Capital is the cash obtained through some form of financing. The two primary ways that companies finance operations are with debt andequity. Depending on the nature of the business, some companies may require more debt than equity, or vice versa.
Capital is a critical component of growing business operations. It is what keeps everything flowing. That said, raising capital isn’t just for companies going through hard times. Capital is also required by successful companies looking to grow. Companies also use debt to buy back stock or pay dividends.
Analysts have mixed views on the use of debt to buy back company stock. Some believe it is a good use of debt at low-interest rates, while others believe companies have taken on too much debt due to a prolonged period of low-interest rates. While there’s nothing wrong with debt, especially at optimal levels, too much of it can greatly increase the risk associated with company earnings. This is why analysts look at trends in measures of market capitalization, debt capitalization, and enterprise value to assess the capital structure of a firm.
Below is a look at the capital structure of McDonald's (MCD).
Equity and Debt Capitalization
McDonald's shares were trading at around $197.61 as of Dec. 31, 2019. The number of shares outstanding dropped from 986 million at the end of 2014 to 765 million by the end of 2019,while market capitalization increased from $90 billion in 2014 to $152 billion in 2019. This is an ideal situation for investors, as it means that the market value of the company’s equity has gone up, but at what cost?
Total debt more than tripled over the same time period that market capitalization increased. Long-term debt increased by approximately $32 billion, from $15 billion on Dec. 31, 2014, to $47 billion on Dec. 31, 2019. Between 2014-2016, McDonald's bought back millionsofshares in a stock buyback program, which reduced the total number of shares outstanding.
Enterprise Value
Enterprise value (EV), also known as a takeover price, is calculated by adding the market cap plus all debt minus any cash and cash equivalents. Unlike market capitalization, which only looks at price and shares outstanding, enterprise value takes the company’s debt capital into consideration.
McDonald's has an enterprise value of $195 billion as of Q4 2019, compared to a market capitalization of $152 billion. The difference between the two is the company’s debt and cash.
The Bottom Line
McDonald's enterprise value has gone up significantly. This is because of a large increase in debt, which was used to pay for billions of dollars in share repurchases and billions more in dividends paid out to investors. It does not, however, mean that McDonald’s is over-capitalized or in trouble. It means that the price of money is still very low and companies such as McDonald's are using this cheap capital to repurchase shares and pay dividends while sitting on large amounts of cash.
Debt increased considerably over the last few years, but the rates on debt are still so low that the hurdle rate required to make the investment in shares profitable is minimal. Companies, such as McDonald's, which believe that its stock is going up in the future, view the purchase of shares with the use of cheap debt to be a good investment. Unfortunately, only time will tell if this is a good capital investment strategy. Investments are only good until they aren't.
FAQs
McDonald's (NYSE:MCD) WACC % As of today (2024-04-03), McDonald's's weighted average cost of capital is 7.37%%. McDonald's's ROIC % is 20.10% (calculated using TTM income statement data). McDonald's generates higher returns on investment than it costs the company to raise the capital needed for that investment.
What is the share capital of McDonald's? ›
| Ordinary Share Capital | Date |
|---|
| McDonalds | USD 16.6M | Sep/2023 |
| Nike | USD 3M | Sep/2023 |
| Papa John's International | USD 492K | Dec/2023 |
| Restaurant Brands International | USD 2.27B | Sep/2023 |
20 more rowsSome major, profitable companies have recently had negative shareholders' equity, including well-known restaurant chains: McDonald's, Starbucks, and Papa John's. The primary driver in these cases may have been issuing massive debt and refranchising or selling corporate-owned stores to franchisees.
How much capital does McDonald's have? ›
McDonald's's total capital for fiscal years ending December 2019 to 2023 averaged 43.794 billion. McDonald's's operated at median total capital of 43.638 billion from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, McDonald's's total capital peaked in December 2023 at 48.446 billion.
What is the cost structure of McDonald's? ›
McDonald's reported total operating costs and expenses amounting to 13.8 billion U.S. dollars during the 2023 financial year. Company-operated restaurant expenses, including food and paper, payroll and employee benefits, and occupancy and other operating expenses, accounted for the largest sum of the company's costs.
What does a 15% WACC mean? ›
The weighted average cost of capital (WACC) tells us the return that lenders and shareholders expect to receive in return for providing capital to a company. For example, if lenders require a 10% return and shareholders require 20%, then a company's WACC is 15%.
Who owns the most stock in McDonald's? ›
Largest shareholders include Vanguard Group Inc, BlackRock Inc., State Street Corp, VTSMX - Vanguard Total Stock Market Index Fund Investor Shares, VFINX - Vanguard 500 Index Fund Investor Shares, Jpmorgan Chase & Co, Geode Capital Management, Llc, Bank Of America Corp /de/, Morgan Stanley, and Wellington Management ...
Who is the main shareholder in mcdonalds? ›
Shareholders
| Name | Equities | % |
|---|
| Vanguard Fiduciary Trust Co. 9.563 % | 69,049,310 | 9.563 % |
| BlackRock Advisors LLC 5.739 % | 41,437,893 | 5.739 % |
| STATE STREET CORPORATION 4.816 % | 34,771,358 | 4.816 % |
| JPMorgan Investment Management, Inc. 2.182 % | 15,755,628 | 2.182 % |
6 more rowsVanguard, which is McDonald's biggest shareholder, had also voted some of its shares for the company's directors, according to earlier vote tallies, another source said.
Why is McDonald's in so much debt? ›
The Bottom Line. McDonald's enterprise value has gone up significantly. This is because of a large increase in debt, which was used to pay for billions of dollars in share repurchases and billions more in dividends paid out to investors. It does not, however, mean that McDonald's is over-capitalized or in trouble.
The restaurant chain looks appealing after its recent stock-price pullback. If you're hungry for a cheap stock to put in your portfolio, you're in luck. McDonald's (MCD -0.91%) shares have sat out of the market rally in the past year, barely rising since March 2023 compared to the 31% spike in the S&P 500.
Should you buy MCD stock? ›
What do analysts say about McDonald's? McDonald's's analyst rating consensus is a Moderate Buy.
Why is McDonald's stock falling? ›
Cash-strapped consumers, bad weather and challenges overseas are adding up to a slow start to 2024 at McDonald's, the company said. Lower-income consumers increasingly have spent their savings and are turning to grocery stores instead of restaurants, McDonald's CFO Ian Borden said Wednesday at an investor conference.
What is the future of McDonald's stock? ›
Stock Price Forecast
The 24 analysts with 12-month price forecasts for McDonald's stock have an average target of 316.42, with a low estimate of 278 and a high estimate of 355.
How much debt does McDonald's have? ›
Total debt on the balance sheet as of December 2023 : $53.09 B. According to McDonald's latest financial reports the company's total debt is $53.09 B. A company's total debt is the sum of all current and non-current debts.
What is considered a good WACC? ›
There is no fixed value that can be considered a “good” weighted average cost of capital (WACC) for a company, as the appropriate WACC will depend on a variety of factors, such as the industry in which the company operates, its capital structure, and the level of risk associated with its operations and investments.
What is Coca Cola's WACC? ›
The WACC stands at 7.71%. This includes the cost of equity at 8.09%, calculated as Risk-Free Rate + Beta x ERP, and the cost of debt at 5.17%, reflecting the interest rate on KO's debt adjusted for tax benefits. The weight of debt in the capital structure is 13.19%.
What is the average WACC retail industry? ›
ROIC WACC - Weighted Average Cost of Capital
| Range | Selected |
|---|
| Cost of equity | 7.9% - 11.5% | 9.7% |
| Tax rate | 26.2% - 27.0% | 26.6% |
| Cost of debt | 4.2% - 9.9% | 7.05% |
| WACC | 5.7% - 9.5% | 7.6% |
In theory, WACC represents the expense of raising one additional dollar of money. For example, a WACC of 5% means the company must pay an average of $0.05 to source an additional $1. This $0.05 may be the cost of interest on debt or the dividend/capital return required by private investors.
