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Key Financial Ratio Analysis of Starbucks

By:   •  July 2, 2017  •  Case Study  •  1,274 Words (6 Pages)  •  3,970 Views

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Key Financial Ratio Analysis of Starbucks

Pepe Ollor

Southern New Hampshire University

Starbucks (SBUX) is an American Corporation that started operations in 1985. Starbucks operates a a roaster, marketer and retailer of specialty coffee worldwide. It’s product diversification and expansion increases sales across all parts and attracts a broad range of consumers. The United States coffee house business is forecasted to generate over $31 billion Starbucks Corporation. (2016).

Liquidity

Measures of liquidity are: current ratio, quick ratio and cash ration. The current ration divides the total current assets by total current liabilities (Gorton, 2016). The current ratio measure the company’s ability to pay current liabilities with current assets. It is preferable to have a high current ratio, which indicates that the business has a lot of current assets on hand to pay off their current liabilities. This also means that an increasing current ration period to period shows improvement in the company’s financial position. According to Harrison, Horngren, and Thomas (2015), a strong current ratio is 1.50, which means that the company has $1.50 in current assets for every $1.00 in current liabilities. Most successful companies operate with current ratios between 1.0 and 2.0. For Starbucks corporation, at 1.05 in 2016 and 1.09 in 2015 (Appendix 1), you can see that there is not that much change between 2015 and 2016 (0.04 difference). Although not very strong, this means that Starbucks’ Current ratio is within the successful range, which means it has 0.5 (2016) to 0.9 (2015) more cents (in current assets) on every dollar in current liabilities (Harrison, Horngren, and Thomas, 2015).

Quick ratio which is also known as Acid Test ratio, is a liquidity ratio that measures the level of the most liquid current ratio because it only adds up cash equivalents, marketable securities, and accounts receivables divided by current liabilities and excludes inventory and other current assets that are more difficult to turn into cash (Gorton, 2016). The higher the quick ratio, the more liquid the company’s current position will be. Since the quick ratio mostly focuses on factors that are the easiest to turn into cash, it is a better way to gauge the coverage provided by the specific assets for the current liabilities in case the company happens to experience any financial difficulties (Investopia, 2016). The rule of thumb for quick ratio: if it’s is greater than 1.0, it means that the company can meet its short-term obligations. As you can see for Starbucks is lower than 1.0 (0.64 for 2016 and 0.67 for 2015) and it’s not in the successful range of 0.9-1.0 (Appendix 1).

A decreasing quick ratio (like Starbucks’) might be due to the company’s balance sheet being over-leveraged or their sales are decreasing. It could also mean that the company is having a challenging time collecting their account receivables or even perhaps they are paying their bills at a fast rate (Gorton, 2016).  On the other hand, a company with a high quick ratio is probably experiencing revenue growth, or it is turning/collecting its account receivable into cash too fast or they are turning inventories over too quickly. One main point of concern is that other companies might impact a company’s quick ratios as well. For instance, if capital expenditure, other asset purchases, allowance for unmanageable debt, and financial policies are not timed properly, it is very difficult for it to be used as a good point of comparison mostly to other companies (Gorton, 2016).

Solvency Ratio

Solvency Ratios measure the flexibility of a company to pay long-term obligations and their level of debt (Harrison, et. al. 2015). Examples of solvency ratio are: Debt to Asset ratio (Total Liabilities / Total Assets) and the Debt to Equity Ratio (Total Liabilities / Total Equity) (Investopedia, 2017). Solvency ratios help business owners determine the chances of the company’s long-term survival. Looking at Appendix 1, Starbucks has a debt to assets ratio of 0.59 (2016) and 0.53 (2015), which didn’t show much change and it was within the safe range of 0.50. A debt to asset ratio around 0.5 indicates that for every dollar of debt there are 2 dollars of asset, or, the company's equity is twice that of its debt (Peavler, 2017).

As for the debt to equity of Starbucks, 2016 showed a ratio of 1.43 while 2015 was 1.13 which are both very close to the desired ratio of 1.5 (Appendix 1). The ratio basically shows how much of the Starbucks is owned by its investors. It shows what is left if Starbucks happens to go out of business after it pays all liabilities (Peavler,2017).

Overall, Debt to Assets and Debt to Equity ratios are alternative levels that measure long-term solvency. The higher the ratios, means the greater the risk that cash flows from operations will be insufficient to cover the interest and principal payments (Peavler,2017).

Profitability ratio 

Profitability ratio measures the ability of a company to generate profits and revenue (Harrison, et al. 2015). Examples are: Net Profit Margin (Net Income / Revenue) and Return on Equity (Net income / Equity). The net profit margin measures how much Starbucks corporation can mark up sales above the cost of goods sold. Operating margin is the percentage of sales left after covering additional operating expense. “Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings” (Investopedia, 2017). For Starbucks, you can see that the net profit margin is 13.2% for 2016 and 14.4% in 2015, which is slight decrease (Appendix 1).

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