was then recorded in 2023, with invested capital rising to US$50,097 million, before settling at US$49,627 million in 2024. This fluctuation suggests changes in capital allocation strategies or asset base.

Economic Profit Trend

Economic profit followed a pattern largely influenced by the interplay between NOPAT and the cost of capital. It rose from US$1,012 million in 2020 to US$3,014 million in 2021, mirroring the NOPAT increase. The decline in NOPAT in 2022 resulted in a decrease in economic profit to US$1,727 million. Economic profit recovered in the subsequent years, reaching US$3,309 million in 2023 and US$3,225 million in 2024, demonstrating a positive economic profit throughout the period despite the rising cost of capital.

Overall, the analysis indicates a company capable of generating economic profit, although subject to fluctuations influenced by operational performance and financing costs. The consistent increase in the cost of capital warrants continued monitoring, as it could potentially impact future economic profit generation.

The data reveals the financial performance of the company over a five-year period, highlighting trends in net income and net operating profit after taxes (NOPAT).

Net Income

There was a noticeable increase in net income from 2020 to 2021, rising from $4,731 million to $7,545 million. This was followed by a decline in 2022 to $6,177 million. Subsequently, net income rebounded strongly in 2023 to $8,469 million, before experiencing a slight decrease in 2024 to $8,223 million. Overall, net income exhibited volatility but maintained an upward trend across the period, ending significantly higher than the initial year.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a similar pattern to net income across the five years. Starting at $6,162 million in 2020, it increased to $8,491 million in 2021, then declined to $7,131 million in 2022. The figure rose again in 2023 to $9,274 million and slightly decreased in 2024 to $9,207 million. The overall trend shows growth over the period with some fluctuations, indicating effective operational profitability maximized after tax impacts.

Comparative Insights

The parallel movement between net income and NOPAT suggests a consistent relationship between operating efficiency and overall profitability. Both metrics experienced peak values in 2023, followed by modest declines in 2024. Despite the dips in 2022 and 2024, the data reflects resilience and recovery in financial performance, emphasizing the company's ability to manage profits through varying economic conditions.

Provision for Income Taxes

The provision for income taxes shows a consistent upward trend from 2020 to 2024. Starting at 1,410 million USD in 2020, it increased moderately to 1,583 million USD in 2021, and 1,648 million USD in 2022. There was a more pronounced rise in 2023 to 2,053 million USD, followed by a smaller increase to 2,121 million USD in 2024. Overall, this indicates a steady growth in the anticipated income tax expense over the five-year period.

Cash Operating Taxes

Cash operating taxes also exhibit a clear upward trajectory during the same period. Beginning at 1,772 million USD in 2020, the amount rose significantly to 2,367 million USD in 2021. It remained relatively stable in 2022 with a slight decrease to 2,334 million USD but then surged to 3,128 million USD in 2023. In 2024, there was a marginal decrease to 3,112 million USD. Despite the minor fluctuations, the overall pattern reflects increasing cash tax outflows over the years.

Comparative Insights

Both provision for income taxes and cash operating taxes demonstrate upward trends, indicating increasing tax obligations and cash outflows related to taxes. The cash operating taxes consistently exceed the provision for income taxes each year, with the gap widening particularly in 2023 and 2024. This could imply differences in timing, payment schedules, or adjustments between the accrual-based provision and actual cash payments. The growth in tax-related expenses corresponds with expected increases in earnings or taxable income, reflecting an expansion in the company's tax base or changes in tax rates and regulations over time.

Total Reported Debt & Leases

The total reported debt and leases values show a generally fluctuating trend over the five-year period. Beginning at 51,463 million US dollars in 2020, the amount decreased to 49,349 million in 2021 and further slightly declined to 48,699 million in 2022. However, a notable increase occurred in 2023, rising to 53,091 million before slightly decreasing again to 51,948 million in 2024. This pattern indicates a period of debt reduction followed by renewed borrowing or lease commitments, and then a minor contraction.

Shareholders’ Equity (Deficit)

The shareholders’ equity, reported as a deficit throughout the period, displays a fluctuating but improving trend after an initial deterioration. Starting at a deficit of -7,825 million US dollars in 2020, the deficit narrowed to -4,601 million in 2021, suggesting an improvement in net assets. Subsequently, it worsened again to -6,003 million in 2022 but improved substantially to -4,707 million in 2023, and further to -3,797 million in 2024. Overall, despite remaining negative, the equity position shows a gradual reduction in deficit size toward the end of the period.

Invested Capital

The invested capital shows moderate year-to-year variation. Starting at 46,817 million US dollars in 2020, it increased slightly to 47,779 million in 2021 before decreasing to 45,461 million in 2022. This is followed by a considerable increase to 50,097 million in 2023, before a slight decline to 49,627 million in 2024. The data suggests fluctuating levels of capital invested in the business, with a peak in 2023 and a mild reduction afterward but still maintaining a level above the initial years.

Summary Insights

The overall financial structure reflects a company managing its debt and equity with some volatility. The fluctuations in total reported debt and leases indicate active adjustments in financing strategies. Despite a consistent equity deficit, the trend toward reducing the deficit over time is a positive sign of improving net asset value. Invested capital variations imply measured reinvestment and capital allocation strategies, with a peak in 2023 suggesting increased operational or strategic investment that is somewhat maintained in 2024. The combined trends show an entity engaged in dynamic financial management amid a negative but improving equity backdrop.

The period under review demonstrates fluctuating economic profit alongside generally increasing invested capital. The economic spread ratio, a key indicator of value creation, exhibits a notable pattern of variation over the five-year span.

Economic Profit

Economic profit increased significantly from 2020 to 2021, more than tripling its value. A subsequent decrease was observed in 2022, followed by a rebound in both 2023 and 2024, remaining relatively stable in the latter two years. This suggests periods of strong value creation interspersed with periods of diminished profitability relative to the capital employed.

Invested Capital

Invested capital experienced a modest increase between 2020 and 2021. A decrease occurred in 2022, before a substantial rise in 2023. The level of invested capital stabilized in 2024, remaining near the 2023 value. This indicates a pattern of capital allocation that includes both expansionary and potentially restructuring phases.

Economic Spread Ratio

The economic spread ratio mirrored the trend in economic profit, with a substantial increase from 2.16% in 2020 to 6.31% in 2021. The ratio then declined to 3.80% in 2022, before recovering to 6.60% in 2023 and holding steady at 6.50% in 2024. This suggests that the company’s ability to generate returns exceeding its cost of capital improved significantly in 2021, experienced a setback in 2022, and then regained momentum in the subsequent two years. The consistency between 2023 and 2024 indicates a stabilization of value creation efficiency.

Overall, the analysis reveals a dynamic relationship between economic profit, invested capital, and the economic spread ratio. While invested capital has generally trended upwards, the economic spread ratio demonstrates that the efficiency of capital deployment has varied, with recent years showing a return to stronger value creation.

The economic profit margin exhibited considerable fluctuation between 2020 and 2024. Initial values demonstrated growth, followed by a period of decline, and then stabilization at a relatively high level. A review of the specific metrics reveals a more nuanced understanding of the company’s financial performance.

Economic Profit

Economic profit increased significantly from US$1,012 million in 2020 to US$3,014 million in 2021, representing substantial improvement. However, this was followed by a decrease to US$1,727 million in 2022. A recovery was then observed in 2023, with economic profit reaching US$3,309 million, and remained strong in 2024 at US$3,225 million. This suggests potential volatility in factors contributing to economic profit, followed by a return to robust performance.

Adjusted Revenues

Adjusted revenues demonstrated a consistent upward trend throughout the period. From US$19,249 million in 2020, revenues grew to US$23,259 million in 2021 and remained relatively stable at US$23,202 million in 2022. Further growth was observed in 2023, reaching US$25,526 million, and continued into 2024 with revenues of US$25,908 million. This consistent revenue growth indicates a strong market position and effective sales strategies.

Economic Profit Margin

The economic profit margin began at 5.26% in 2020, increasing substantially to 12.96% in 2021, coinciding with the significant rise in economic profit. A decline to 7.44% occurred in 2022, reflecting the decrease in economic profit despite stable revenues. The margin rebounded to 12.96% in 2023, mirroring the recovery in economic profit, and settled at 12.45% in 2024. The margin’s sensitivity to changes in economic profit, while revenues show consistent growth, suggests that cost management and capital efficiency are key drivers of profitability.

In summary, while adjusted revenues consistently increased, the economic profit margin experienced fluctuations tied to changes in economic profit. The company demonstrated an ability to recover from a dip in profitability, achieving a strong margin by 2023 and maintaining it through 2024. Continued monitoring of the factors influencing economic profit will be crucial for sustained financial performance.