McDonald’s (MCD) Stock: Capital Structure Analysis

Capital is the cash obtained through some form of financing. It is critical to a company’s growth prospects and keeps everything flowing. That said, raising capital isn’t just for companies going through hard times. It is also required by successful companies looking to grow. Companies also use debt to buy back stock or pay dividends. The two primary ways that companies finance operations are with debt and equity.

Analysts are mixed on the use of debt to buy back company stock. Some believe using debt is smart when interest rates are low while others believe it leads companies to take on too much debt. While there’s nothing wrong with debt, too much of it can risk a company’s 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.

Key Takeaways

• Equity capital, debt capital, financial leverage, and enterprise value are key to analyzing any company’s capital structure.
• McDonald’s debt increased between 2023 and 2024.
• The company bought back millions of shares, reducing the number of shares outstanding.
• MCD debt-to-capital ratio remained flat between 2023 and 2024.

McDonald’s Equity and Debt Capital

McDonald’s (MCD) shares closed at $304.51 on Sep. 30, 2024. The number of shares outstanding dropped 1.59% to 720 million at the end of the third quarter of 2024 from the same period in 2023.

The company’s market capitalization increased from $191.99 billion in September 2023 to $218.22 billion in September 2024. 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 increased by more than 7% (from $49.75 billion to $53.41 billion) over the same period that market cap increased. Long-term debt increased by 4.6% to $38.99 billion by Sept. 30, 2024.

McDonald’s bought back millions of shares in a stock buyback program in the year between Sept. 30, 2023, and Sept. 30, 2024, which reduced the total number of shares outstanding.

McDonald’s Financial Leverage

Using a financial leverage ratio like the total debt-to-capital ratio is an important way to analyze how much debt a company has in its capital structure. Investors can use this ratio to track debt relative to equity capital over time and in comparison to other firms.

MCD’s debt-to-capital ratio remained flat at 1.15 between the end of the third quarter of 2023 to the same period in 2024. This means that the company continued to fund its operations with $1.15 worth of debt for every dollar of its capital.

Note

There were over 38,000 McDonald’s location in more than 100 countries.

McDonald’s Enterprise Value (EV)

Enterprise value (EV), also known as a takeover price, is calculated by adding the company’s market cap plus all debt minus any cash and cash equivalents. A company’s market cap only looks at its share price and the number of outstanding shares. The EV, on the other hand, factors the company’s debt capital.

McDonald’s has an enterprise value of $269.42 billion as of Sept. 30, 2024, compared to its market cap of $218.22 billion. The formula to calculate EV is:

EV = Market Cap + Total Debt and Cash

The difference between the two ($51.2 billion) is the company’s debt and cash.

Is McDonald’s a Good Investment?

This depends on your investment goals and financial situation. But, overall MCD is a strong company with strong financials despite some weaknesses in its share price. The company has consistent revenue growth ($23.12 billion to $25.49 billion between 2023 and 2024), pays investors a dividend, and has global brand recognition. Investors should be weary of lower consumer spending, changing habits, and weakness in international markets.

Can Corporate Debt Negatively Impact Share Prices?

In some cases, a company’s debt can drag down its share prices. Debt can eat away at a company’s profitability and its ability to pay dividends (if it pays them), which can lead to lower earnings. Investors may perceive higher debt as a risk—especially if it adds to its short-term debt and cannot repay it. Long-term debt, although still a risk, tends to be cheaper and more affordable than short-term debt vehicles.

Why Is a Company’s Market Capitalization Important?

A company’s market capitalization is a way to measure its market value and size. This allows investors to compare similar companies. They can use this information to analyze the risks and whether certain companies are better suited to their financial goals and situation.

The Bottom Line

Increases in McDonald’s enterprise value are because of a rise 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.