The financial statement is an important part of the financial structure of a company. Financial statements are usually prepared with several values which can be difficult to understand. An analysis of the financial statement through the use of financial ratios can be used to gain a better understanding of a company’s financial structure. Financial statement analysis will be important for managers, shareholders, and investors that would to see and know the future of a company. This paper analyzes the financial statement of Starbucks by looking at the company’s annual reports and examining the short-term liquidity, its operating efficiency, the capital structure, and the company’s profitability.
Introduction to The Company
Background of The Firm
Starbucks Corporation was established in 1971 and was the first American coffee beverage company. The company had its headquarters in Seattle, Washington. The company was first profitable in the 1980s in Seattle. It continually expanded to different parts of the United States in the 1980s. The company opened its first location outside North America in Tokyo in the year 1996. Since then, Starbucks has increasingly opened up its operations in different parts of the world. The company has grown incredibility in the coffee industry and expanded its industry to the food and beverage retail industry.
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Industry
Starbucks is known mainly for its coffee. Between the year 1971 and 1999, the company’s only industry was the coffee retailing industry. However, it expanded to the food and beverage industry. Apart from simply serving hot and cold coffee, the company serves an array of drinks and foods. The company serves snacks, food, and tea which are served alongside its coffee beverage (“Starbucks Company Information”, 2019). Starbucks started experimenting with coffee eateries in the year 1999 after it opened stores in Singapore as the company hoped. It thus opted to enter the food and beverage industry where it started serving other foods apart from simply coffee. While the company faces stiff competition from other global food and beverage retailers such as McDonald's, Starbucks has managed to identify a unique position in the market by identifying itself as a destination where different individuals would mainly go for coffee and have other eateries as additional.
Economy
Starbucks primary area of service is in the United States. The U.S. has a thriving economy with a high GDP, income, and expenditure. Starbucks thus enjoys these benefits by experiencing high sales. The company has its operations in different parts of the world which are located in developed cities. This is a strategic location of the company which means that it can benefit from the thriving economies of different parts of the world.
Outlook for The Future
The outlook for the future for Starbucks is bright. The company has built a huge customer base and established its brand. There are loyal customers to Starbucks that are growing on a daily basis. Additionally, every year, the company opens up new locations in both the United States and in different parts of the world. These new locations mean that the company is increasingly attracting a huge number of customers that are ready and willing to purchase from the company on a daily basis. While the food and beverage industry and the coffee retail industry is significantly growing, the company is yet to experience significant competition from companies such as McDonald’s which have ventured into the coffee market. However, Starbucks has established a strong brand and can easily outdo any competition in the coffee, food and beverage industry.
Short-Term Liquidity of Starbucks
The short-term liquidity of a company can be analyzed by considering the current ratio, quick ratio, and the cash ratio (Rinne & Suominen, 2016). An analysis of the given ratios was done as shown in the table 1 below (“Starbucks Corp,” 2018).
Current Ratio
This is a liquidity ratio that is calculated by taking the current assets and dividing it by the current liabilities. For the year 2018, the current ratio was calculated as:
From the above analysis, the current ratio showed a significant improvement between the years 2016 to 2018. This was because the company recorded improvement in its current assets. The current ratio was also higher compared to that of the industry average of 0.97. This shows that the company’s current ratio is quite good compared to other competitors.
Quick Ratio
This is a raio used to measure the ability of a company to be able to meet all of its short-term obligations by using total quick assets. The quick ratio of Starbucks was calculated as follows:
The quick ratio of Starbucks improved consistently from the year 2016 to 2018. The quick ratio of the consumer services industry was identified as 0.29. This shows that Starbucks had a higher quick ratio and was thus performing better compared to other competing industries.
Cash Ratio
This is a ratio involving the total cash and cash parallels of a company when compared to the current liabilities of the company. The cash ratio is used to calculate the ability of a company to repay short-term debt through the use of readily available liquidated sources. The cash ratio of Starbucks for the year 2018 was calculated as:
Starbucks Cash ratio increased progressively from the year 2016 to 2018. The average of the cash ratio in the consumer services industry was identified as 0.29. Starbucks had a higher averaged when compared to that of competing firms indicating that the company is doing better compared to other industries.
The short-term liquidity of a company is used to estimate if a company would meet its short-term debt and current liabilities. From the above analysis, Starbucks has an impressive short-term liquidity which is higher than that of the industry average. The analysis shows that Starbucks can easily meet its short-term liabilities and any short-term debt obligations.
Operating Efficiency
The operating efficiency of a company is used to identify how effectively a company manages its resources. A company that has a good operating efficiency should be able to sell goods and services, pay its bills, receive payments from customers, and buy equipment comfortable. These services should be performed as a daily business activity without keeping them for a long time. There are various ratios that can be used to measure the operating efficiency of a company. These ratios include inventory turnover, receivables turnover, and payable turnover. The operating efficiency of Starbucks was analyzed by looking at the different ratios shown in table 2 (“Starbucks Corp,” 2018).
Inventory Turnover
Inventory turnover can be described as the best tool that can be used to measure the efficiency ratio (Gartenstein, 2018). This is because it provides ongoing information concerning how well a business is using the materials that it purchased. The inventory turnover ratio for Starbucks was calculated as:
The inventory turnover for Starbucks showed improvement from the year 2016 to 2018. Starbucks experienced a lower inventory turnover that was lower than the consumer services industry of 8.87. This shows that the company is holding more of its inventory compared to sales.
Receivables Turnover
The receivable turnover is used to show the speed which the business gets paid for the products and the services it sells. It is used to provide information about the general cash flow and the net worth. The receivable turnover measures operating efficiency by analyzing whether there is available cash for operation. The receivable turnover ratio for Starbucks for the year 2018 was calculated as follows:
The receivables turnover of Starbucks deteriorated between 2016 and 2017 but improved from 2017 and 2018 and exceeded the level of 2018. The receivables turnover of Starbucks was higher than the industry average of 21.23. This shows that the company gets well paid for its operations and there are very remaining debts for sales.
Payable Turnover
The payable turnover is a ratio that provides the regularity which a company pays its bills. Businesses that pay their bills on time operate more efficiently compared to those businesses that do not pay their bills on time. The payables turnover for Starbucks for the year 2018 was calculated as follows:
The payable turnover of Starbucks declined consistently between 2016 and 2018. While there was a consistent decrease, the payable turnover was still higher compared to the consumer services industry average of 7.56. This shows that Starbucks operates efficiently because it has the ability to pay for its business expenses.
From the above analysis, the operating efficiency of Starbucks can be stated to be average. The inventory turnover, which is the best indicator of the operating efficiency, is lower but close to the industry average. However, the receivable turnover and payable turnover ratio are higher than the industry average. This shows that Starbucks is performing quite well in managing its receipt and the making of payments. Starbucks overall operating efficiency is thus average and commendable.
Capital Structure
The capital structure of a company describes the mix of the long-term capital of a company. It shows that there is a reliable type of funding that should support the company’s growth and acquisition of related assets. Critical components that can be used to show the capital structure of a company is through the company’s equity and debt. The proper use of debt and equity is an indicator that a company would have a strong balance sheet. The ratios that can be used to identify the capital structure of a company are thus the debt-to-equity and the debt-to-capital ratios ( Loth, 2019) . The given ratios were calculated for Starbucks for between the year 2015 and 2018 as shown in table 3 (“Starbucks Corp,” 2018).
Debt-to-Equity
The debt-to-equity ratio is used to show that a company may not be able to generate enough cash in order to satisfy debt obligations. Lower debt-to-equity ratios are considered better. The debt-to-equity ratio for Starbucks was calculated as follows for the year 2018.
The debt-to-capital ratio for Starbucks deteriorated from 2016 to 2017 before it increased in 2018(“Starbucks Fiscal 2018 Annual Report”,2018). Starbucks experienced a sudden increase in its debt to equity ratio because it took a long-term debt. The ratio is higher than the consumer services industry average of 1.25. The high debt-to-equity ratio shows that Starbucks has high debt and may not generate enough cash to meet debt obligations.
Debt-to-Capital
The debt-to-capital ratio is used to indicate the risk of a company based on the financial structure. A high ratio indicates that the company makes use of debt to finance operations while a low ratio means that the company raises funds from shareholders or its current revenues. The debt-to-Capital ratio for Starbucks was calculated for the year 2018 as shown.
The debt-to-capital ratio of Starbucks increased consistently between from 2015 to 2018. The company’s debt-to-capital ratio was also higher than the industry average of 0.55. This shows that the company raises most of its funds through the use of debt to finance its operates.
The analysis of ratios that are used to indicate the financial structure of a company shows that Starbucks has a poor capital structure. The company finances most of its business obligations through the use of debt. Starbucks can change its strategy and make use of shareholder’s equity in order to have a better capital structure.
Profitability
Profitability can be defined as the ability of a company to earn a profit. A profit can be realized by a company after a company subtracting all expenses that are directly related to the generation of the revenue. The profitability of a company is important when assessing whether the financial structure and business operations of a company is sound. The profitability of a company is analyzed through the use of financial statements which provide. Profitability ratios that were investigated include the gross profit margin, operating profit margin, net profit margin, return on investments, and return on assets (Kenton, 2019). The ratios were tabulated as shown in table 4 (“Starbucks Corp,” 2018).
Gross Profit Margin
The gross profit margin is used to measure how much a company made sales above the cost of goods sold. The gross profit margin was calculated as follows:
The gross profit margin of Starbucks decreased between 2015 and 2018(“Starbucks Fiscal 2018 Annual Report”,2018). However, the value has been staying at a constant level of ranging between 58% and 60%. The gross profit margin was higher than that of competitors and the industry average of 50% showing that the company was profitable.
Operating Profit Margin
The operating profit margin is used to measure the percentage of sales left after the inclusion of additional operating expenses. The operating profit margin of Starbucks was calculated as shown below
The operating profit margin of Starbucks decreased from 2016 to 2018. The operating profit margin was higher than the industry average of 8.24% indicating that Starbucks was profitable.
Net Profit Margin
The net profit shows the ability of a company to generate earnings after the deduction of taxes. The net profit margin of Starbucks was calculated as:
The net profit margin of Starbucks decreased between 2016 and 2017 but increased between 2017 and 2018. The net profit margin was higher than the industry average of 5.36% indicating that Starbucks was profitable.
Return on Equity
The return on equity is a ratio which measures the ability of a company to earn returns on equity investments. The return on equity for Starbucks was calculated as shown below
The return on equity increased sharply between 2017 and 2018. The ROE increased since there was an additional increase of a higher asset base.
Return on Assets
The return on assets is a ratio which assesses the profitability in relation to the costs and expenses. It is analyzed to identify how well a company is doing in deploying its assets to generate profits. The return on assets for Starbucks was calculated as shown below
The return on assets for Starbucks increased between 2016 and 2017 but decreased between 2017 and 2018. The ROA was higher than the industry average of 6.32% indicating that Starbucks was profitable.
Conclusion
From the analysis of the different parts of the financial statements of Starbucks, the company is financially healthy. The company has a stable financial structure by having a strong capital structure, good short-term liquidity, a strong capital structure, and showing high profitability. However, the company can improve its operating efficiency by improving the handling of inventory. Further analysis of Starbucks is recommended to be done through the use of trend analysis. This should provide a better view of the growth of the company over the past years and provide future expectations of the expectation of the company. This can help the company prepare for future growth or challenges adequately.
References
Gartenstein, D. (2018). Which Financial Ratio Is the Best Measure of Operating Efficiency? Retrieved from https://smallbusiness.chron.com/financial-ratio-measure-operating-efficiency-81024.html
Kenton, W. (2019). Profitability Ratios Definition. Retrieved from https://www.investopedia.com/terms/p/profitabilityratios.asp
Loth, R. (2019). Analyzing a Company's Capital Structure. Retrieved from https://www.investopedia.com/articles/basics/06/capitalstructure.asp
Rinne, K., & Suominen, M. (2016). Short-term reversals returns to liquidity provision and the costs of immediacy. Returns to Liquidity Provision and the Costs of Immediacy (January 28, 2016) .
Starbucks Corp. (2018). Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp
Starbucks Company Information. (2019). https://www.starbucks.com/about-us/company-information
Starbucks Fiscal 2018 Annual Report. (2018). Retrieved from https://s22.q4cdn.com/869488222/files/doc_financials/annual/2018/2018
