McDonalds Corp

Steady earnings, but heavy capital spending and negative equity; the valuation output cannot be trusted.

McDonald's (MCD) reported revenue of $26.9B and net income of $8.6B for the year to 31 December 2025. Reported profit has not been negative in any of the 15 years measured, and free cash flow has averaged 86% of reported profit. Total debt of $40.8B sits beside a book value of -$1.8B, and capital spending has averaged 6.1× depreciation. The engine's verdict is that the price sits within the margin of safety, and we report that as the engine's result. However, the base-case value of $129,159,249.34 per share is far above the share price of $242.97, so we do not think the valuation can be relied on.

McDonald's (MCD) reports revenue of $26.9B for the year to 31 December 2025, and net income of $8.6B. The filing excerpts we received contain no narrative sections, so we cannot confirm from the filing how the revenue is split between company-run restaurants, franchise rent and royalties, and other sources. The general structure of the business is one we have not been able to check against the filing text.

• Revenue growth of 1.0% a year over the period (CAGR)
• Operating margin of 46% in the latest year, with volatility of 4.4%
• Free cash flow of $7.2B with cash conversion averaging 86%
• Franchise income and restaurant sales (split not confirmed by the excerpts)

Inside the circle? Reported profits have not been negative in any of the 15 years measured, and operating margins have stayed in a fairly narrow band. Revenue growth has been slow, and the balance sheet carries $40.8B of debt with negative book value, which makes the return and value figures unreliable. We could not read any narrative on technology change, regulation, customer behaviour or cyclicality, so those risks remain unassessed from the filing.

We could not confirm a moat from the filing. The excerpts we received contain no narrative sections, so we cannot read how McDonald's describes its brand, franchise model, real estate or competitors. The financial figures are strong on paper: operating margin averaged 42% and return on invested capital averaged 23%. These figures show what the business earned, but they do not show why competitors have stayed out. Until the filing text explains a source of protection, you should treat the moat as unproven and its lifespan as unknown.

We could not read any narrative from the latest annual report, so we cannot check how management explains its capital decisions in its own words. The numbers point in two directions. The share count has shrunk by -79% a year, which suggests buybacks have been large, and dividends have taken an average payout of 61% of earnings. Against that, the retained earnings test fails at -4.3×, and total debt of $40.8B sits alongside a book value of -$1.8B. A Buffett-style investor would ask whether buybacks were made below intrinsic value, and the excerpts we have do not show the valuation reasoning behind them. Candour is unclear because we have no filing text to judge it from.

• The share count change of -79% a year is the strongest signal in the numbers, but a falling share count only creates value if the shares were bought below intrinsic value, which we cannot confirm from the excerpts.
• Dividends have averaged a payout of 61% of earnings, which leaves less profit to retain and reinvest in the business.
• Total debt of $40.8B against normalised owner earnings of $7.0B gives a debt payback of 5.9 yrs, and book value is negative at -$1.8B, which suggests past buybacks and dividends have been funded partly by borrowing.
• The filing excerpts contain no narrative sections, so we cannot check any statement about buybacks, acquisitions or their reasons against the filing text.

• FailsA business that doesn't eat capitalFails

  Capital spending has averaged 6.1× depreciation; estimated maintenance capex was $2.4B last year.

  Why this test
• FailsThe $1 retained testFails

  Each dollar retained over the period has been matched by -4.3× of market value created ($24.6B retained in total).

  Why this test

Buffett's tests give a mixed picture. The consistent earning power test passes, and the return on invested capital of 23% on average passes the test for returns on capital. The test for a business that doesn't eat capital fails: capital spending has averaged 6.1× depreciation, and estimated maintenance capex was $2.4B last year. The one-dollar retained test fails at -4.3×, which means the profit kept in the business has not created matching market value for owners over the period. On debt, Buffett looks for little or no borrowing. Repaying total debt would take 5.9 yrs of normalised owner earnings, and interest cover is 7.8×, so this test is mixed. The return on equity of 192% is not a clean signal, because shareholders' equity is negative in the latest year and some of that return is borrowed. We could not check the durable advantage or management candour, because the filing narratives were not extracted, so those principles remain unassessed.

• Total debt and book value in future annual reports

  Shows whether the borrowing behind the return on equity is growing or shrinking.

• Capital spending relative to depreciation

  A ratio that stays far above one means more cash is needed to keep the business competitive.

• Share buybacks and the price paid for them

  Buffett favours buybacks only below intrinsic value, and the excerpts do not show that reasoning.

• Narrative sections on the franchise model, brand and competitors

  Without them the durability of any moat cannot be checked.

• Revenue growth over the coming years

  Slow growth alongside heavy capital spending is the pattern Buffett warns against.

Questions the filings couldn't answer

• How does the company describe its franchise model and the rent and royalty income it earns from franchisees?
• Why does shareholders' equity turn negative, and does the company explain this in its own words?
• What assumptions drive the value model, and why does the base case sit so far above the share price?