Starbucks Company Ratio Analysis

Starbucks Ratio Analysis Ratio analysis is a tool that is beneficial in undertaking quantitative analysis on figures found on financial statements. Ratios provide a common approach for comparing financial strength and performance of two or more companies. Imperatively, ratios can divulge a company’s financial strength or weakness in addition to divulge trends regarding business conditions and profitability (Noreen, Brewer, and Garrison, 2017). The main purpose of this assignment is to perform ratio analysis of Starbucks to analyze the company’s strengths and weaknesses.

Profitability One of the key aspects that determine the strong suit of a corporation is its profitability levels. Profitability ratios measure the ability of an organization to earn an adequate return. They measure the capacity of a firm to generate profit. It is imperative to note that high profitability ratios are a good indicator and demonstrate that the firm is operating as it should (Lan, 2012). Despite the fact that the returns generated by Starbucks are commendable, there was a decline in the profitability level of the company.

In the 2017 financial year, the operating income of Starbucks was $4.1 billion. However, as compared to the 2016 fiscal year, this was a 0.9% decline. This can be delineated by the operating margin, which investigates the relationship between revenues and management controlled expenses. In 2017, the operating margin of Starbucks was 18.5%. However, this was a decline of 110 basis points in comparison to the preceding year. Other ratios that measure the profitability of a firm are return on assets and return on equity.

Return on assets (ROA) is a metric that determines the efficiency of a firm in capitalizing its assets. The ROA of Starbucks in 2017 was 20.08%. This is one of the strengths of the company as it shows that for every dollar of assets, the company generated a return of 20.08 cents. On the other hand, return on equity measures the income level that is attributed to shareholders against the investment that is put into the company by shareholders. It takes into consideration the financial leverage used by a firm.

In 2017, the ROE of Starbucks was 52.93%. This is a high return and implies that for every dollar of shareholders’ equity, Starbucks generated a return of 52.03 cents. Regardless of the slight decline in income generated, Starbucks reported another financial year of strong performance. This is linked to the fact that each of the company’s business segment across the globe contributed to record results. This is perceptible through the 3% store sales increase.

In line with the same performance, the consolidated net revenues of Starbucks in the 2017 fiscal year were $22.4 billion, which was a 5 percent increase compared to the net revenues of the 2016 fiscal year (Starbucks, 2017). Liquidity Liquidity ratios try to measure the ability of a firm to pay-off its short-term debt obligations. Basically, it encompasses the capability of a firm to utilize its current assets to meet its short-term liabilities (Lan, 2012). This usually takes into account one financial year. Three financial ratios were used to assess the liquidity of the company.

To begin with, the current ratio indicates if the company has the ability to pay off its short-term liabilities in the event of an emergency through the liquidation of its current assets. In 2017, the current ratio of Starbucks is 1.25. The inference of this is that if the company liquidates all of its current assets, it would be able to cover its current liabilities. Secondly, there is the quick ratio, which measures the liquidity but does not take into consideration particular line items like prepai expenses that cannot be expediently liquidated.

The computed quick ratio of Starbucks is 0.93. This indicates that the company can cover 93% of current liabilities by using all cash on-hand, the liquidation of short-term marketable securities and monetizing accounts receivable. An additional liquidity ratio that was examined is cash ratio. It is.