Starbucks Ratio analysis

Starbucks Ratio Analysis The relevance of ratio analysis cannot be overstated in seeking to assess the financial viability of an enterprise. As Porter and Norton (2012) point out, ratio analysis is one of the most important “techniques used by investors, creditors, and analysts in making informed decisions” (p. 698). Starbucks Corporation remains one of America’s foremost coffee marketers and retailers.

In addition to sourcing, roasting, as well as selling coffee, the company also offers for sale a variety of other beverages and snacks – effectively making it one of the world’s largest fast-food entities. In seeking to assess as well as evaluate the company’s financial situation as well as performance, it would be prudent to conduct a financial statement ratio analysis using its full year fiscal results for the years 2017 and 2016 (Starbucks, 2018). Towards this end, three kinds of ratios will be taken into consideration, i.e.

liquidity ratios, financial leverage ratios, and profitability ratios. The assessment in this case covered a total of 2 years so as to get a clearer view of the financial viability of the enterprise. Liquidity Ratios In essence, liquidity ratios come in handy in the assessment of the ability of an entity to settle its financial obligations in the short-run (Noreen, Brewer, and Garrison, 2017).

In that regard, therefore, they are of great relevance to persons who would be interested in finding out about the company’s ability to settle its debts in the near-term. For instance, coffee suppliers seeking to determine whether to extend short-term credit to Starbucks would be interested in the company’s liquidity ratios as they seek to determine whether the company will honor its payments for goods supplied. Appendix 1 presents the computations for the current ratio and quick ratio.

To begin with, the current ratio figures depicted enable us to measure the ability of Starbucks to settle its near-term obligations using its current assets. In basic terms, the ratio compares the figure of current assets to that of current liabilities (Merrill Lynch, 2000). For the year ended 1st October 2017, Starbucks had a current ratio of 1.25. The previous year’s current ratio was 1.05.

According to Baker and Powell (2009), a higher current ratio is often desirable as it indicates that a company would not face any challenge in sorting out its short-term obligations. In this case, Starbucks does not appear to have a problem with its short-term obligations as its current ratio is higher than 1 – effectively meaning that it has enough current assets to settle its shot-term debt. This means that short-term creditors are more likely than not to provide the relevant supplies to the company as the risk of default is minimal.

It should however be noted that the current ratio has a major drawback. In essence, the current ratio includes the inventory figure. Due to their very nature, some inventories may be difficult to liquidate at short notice. To solve this problem, it would be prudent to compute the quick ratio which does not include the inventory figure. Starbucks’ quick ratio for the year ended 1st of Oct 2017 and 2nd Oct 2016 is 0.93 and 0.74 respectively.

This effectively means that for every dollar of short-term liabilities, Starbucks had $0.93 and $0.74 worth of assets that are liquid and can be used to sort the said obligations. It should be noted that the quick ratio in this case does not necessarily mean that Starbucks will not be able to meet its obligations in the short-run or go into default. What this effectively means is that Starbucks is largely reliant upon its inventories to sort its obligations in the short-run.

This is not necessarily a bad thing for a company selling quick-moving products. In the final analysis, therefore, Starbucks financial ability to meet its obligations in the short-run is not in question within the two years under consideration. Financial Leverage Ratios While the liquidity ratios highlighted above are indicative of Starbuck’s ability to meet its obligations in the short-run, financial leverage ratios would come in handy as we seek to assess or determine how solvent Starbucks is in the long run.

Towards this end, these particular ratios are designed to highlight a firm’s utilization of long-term debt. The company’s debt ratio for the years ended 1st October 2017 and 2nd October 2017 is 0.62 and 0.59 respectively (appendix 2). When expressed as a percentage, this particular ratio indicates that for both years under consideration, Starbucks has sufficient assets to pay off its liabilities. In other words, Starbucks’ liabilities are 62% and 59% of its total assets for the years ended 1st October 2017 and 2nd October 2017 respectively.

This implies that the company has no stability issues. In this case, therefore, those who lend the company funds ought not to be concerned of not being repaid. Next, we have the debt to equity ratio. This is an important ratio that seeks to compare the total debt of Starbucks to its total equity. As Porter and Norton (2012) point out, investors are more excited by equity than debt in the balance sheet.

In the authors’ own words, “debt, and its interest charges, make up a fixed obligation that must be repaid in a finite period of time” (Porter and Norton, 2012, p. 526). Equity, however, does not have to be paid off. For the years ended 1st October 2017 and 2nd October 2017, Starbucks’ debt to equity ratio was 1.63 and 1.43 respectively (appendix 2). The debt to equity ratio in this case indicates that Starbucks has been taking on more debt in relation to its equity.

It is important to note that although a lower ratio could in some quarters be deemed to be an indication of the stability of Starbucks, the utilization of more debt to finance operations could result in enhanced earnings. However, for the said earnings to be of relevance, the company ought to ensure that they exceed the cost of debt (i.e. the interest). Profitability Ratios Profitability ratios in this case would enable us to determine how successful Starbucks is in the generation of profits.

To begin with, the company’s return on assets ratio for the years ended 1st October 2017 and 2nd October 2017 is 0.05 and 0.06 respectively (appendix 3). Looking at this particular ratio, it is possible to tell how effectively Starbucks is using its assets in the generation of profits. For every dollar invested in Starbucks’ assets, the company was able to generate 5 cents and 6 cents worth of net income in 2017 and 2016 respectively. This means that in 2016, Starbucks was more efficient in the conversion of investments into profits than in 2017.

The company’s management was therefore not as efficient in 2017 as they were in 2016 in the generation.