Financial Analysis of Starbucks

Financial Analysis of Starbucks

FINANCIAL ANALYSIS OF STARBUCKS  2
This is next part of the capstone project. Please allow the same writer to continue this project with me.

Write the Financial Analysis section of your project paper. Please include financial statement information
(income statement, balance sheet, etc that you should include as appendices) supporting tables and
graphs.

The company analysis should include:
financial ratios
comparison of financial performance over time � a minimum of three years,
comparison with other competitive firms
financial issues that have impacted the organization
The business plan should include:
detailed, monthly projected financial statements for the first year, and
at least two additional years of annual projections

Financial Analysis of Starbucks

Financial analysis is used to assess and evaluate the financial performance of a company
following its real strategies and goals. This section evaluates the financial performance of
Starbucks using the ratio analysis procedures. Ratio analysis involves the assessment of how
different transactions in the financial statements of the company relate to one another. It
compares the present company performance to past performance as well as financial
performance of competitors in the industry (Mankin, Jewell & Rivas, 2017). This makes the
foundation for making predictions of future financial performance. They provide liquidity state
of the company as well as assess the management of investing, operating and financial cash

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flows. This section provides financial ratios of Starbucks financial performance for three fiscal
years between 2015 and 2017. The section uses profitability ratios, operating ratios, solvency and
gross margins of the company. The financial ratios are classified in asset management ratios,
market value ratios, debt management ratios, liquidity ratios, leverage or solvency ratios, and
profitability ratios.

Liquidity Ratio

This is used to examine the capability of Starbucks Corporation to pay off current and
long-term financial obligations, particularly without raising additional or external capital. This
ratio is important because it shows whether the current assets can sufficiently meet company
obligations when they fall due. The liquidity ratio includes current and quick ratios or acid test.
The analysis of Starbucks Corporation shows that its current ratio was 1.3 in 2017, 1.04 in 2016
and 1.2 in 2015. The current ratio is calculated by dividing current assets by current liabilities.
The results show that the company can pay its current liabilities with the cash produced from its
operations. This is a healthy financial performance because current liabilities or creditors can be
assured that their obligations will be paid. The quick ratio or the acid test for the company was
0.84 in 2017, 0.67 in 2016 and 0.64 in 2015 (Starbucks Fiscal, 2017). The acid test measures the
ability of Starbucks to meet short-term financial obligations by use of most liquid assets. It is
determined by dividing quick assets with current liabilities. The high quick ratio shows that the
company is financially stable in the short-term. Despite the current ratio being secure, the acid
test is low possibly because of the excessive non-liquid inventories. This implies that the
turnover ratio may be decreasing over the average sales collection days or significant credit
terms. The corporation should strengthen the collection and credit policies (Mankin, Jewell &
Rivas, 2017).

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Solvency Ratios

This is an essential financial ratio used to determine the capability of the corporation to
meet its long-term obligations or debts. It is used to quantify the size of the corporation after
income tax. Excluding non-cash costs for depreciation in contrast to total debt obligations
assesses it. It shows whether financial cash flows are adequate to meet both long and short-term
obligations. The debt to asset ratio was 0.62 in 2017, 0.59 in 2016 and 0.55 in 2015. This shows
that over 55% of Starbucks total financial is from creditors as opposed to company shareholders.
The creditor financial is increasing over the three years. The debt to equity ratio was 1.63 in
2017, 1.43 in 2016 and 2.10 in 2015 (Starbucks Fiscal, 2017). This indicates that there is an
excellent creditor financing as compared to stockholders. The high ratio shows that the cash flow
from operations will be insufficient to cover principal payments and interests. Further analysis
shows that the company is 44% health that is positive and generally sound financial
performance. Moreover, a lower solvency ratio of the corporation shows that the company has
high profits in default to its debt obligations (Starbucks Fiscal, 2017).

Profitability Ratio

It is a financial metric used to examine the capacity of a company to generate earnings
compared to its associated costs. Investors and analysts use this ratio to measure and evaluate the
ability to generate revenue relative to revenue, assets of a balance sheet and operating costs and
equity of shareholders during a particular period. The net profit margin of the company was
12.89% in 2017, 13.22% in 2016 and 14% in 2015. There is a decrease in sales that could imply
a net financial loss. The net profit margin has been falling which indicates that the company
should increase its investment returns or return on equity. The gross profit on sales was 58.47%

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in 2017, 59.57% in 2016 and 59% in 2015. Gross profit margin is calculated as a percentage of
sales, and the company shows a decreasing percentage that may imply and increasing product
costs or falling selling prices. The declining gross profits indicate falling capacity to sell products
at the planned market price or most likely Starbucks is facing the increased cost of goods.
Starbucks Corporation return on equity was 53% in 2017, 47% in 201 and 50% in 2015. This
ratio is used to measure return on investments by stockholders. The ratio is high indicating that
Starbucks is not in high debts. This is because the company pays a lower interest cost amounting
to healthy financial performance and operations (Starbucks Fiscal, 2017).
Comparison with Competitors

Starbucks Corporation operates in a very competitive environment. It is important to
compare its financial performance against the leading competitors in the industry.

No Financial Ratio Starbucks Dunkin Donuts
1 Return on Assets 0.18 0.03
2 Return on Equity 0.50 1.43
3 Return on financial leverage 29.30 47.80
4 Net Profit Margin 0.14 1.40
5 Operating Profit Margin 0.14 0.37
6 Inventory Turnover 6.50 3.94
7 Current Ratio 1.19 1.33
8 Quick Ratio 0.81 0.75
9 Debt to Equity 2.10 -15.48

According to the competition comparison, Starbucks seems to be doing better than its
main rivals. This is because the company is capable of generating return ratios that are higher
than Dunkin Donuts. The general performance is better than the rival concerning levels of
satisfaction and profitability (Warren & Jones, 2018). For instance, the return on equity shows
that the company can put all shareholders’ dollar to proper use. This is impressive to potential

FINANCIAL ANALYSIS OF STARBUCKS  6
investors. However, Dunkin Donuts profitability ratios outperformed Starbucks; it should not
affect the company significantly. The mean -variance between the two corporations is the
extreme variance of costs that each company incurs. Besides, Starbucks outperformed its
competitor in each turnover ratio making it more efficient at branding strategies as well as
turning over their inventories to generate cash. However, the company might fail to use their
assets to the fullest potential. Also, the two companies prove to be highly liquid in the liquidity
calculations. Liquidity ratio ensures that a company strives to be higher than the other and both
firms are highly successful. This shows that liquidity ratios are not the main deciding factor for
making investment decisions. However, the liquidity ratios have a positive influence in the
overall decision-making process (Volpe, 2017).
The comparison of the solvency ratios for the two companies shows that Starbucks tends
to depend more on equity financing than creditors. The solvency ratios are desirable because
equity is essential in maximizing the wealth of shareholders. The company makes wise decisions
in case of adversities (Sari & Hunar, 2018). For instance, the management of Starbucks did not
let the litigation stall its operations.

Financial Statement of Earnings Forecasts

Fiscal Year 2016 2017 2018 2019
Total Net Revenues 21,316 22,387 23,512 24,637
Cost of sales 8,511 9,038 9,598 10,157
Store operating expenses 6,064 6,493 6,952 7,412
Other operating expenses 545 554 563 572
Amortization and depreciation 981 1,011 1,042 1,073
Administrative and general expenses 1,361 1,393 1,426 1,459
Impairments and restructuring – 153 – –
Total Operating Expenses 17,462 18,644 19,906 21,168
Income from equity investees 318 391 481 571
Operating Income 4,172 4,135 4,098 4,062
Interest Income and other, net 108 275 700 1,125
Interest expense (81) (93) (107) (121)

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Earnings before income taxes 4,199 4,318 4,440 4,563
Income Tax expenses 1,380 1,433 1,488 1,543
Net earnings attributable to Starbucks 2,818 2,885 2,954 3,022
This is a consolidated financial statement of earnings of Starbucks Corporation showing
2017 as the base year and providing two additional years as the forecasts of the financial
performance of the company.
In summary, the income statement is the financial statement that best explains the
financial performance of the company. This is because it captures financial metrics that can be
used to measure the current performance of Starbucks and shows the company profitability. The
financial analysis shows that Starbucks is a profitable company to invest and has sustainable
operations over years that indicate positive performance. Besides, the competitive comparison
shows that Starbucks does better than most the companies in the industry. This has allowed the
company to establish its business as a global brand, employing a diverse workforce across the
globe.

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References

Mankin, J. A., Jewell, J. J., & Rivas, J. (2017). To Improve Financial Reporting, We Need to
Disclose More Relevant Information.
Sari, N., & Hunar, R. S. (2018). ANALYSIS METHOD OF TRANSFER PRICING USED BY
MULTINATIONAL COMPANIES RELATED TO TAX AVOIDANCE AND ITS
CONSISTENCIES TO THE ARM’S LENGTH PRINCIPLE (CASE STUDY:
STARBUCKS CORPORATION). Journal of Business Strategy and Execution, 8(1), 70-
96.
Starbucks Fiscal, (2017). Annual Report. UNITED STATES SECURITIES AND EXCHANGE
COMMISSION. Washington, DC 20549 Form 10-K.
Volpe, A. (2017). Financial analysis of 100 major lighting manufacturers worldwide (No. W29).
CSIL Centre for Industrial Studies.
Warren, C., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.