# McDonald’s Corp. (MCD)

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

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 7,677,176  5,950,292  4,932,304  5,175,500  5,305,231
Cost of capital2 6.37% 6.18% 6.09% 6.23% 6.39%
Invested capital3 37,989,124  38,371,656  37,765,070  45,346,019  40,707,452

Economic profit4 5,259,165  3,577,417  2,633,018  2,350,229  2,703,938

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
= 7,677,1766.37% × 37,989,124 = 5,259,165

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 5,924,300  5,192,300  4,686,500  4,529,300  4,757,800
Deferred income tax expense (benefit)1 102,600  (36,400) (538,600) (1,400) (90,700)
Increase (decrease) in deferred revenues, initial franchise fees2 627,800  —  —  —  —
Increase (decrease) in equity equivalents3 730,400  (36,400) (538,600) (1,400) (90,700)
Interest expense, net of capitalized interest 981,200  921,300  884,800  638,300  570,500
Interest expense, operating lease liability4 313,073  300,841  321,975  358,008  411,240
Adjusted interest expense, net of capitalized interest 1,294,273  1,222,141  1,206,775  996,308  981,740
Tax benefit of interest expense, net of capitalized interest5 (271,797) (427,749) (422,371) (348,708) (343,609)
Adjusted interest expense, net of capitalized interest, after taxes6 1,022,476  794,392  784,404  647,600  638,131
Net operating profit after taxes (NOPAT) 7,677,176  5,950,292  4,932,304  5,175,500  5,305,231

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
= 9,938,824 × 3.15% = 313,073

5 2018 Calculation
Tax benefit of interest expense, net of capitalized interest = Adjusted interest expense, net of capitalized interest × Statutory income tax rate
= 1,294,273 × 21.00% = 271,797

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 1,891,800  3,381,200  2,179,500  2,026,400  2,614,200
Less: Deferred income tax expense (benefit) 102,600  (36,400) (538,600) (1,400) (90,700)
Add: Tax savings from interest expense, net of capitalized interest 271,797  427,749  422,371  348,708  343,609
Cash operating taxes 2,060,997  3,845,349  3,140,471  2,376,508  3,048,509

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 decreased 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 —  —  77,200  —  —
Long-term debt, excluding current maturities 31,075,300  29,536,400  25,878,500  24,122,100  14,989,700
Operating lease liability1 9,938,824  9,673,356  10,093,270  10,084,719  10,332,652
Total reported debt & leases 41,014,124  39,209,756  36,048,970  34,206,819  25,322,352
Shareholders’ equity (deficit) (6,258,400) (3,268,000) (2,204,300) 7,087,900  12,853,400
Net deferred tax (assets) liabilities2 (3,900) 251,500  827,500  1,171,500  1,012,000
Deferred revenues, initial franchise fees3 627,800  —  —  —  —
Equity equivalents4 623,900  251,500  827,500  1,171,500  1,012,000
Accumulated other comprehensive (income) loss, net of tax5 2,609,500  2,178,400  3,092,900  2,879,800  1,519,700
Adjusted shareholders’ equity (deficit) (3,025,000) (838,100) 1,716,100  11,139,200  15,385,100
Invested capital 37,989,124  38,371,656  37,765,070  45,346,019  40,707,452

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 decreased from 2017 to 2018 not reaching 2016 level.

### Cost of Capital

McDonald’s Corp., cost of capital calculations

Capital (fair value)1 Weights Cost of capital
Equity2 140,183,176  140,183,176  ÷ 181,822,000  = 0.77 0.77 × 7.52% = 5.80%
Debt obligations3 31,700,000  31,700,000  ÷ 181,822,000  = 0.17 0.17 × 3.15% × (1 – 21.00%) = 0.43%
Operating lease liability4 9,938,824  9,938,824  ÷ 181,822,000  = 0.05 0.05 × 3.15% × (1 – 21.00%) = 0.14%
Total: 181,822,000  1.00 6.37%

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 »

Capital (fair value)1 Weights Cost of capital
Equity2 129,550,824  129,550,824  ÷ 171,024,180  = 0.76 0.76 × 7.52% = 5.69%
Debt obligations3 31,800,000  31,800,000  ÷ 171,024,180  = 0.19 0.19 × 3.11% × (1 – 35.00%) = 0.38%
Operating lease liability4 9,673,356  9,673,356  ÷ 171,024,180  = 0.06 0.06 × 3.11% × (1 – 35.00%) = 0.11%
Total: 171,024,180  1.00 6.18%

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 »

Capital (fair value)1 Weights Cost of capital
Equity2 105,691,070  105,691,070  ÷ 143,284,340  = 0.74 0.74 × 7.52% = 5.54%
Debt obligations3 27,500,000  27,500,000  ÷ 143,284,340  = 0.19 0.19 × 3.19% × (1 – 35.00%) = 0.40%
Operating lease liability4 10,093,270  10,093,270  ÷ 143,284,340  = 0.07 0.07 × 3.19% × (1 – 35.00%) = 0.15%
Total: 143,284,340  1.00 6.09%

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 »

Capital (fair value)1 Weights Cost of capital
Equity2 106,723,326  106,723,326  ÷ 141,708,045  = 0.75 0.75 × 7.52% = 5.66%
Debt obligations3 24,900,000  24,900,000  ÷ 141,708,045  = 0.18 0.18 × 3.55% × (1 – 35.00%) = 0.41%
Operating lease liability4 10,084,719  10,084,719  ÷ 141,708,045  = 0.07 0.07 × 3.55% × (1 – 35.00%) = 0.16%
Total: 141,708,045  1.00 6.23%

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 »

Capital (fair value)1 Weights Cost of capital
Equity2 91,287,051  91,287,051  ÷ 118,319,704  = 0.77 0.77 × 7.52% = 5.80%
Debt obligations3 16,700,000  16,700,000  ÷ 118,319,704  = 0.14 0.14 × 3.98% × (1 – 35.00%) = 0.37%
Operating lease liability4 10,332,652  10,332,652  ÷ 118,319,704  = 0.09 0.09 × 3.98% × (1 – 35.00%) = 0.23%
Total: 118,319,704  1.00 6.39%

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 »

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 5,259,165  3,577,417  2,633,018  2,350,229  2,703,938
Invested capital2 37,989,124  38,371,656  37,765,070  45,346,019  40,707,452
Performance Ratio
Economic spread ratio3 13.84% 9.32% 6.97% 5.18% 6.64%

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 × 5,259,165 ÷ 37,989,124 = 13.84%

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 5,259,165  3,577,417  2,633,018  2,350,229  2,703,938
Revenues 21,025,200  22,820,400  24,621,900  25,413,000  27,441,300
Add: Increase (decrease) in deferred revenues, initial franchise fees 627,800  —  —  —  —
Adjusted revenues 21,653,000  22,820,400  24,621,900  25,413,000  27,441,300
Performance Ratio
Economic profit margin2 24.29% 15.68% 10.69% 9.25% 9.85%

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 × 5,259,165 ÷ 21,653,000 = 24.29%

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.