Market value of company liabilities and equity from balance sheet

Starbucks

The short-term liabilities of Starbucks are $2.075 billion. The long-term debt is $549.5 million. Total long-term liabilities -- not the same thing as long-term debt -- are $899.7 million.

The market value of equity of Starbucks (market cap) is $31.17 billion.

The debt ratio of Starbucks is as follows: 2975.5 / 7360.4 = .404

The debt to equity ratio of Starbucks is as follows: 2975.5 / 4384.9 = 0.678

The short-term debt to equity ratio is as follows: 2075.8 / 4384.9 = 0.473

The short-term debt ratio is as follows: 2075.8 / 7360.4 = 0.282

The long-term debt to equity ratio is as follows: 899.7 / 4384.9 = .205

The long-term debt ratios is as follows: 899.7 / 7360.4 = .112

I believe that this debt ratio is healthy. There are two reasons for this. The first is that Starbucks has a low degree of leverage with a debt ratio of this nature. The company is primarily financed through equity. Moreover, the level of long-term debt has remained unchanged for several years and this indicates that the company has control of its finances. As capital structures go, an equity-oriented capital structure implies a company that sees itself as having a long-term growth trajectory. This is the case for Starbucks, so an equity-oriented structure is a good one for Starbucks.

3. The debt-to-equity ratio for Dunkin Brands is as follows: 2841.05 / 306.24 = 9.277

The debt-to-equity ratio for McDonalds is as follows: 17,341 / 14634.2 = 1.185

The highest D/E ratio of these three companies is at Dunkin Brands. This company is almost entirely financed by debt and has a very low equity level. The company's long-term debt situation is not worsening very quickly, but the company has struggled to build the book value of its equity in recent years. Dunkin has barely turned any profit lately ($26.86 million in FY2010 on $536 million in revenue). The fact that the company has just $536 million in revenue but has liabilities of $2.8 billion is alarming. Almost all of its asset base is in the form of "goodwill" and "intangibles." I would not want to invest in a company that will take decades to earn enough money to pay off its debt.

McDonalds has a fairly high level of debt. The company's business, however, is more mature than its Starbucks' business, as it has operated internationally for decades and has few real growth markets left. By contrast, Starbucks has a whole world of growth markets. This implies that Starbuck should have more of a growth orientation than McDonalds. For capital structure, this implies that Starbucks should be more focused on equity financing. McDonalds can use debt financing to lower its cost of capital and provide more leverage on its earnings, in particular because the company has exception cash flows.

4. What I learned from this exercise is the role that debt and equity play in the financing of a company. These three different companies all have very different capital structures, reflecting the state of the business, and where it fits in the business cycle. The growth company of the three, Starbucks, has an equity-oriented capital structure. McDonalds uses debt to lower its cost of capital, as it is a maturing business. Dunkin Brands is in a poor financial situation, burdened with heavy debt load and low profits. This leaves the company with barely any equity value. The situation at Dunkin is reflective of the firm's business -- declining.

The different ratios can be used to identify where issues may lie. For example, Starbucks has seen its total liabilities increase each year, but the long-term debt portion has not. The other increases were simply a reflection of the fact that the company is growing. That Starbucks' equity is steadily growing is a reflection of the healthy profits that the company is earning.