An analysis of Starbucks´ financial development

Evelyn J. Flores Infantes

HAN University of Applied Sciences

Business management studies

503983- IHA-C01

Evelyn.flores.i@hotmail.com

ABSTRACT

Ratio analysis is a commonly used analytical tool for verifying the performance of a firm. While ratios are easy to compute, which in part explains their wide appeal, their interpretation is problematic, especially when two or more ratios provide conflicting signals. Ratio analysis is often criticized on the grounds of subjectivity, that is the analyst must pick and choose ratios in order to assess the overall performance of a firm.

In this blog we show the calculations of ROA, RAE, Current Ratio, Quick Ratio, Total Debt Ratio, Debt Equity Ratio, Assets Turnover and inventory turnover in order to know how solvent, efficient, liquid and profitable is Starbucks Company.

Tags

Finance Analysis, balance sheet, Income statement, Ratios, Liquidity ratio, profitability ratio, Solvency ratio, Efficiency ratio.

1. INTRODUCTION

A sustainable business and mission requires effective planning and financial management. Ratio analysis is a useful management tool that will improve your understanding of financial results and trends over time, and provide key indicators of organizational performance. Managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed. Funders may use ratio analysis to measure your results against other organizations or make judgments concerning management effectiveness and mission impact.

For ratios to be useful and meaningful, they must be: Calculated using reliable, accurate financial information, Calculated consistently from period to period, Used in comparison to internal benchmarks and goals, Used in comparison to other companies in your industry, Viewed both at a single point in time and as an indication of broad trends and issues over time, Carefully interpreted in the proper context, considering there are many other important factors and indicators involved in assessing performance.

In this blog, I will explain how Starbucks Company has financially developed in the last 4 years. I will calculate and the ratio to show how solvent, profitable, efficient and liquid is this Company.

Moreover, Starbucks has published its annual reports which are available on the web site of Starbucks Company.

1.1 Earlier research

Definitions:

Financial analysis

The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.

One of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company's own historical performance.

Balance sheet

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).

Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.

Income statement

A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense."

The income statement is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations.

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations.

Ratio analysis

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.

There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity.

Categories of financial ratios:

Liquidity

Liquidity is the ability of a business to pay its current liabilities using its current assets. Information about liquidity of a company is relevant to its creditors, employees, banks, etc.

Current Ratio

The current ratio is balance-sheet financial performance measure of company liquidity.

The current ratio indicates a company's ability to meet short-term debt obligations. The current ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. Potential creditors use this ratio in determining whether or not to make short-term loans. The current ratio can also give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. The current ratio is also known as the working capital ratio.

Calculation (formula)

The current ratio is calculated by dividing current assets by current liabilities:

The current ratio = Current Assets / Current Liabilities

The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio.

Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow.

If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.

All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months.

Quick Ratio

The quick ratio is a measure of a company's ability to meet its short-term obligations using its most liquid assets (near cash or quick assets). Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Quick ratio is viewed as a sign of a company's financial strength or weakness; it gives information about a company’s short term liquidity. The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice.

The quick ratio is also known as the acid-test ratio or quick assets ratio.

Calculation (formula)

The quick ratio is calculated by dividing liquid assets by current liabilities:

Quick ratio = (Current Assets - Inventories) / Current Liabilities

Calculating liquid assets inventories are deducted as less liquid from all current assets (inventories are often difficult to convert to cash). All of those variables are shown on the balance sheet.

Alternative and more accurate formula for the quick ratio is the following:

Quick ratio = (Cash and cash equivalents + Marketable securities + Accounts receivable) / Current Liabilities

The formula's numerator consists of the most liquid assets (cash and cash equivalents) and high liquid assets (liquid securities and current receivables).

The higher the quick ratio, the better the position of the company. The commonly acceptable current ratio is 1, but may vary from industry to industry. A company with a quick ratio of less than 1 can not currently pay back its current liabilities; it's the bad sign for investors and partners.

Profitability

Profitability is the ability of a business to earn profit for its owners. While liquidity ratios and solvency ratios are relationships that explain the financial position of a business profitability ratios are relationships that explain the financial performance of a business.

Return on Assets

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage. Unlike other profitability ratios, such as return on equity (ROE), ROA measurements include all of a company's assets – including those which arise from liabilities to creditors as well as those which arise from contributions by investors. So, ROA gives an idea as to how efficiently management use company assets to generate profit, but is usually of less interest to shareholders than some other financial ratios such as ROE.

Return on assets gives an indication of the capital intensity of the company, which will depend on the industry. Capital-intensive industries (such as railroads and thermal power plant) will yield a low return on assets, since they must possess such valuable assets to do business. Shoestring operations (such as software companies and personal services firms) will have a high ROA: their required assets are minimal. The number will vary widely across different industries. This is why, when using ROA as a comparative measure, it is best to compare it against a company's previous ROA figures or the ROA of a similar company.

Calculation (formula)

Return on assets is calculated by dividing a company's net income (usually annual income) by its total assets, and is displayed as a percentage. There are two acceptable ways to calculate return on assets: using total assets on the exact date or average total assets:

ROA = Net Income after tax / Total assets (or Average Total assets)

Return on Equity

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.

ROE is one of the most important financial ratios and profitability metrics. It is often said to be the ultimate ratio or the ‘mother of all ratios’ that can be obtained from a company’s financial statement. It measures how profitable a company is for the owner of the investment, and how profitably a company employs its equity.

Calculation (formula)

Return on equity is calculated by taking a year’s worth of earnings and dividing them by the average shareholder equity for that year, and is expressed as a percentage:

ROE = Net income after tax / Shareholder's equity

Instead of net income, comprehensive income can be used in the formula's numerator.

Return on equity may also be calculated by dividing net income by the average shareholders' equity; it is more accurate to calculate the ratio this way:

ROE = Net income after tax / Average shareholder's equity

Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at the period's end and dividing the result by two.

A common way to break down ROE into three important components is the DuPont formula, also known as the Strategic Profit model. Splitting the return on equity into three parts makes it easier to understand the changes in ROE over time.

ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets / Shareholder's equity) = Net profit margin * Asset Turnover * Financial leverage

Solvency

Solvency is a measure of the long-term financial viability of a business which means its ability to pay off its long-term obligations such as bank loans, bonds payable, etc.. Information about solvency is critical for banks, employees, owners, bond holders, institutional investors, government, etc.

Total Debt Ratio

Debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows how much the company relies on debt to finance assets. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.

Debt ratio is similar to debt-to-equity ratio which shows the same proportion but in different way.

Calculation (formula)

The debt ratio is calculated by dividing total liabilities (i.e. long-term and short-term liabilities) by total assets:

Debt ratio = Liabilities / Assets

Both variables are shown on the balance sheet.

The optimal debt ratio is determined by the same proportion of liabilities and equity as a debt-to-equity ratio. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt.

Debt Equity Ratio

The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial leverage.

Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's financial standing. It is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital.

Calculation (formula)

A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the shareholders' equity:

Debt-to-equity ratio = Liabilities / Equity

Activity Ratio

Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources.

Total Assets Turnover

Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. The ratio helps to measure the productivity of a company's assets.

Calculation (formula)

Asset turnover = Revenue / Average total assets

Or in days = 365 / Asset turnover

The numerator of the asset turnover formula shows revenues which are found on a company's income statement and the denominator shows total assets which is found on a company's balance sheet (statement of financial position).

Inventory Turnover

Inventory turnover is a measure of the number of times inventory is sold or used in a given time period such as one year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management. This ratio is important because gross profit is earned each time inventory is turned over. A lso called stock turnover.

Calculation (formula)

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory level ((beginning inventory + ending inventory)/2):

Inventory turnover = Cost of goods sold / Average Inventory

In the income statement cost of goods sold (COGS) is named "Cost of sales".

The number of days in the period can then be divided by the inventory turnover formula to calculate the number of days it takes to sell the inventory on hand or "inventory turnover days":

Days inventory outstanding = 365 / Inventory turnover

1.1 Research question

How has Starbucks financially developed the last 4 years?

2. METHODOLOGY

The research method will consist of literature and financial data study. The data sources will be: Starbuck annual reports, and expert opinions.

In order to answer the research question, the balance sheet and Income statement of Starbucks will be analyzed. Different categories of ratios (solvency, profitability, efficiency and liquidity) will be calculated.

Finally, the obtained ratios will be compared with ratios of last years in order to know how good or bad is the financial situation of Starbucks.

3. RESULTS

ANNUAL INCOME STATEMENT (values in 000´s)

Period Ending:

Trend

9/29/2013

9/30/2012

10/2/2011

10/3/2010

Total Revenue

$14,892,200

$13,299,500

$11,700,400

$10,707,400

Cost of Revenue

$6,382,300

$5,813,300

$4,915,500

$4,416,500

Gross Profit

$8,509,900

$7,486,200

$6,784,900

$6,290,900

Operating Expenses

Research and Development

Sales, General and Admin.

$5,681,200

$5,149,200

$4,737,000

$4,456,200

Non-Recurring Items

$2,784,100

$53,000

Other Operating Items

$621,400

$550,300

$523,300

$510,400

Operating Income

($325,400)

$1,997,400

$1,728,500

$1,419,400

Add'l income/expense items

$123,600

$94,400

$146,100

$50,300

Earnings Before Interest and Tax

($201,800)

$2,091,800

$1,844,400

$1,469,700

Interest Expense

$28,100

$32,700

$33,300

$32,700

Earnings Before Tax

($229,900)

$2,059,100

$1,811,100

$1,437,000

Income Tax

($238,700)

$674,400

$563,100

$488,700

Minority Interest

($500)

($900)

($2,300)

($2,700)

Equity Earnings/Loss Unconsolidated Subsidiary

$251,400

$210,700

$173,700

$148,100

Net Income-Cont. Operations

$259,700

$1,594,500

$1,419,400

$1,093,700

Net Income

$8,300

$1,383,800

$1,245,700

$945,600

Net Income Applicable to Common Shareholders

$8,300

$1,383,800

$1,245,700

$945,600

BALANCE SHEET (values in 000´s)

Period Ending:

Trend

9/29/2013

9/30/2012

10/2/2011

10/3/2010

Current Assets

Cash and Cash Equivalents

$2,575,700

$1,188,600

$1,148,100

$1,164,000

Short-Term Investments

$658,100

$848,400

$902,600

$285,700

Net Receivables

$838,700

$724,600

$616,900

$606,900

Inventory

$1,111,200

$1,241,500

$965,800

$543,300

Other Current Assets

$287,700

$196,500

$161,500

$156,500

Total Current Assets

$5,471,400

$4,199,600

$3,794,900

$2,756,400

Long-Term Assets

Long-Term Investments

$554,800

$575,900

$479,300

$533,300

Fixed Assets

$3,200,500

$2,658,900

$2,355,000

$2,416,500

Goodwill

$862,900

$399,100

$321,600

$262,400

Intangible Assets

$274,800

$143,700

$70,800

Other Assets

$185,300

$144,700

$409,600

$346,500

Deferred Asset Charges

$967,000

$97,300

Total Assets

$11,516,700

$8,219,200

$7,360,400

$6,385,900

Current Liabilities

Accounts Payable

$4,723,600

$1,699,600

$1,626,500

$1,365,000

Short-Term Debt / Current Portion of Long-Term Debt

Other Current Liabilities

$653,700

$510,200

$449,300

$414,100

Total Current Liabilities

$5,377,300

$2,209,800

$2,075,800

$1,779,100

Long-Term Debt

$1,299,400

$549,600

$549,500

$549,400

Other Liabilities

$357,700

$345,300

$347,800

$375,100

Deferred Liability Charges

Misc. Stocks

Minority Interest

$2,100

$5,500

$2,400

$7,600

Total Liabilities

$7,036,500

$3,110,200

$2,975,500

$2,711,200

Stock Holders Equity

Common Stocks

$800

$700

Capital Surplus

$282,100

$39,400

$40,500

$145,600

Retained Earnings

$4,130,300

$5,046,200

$4,297,400

$3,471,200

Treasury Stock

Other Equity

$67,000

$22,700

$46,300

$57,200

Total Equity

$4,480,200

$5,109,000

$4,384,900

$3,674,700

Total Liabilities & Equity

$11,516,700

$8,219,200

$7,360,400

$6,385,900

4. DISCUSSION

In this part we will analyze the collected data and compare it with the earlier theoretical research frameworks. We will try to integrate the theory and attempt to answer the research question.

Firstly, we will analyze the balance sheet and income statement of Starbucks.

Then, using the framework or earlier research we will calculate the different category ratios.

The categories that we will analyze are liquidity, solvency, profitability and efficiency.

Finally, we will compare those calculations (ratios) to see how the financial development of Starbucks is going on.

From the Balance Sheet and Income Statement.

In terms of liquidity

Current Ratio

9/29/2013

9/30/2012

10/2/2011

10/3/2010

CR=CA/CL

$5,471,400	$4,199,600	$3,794,900	$2,756,400
$5,377,300	$2,209,800	$2,075,800	$1,779,100
1.02	1.90	1.83	1.55

Quick Ratio

QR=(CA-inventories)/CL

$5,471,400	$4,199,600	$3,794,900	$2,756,400
$1,111,200	$1,241,500	$965,800	$543,300
$4,360,200	$2,958,100	$2,829,100	$2,213,100
$5,377,300	$2,209,800	$2,075,800	$1,779,100
0.81	1.34	1.36	1.24

In terms of profitability

ROA=NI/av.TA

$8,300	$1,383,800	$1,245,700	$945,600
$11,516,700	$8,219,200	$7,360,400	$6,385,900
0%	17%	17%	15%

ROE=NI/av.E

$8,300	$1,383,800	$1,245,700	$945,600
$4,480,200	$5,109,000	$4,384,900	$3,674,700
0%	27%	28%	26%

In terms of solvency

Total Debt Ratio

TDR=TD/TA

$7,036,500	$3,110,200	$2,975,500	$2,711,200
$11,516,700	$8,219,200	$7,360,400	$6,385,900
61%	38%	40%	42%

Debt to Equity Ratio

D/E

$7,036,500	$3,110,200	$2,975,500	$2,711,200
$4,480,200	$5,109,000	$4,384,900	$3,674,700
1.57	0.61	0.68	0.74

In terms of efficiency

Asset turnover=Revenues/av.TA

$14,892,200	$13,299,500	$11,700,400	$10,707,400
$11,516,700	$8,219,200	$7,360,400	$6,385,900
1.29	1.62	1.59	1.68

Inventory turnover=COGS/av.Inventory

$6,382,300	$5,813,300	$4,915,500	$4,416,500
$1,111,200	$1,241,500	$965,800	$543,300
5.74	4.68	5.09	8.13

5. CONCLUSION

After having analyzed the Income Statement, Balance sheet, calculate the ratios and compared the result with the data with the earlier research, we can conclude that in general Starbucks has had pretty healthy financial situations until 2012. Last 2013 has been a hard year for Starbucks, we can see from the calculated ratios that liquidity went down, solvency has dramatically decreased, profitability went hugely down in 2013 comparing it with the other years and the company has been using its assets less efficient than years before.

After the calculation above, we can conclude that the financial development of Starbucks has decreased dramatically the last year, 2013.