Starbucks Financial Ratio Analysis: 2016–2017 Results

Introduction

The relevance of ratio analysis cannot be overstated when assessing 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, and selling coffee, the company also offers a variety of other beverages and snacks — effectively making it one of the world's largest fast-food entities.

In seeking to assess and evaluate the company's financial situation and performance, it is prudent to conduct a financial statement ratio analysis using its full-year fiscal results for 2017 and 2016 (Starbucks, 2018). Towards this end, three kinds of ratios are taken into consideration: liquidity ratios, financial leverage ratios, and profitability ratios. The assessment covers a total of two years in order to obtain a clearer view of the financial viability of the enterprise.

Liquidity Ratios

Liquidity ratios are used to assess an entity's ability to settle its financial obligations in the short run (Noreen, Brewer, & Garrison, 2017). They are therefore highly relevant to parties interested in determining whether a company can settle its near-term debts. For instance, coffee suppliers seeking to decide whether to extend short-term credit to Starbucks would look to its liquidity ratios to determine whether the company will honor payments for goods supplied. Appendix 1 presents the computations for the current ratio and the quick ratio.

The current ratio measures the ability of Starbucks to settle its near-term obligations using its current assets. In basic terms, the ratio compares current assets to current liabilities (Merrill Lynch, 2000). For the year ended October 1, 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 generally desirable because it indicates that a company can meet its short-term obligations without difficulty. In this case, Starbucks does not appear to face problems with its short-term obligations, as its current ratio exceeds 1 — meaning it holds enough current assets to cover its short-term debt. This means that short-term creditors are more likely to provide supplies to the company, given the minimal risk of default.

It should be noted, however, that the current ratio has a significant drawback: it includes the inventory figure. Due to their nature, some inventories may be difficult to liquidate on short notice. To address this limitation, it is useful to compute the quick ratio, which excludes inventory. Starbucks' quick ratio for the years ended October 1, 2017 and October 2, 2016 was 0.93 and 0.74, respectively. This means that for every dollar of short-term liabilities, Starbucks held $0.93 and $0.74 worth of liquid assets available to cover those obligations.

A quick ratio below 1 does not necessarily indicate that Starbucks will fail to meet its short-term obligations or go into default. What it does indicate is that Starbucks is largely reliant upon its inventories to settle its short-term obligations. This is not necessarily a disadvantage for a company selling fast-moving consumer products. In the final analysis, Starbucks' financial ability to meet its short-term obligations is not in question within the two years under consideration.

Financial Leverage Ratios

While liquidity ratios indicate Starbucks' ability to meet its short-term obligations, financial leverage ratios help assess how solvent the company is over the long run. These ratios highlight a firm's utilization of long-term debt. The company's debt ratio for the years ended October 1, 2017 and October 2, 2016 was 0.62 and 0.59, respectively (Appendix 2). Expressed as a percentage, this ratio indicates that for both years under consideration, Starbucks' liabilities represent 62% and 59% of its total assets, respectively. This implies that the company has no significant stability issues, and lenders ought not to be concerned about repayment.

Next is the debt-to-equity ratio, which compares the total debt of Starbucks to its total equity. As Porter and Norton (2012) point out, investors generally favor equity over debt on the balance sheet. In the authors' words, "debt, and its interest charges, make up a fixed obligation that must be repaid in a finite period of time" (p. 526). Equity, by contrast, does not have to be paid off. For the years ended October 1, 2017 and October 2, 2016, Starbucks' debt-to-equity ratio was 1.63 and 1.43, respectively (Appendix 2). This indicates that Starbucks has been taking on more debt relative to its equity over the period. Although a higher ratio may raise concerns in some quarters, using debt to finance operations can enhance earnings — provided those earnings exceed the cost of debt, that is, the interest charges.