Starbucks is an American coffee company that sells coffee drinks, teas, and other beverages. The company was founded in 1971 in Seattle and has grown to over 30,000 stores located worldwide. The company and its subsidiaries are involved in as a roasting, marketing, and retailing of specialty coffee worldwide. The company has employed about 346,000 people. The company is currently valued at 108.36 billion. This essay gives a financial analysis of Starbucks' 2018 financial report.
Financial Ratios
Financial ratios are a better way of assessing a company's financial health in terms of profitability, risks, solvency, and efficiency. With a market capitalization of $101.9 billion, Starbucks can be categorized as a large-cap company. Large-cap companies are those with a market capitalization of $10 billion or more. These companies have a long experience in the industry. Large-cap companies compensate investors with a continuous increase in dividend payment and share value.
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The price to earnings ratio is the share price relative to the annual net income earned by the company per share. The ratio shows how much a shareholder in common stock makes per dollar of current earnings. Starbucks' P/E ratio was 28.47 in 2018. The company is trading at 28 times the earnings. This means that investors can expect higher growth from the company compared to the whole market.
The price to book ratio is the valuation metric is the current stock price of a company relative to the amount that would be left if the company liquidated its assets and paid its liabilities. Starbucks ' current price to book value was 0.00. This shows that the company has a potentially undervalued stock and is, therefore, a bad investment.
Starbucks has maintained a 5-year average dividend yield of 1.60 and a pay-out ratio of 43.92 percent in 2019. The company has a healthy pay-out ratio and is also appropriate from a dividend investor's point of view. The ratio means Starbucks is distributing approximately half of its earnings as dividends, which signifies, the company is an industry leader.
In 2018, Starbucks had an inventory of $38.4 million and total assets amounting to $24, 156.4 million bringing the inventory to total assets ratio to 0.159 percent. This shows that the company has a high inventory turnover, which is a optimistic indicator of effective inventory management. Additionally, the company had total liabilities of $22,980 million. The total liabilities to total assets is, therefore, 0.951. Total liability to total asset ratio is representative of the company's assets financed through debt. This ration shows that Starbucks' can meet is an obligation by selling its assets if needed. The lower the ratio, the less risky the company.
From the six ratios, it is clear that Starbucks is of value to investors given the high price to book ratio, market capitalization, high dividend yield, and high inventory turnover.
Comparison to Competitors
To fully determine the risk and return of Starbuck, its financial ratios must be compared with those of competitors. This will help determine whether and why investors would opt to invest in companies other than Starbucks. The three main Starbucks' competitors are Chipotle Mexican Grill, Darden Restaurant, and Domino Pizza.
Starbucks has a market capitalization of 101.9 billion, which is the highest compared to competitors. Its competitors Chipotle Mexican Grill, Darden Restaurant, and Domino Pizza, are valued at 22.66 billion, 14.17 billion, and 12.06 billion. The market capitalization is 1104.9 percent higher than that of the Restaurant industry. The huge value of Starbuck means that it enjoys an investor's confidence.
At the close of the 2018 financial year, the P/E ratio of Chipotle Mexican Grill was 68.32, Darden Restaurant P/E ratio was 20.48 while that of Domino Pizza was 32.41. This means that investors would get higher returning trading with Starbucks competitors.
Among its competitors, only Domino Pizza had a similar price to book ration. Domino Pizza had a ratio of -3.33, which means the company is a poorer investment. Chipotle Mexican Grill and Darden Restaurants, have a price to book rate higher than one at 8.30 and 6.02. Values of price to book ratio greater than one mean that the company's stock is overvalued and may have performed well.
Chipotle Mexican Grill and Darden Restaurants are also low-risk businesses considering they have total liability to total assets ratio. Chipotle Mexican Grill and Darden Restaurants have their ratio at 0.366 and 0.5987. The two can also meet their obligations without any difficulty. Domino has a huge debt to asset ratio of 4.35, which means its assets are funded by debt and may, therefore, be unable to meet its obligations. On 2018's inventory to total assets ratio, Domino's ratio stood at 5.5, Chipotle's at 0.97, while that of Darden Restaurant stood at 22.5 percent. Domino and Darden have poor inventory management.
Domino dividend yield was 2.6 percent in 2018. Darden has a dividend yield of 3.03 percent and the pay-out ratio of 60.48 percent. Chipotle pay-out ratio and dividend yield have averaged zero.
Though Starbucks competitors have excellent dividend yield, can pay the obligation, they still are riskier to invest in, Starbuck' huge market capitalization and mature status in the industry means that is favored more by investors.
References
Starbuck 2018 Annual Report. (2019). Annual Report. Retrieved from https://s22.q4cdn.com/869488222/files/doc_financials/annual/2018/2018-Annual-Report.pdf
Starbucks. (2019). Manufactured Goods. Retrieved from https://www.starbucks.com/responsibility/sourcing/store-products
