Income Statement
Over the last three years, the operating income accrued by Starbucks Corporation has been on an upward trend. Also, according to the organization’s income statement for the trailing twelve months, the organization has made a net income of $3,389,700,000. In addition, the organization has seen an improvement in its earnings per share. Therefore, the organization promises a higher return per share for any investor who will buy shares with the company. In addition, a comparison between the net profit margin on sales for the 2018 and 2019 shows a decrease in the amount of profit attributed to sales. While the net profit margin on sales for 2019 was 13.58%, the net profit margin ratio for 2018 was 18.28%. The decrease in this financial ratio shows an increase in the cost of sales, among other expenses, and the decrease in the profitability level of the company.
Starbucks Corporation
Income Statement
For the Trailing Twelve Months (TTM)
Total Revenue 26,662,700,000
Cost of Revenue 19,468,900,000
Gross Profit 7,193,800,000
Total Operating Expenses 3,536,700,000
Operating Income 3,657,100,000
Interest Expense 373,200,000
Other Income/Expenses Net 856,400,000
Income Before Tax 4,214,900,000
Income Tax Expenses 829,200,000
Income from Continuing Operations 3,385,700,000
Net Income 3,389,700,000
Balance Sheet
Using the values in the balance sheet, the current ratio was calculated. The current ratio is a good determinant for the financial position of an organization to settle its short-term obligations (Fridson & Alvarez, 2011; Wicker & Breuer, 2014). Starbucks’ current ratio was 0.92 in 2019 compared to 2.20 in 2018. Based on the ratio, the organization has accumulated a lot of short-term liability and thus putting it at risk of being unable to meet short-term obligation (Damodaran, 2002). Also, the return on equity reduced from 384.27 to -57.76. The financial leverage of the organization to finance its assets with debt and other liabilities will be affected by this drop (“Yahoo”, 2020). Therefore, upon the analysis of Starbucks’ income statement and balance sheet, it is evident that the organization is not in favourable financial conditions. While the net income has increased in the trailing twelve months, the profitability and the ability of the organization to request and settle debts and other liabilities have been affected.
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Starbucks Corporations
Balance Sheet
For the Year Ended 2019
ASSETS
Current Assets
Cash and Cash Equivalent 2,686,600,000
Other Short-Term Investments 70,500,000
Total Cash 2,757,100,000
Net Receivable 879,200,000
Inventory 1,529,400,000
Total Current Assets 5,653,900,000
Total Non-current Assets 13,565,700,000
Total Assets 19,219,600,000
LIABILITIES AND SHAREHOLDERS’EQUITY
Current Liabilities
Account Payable 1,189,700,000
Tax Payable 1,291,700,000
Accrued Liabilities 1,545,400,000
Deferred Revenue 1,269,000,000
Total Current Liabilities 6,168,700,000
Total Non-current Liabilities 19,281,900,000
Total Liabilities 22,980,600,000
Shareholders’ Equity
Common Stock 1,300,000
Retained Earnings 1,457,400,000
Accumulated other comprehensive income -330,300,000
Total Shareholders’ Equity 1,169,500,000
Total Liabilities and Shareholders’ Equity 24,156,400,000
Factors to be Considered by Starbucks When Evaluating Future Investment Projects
Due to its global market position, Starbucks has the potential to explore new investment opportunities in order to diversify and increase its sources of revenue. However, to effectively make future investments, the organization should consider multiple factors, including its overdependence on the American market, cases of self-cannibalization, expansion into emerging markets, widening product mix and offers, and the adoption of technology (Sakal, 2018). Currently, the organization mainly focuses on the American market. However, since the organization has a strong market position and a global brand, it has an opportunity to explore future investments in emerging markets in Asia, the Middle East, and Africa. Emerging markets do not present strong competition since most of its rival brands have not encroached these markets. Besides, the increased saturation in the United States should make the adoption of an international strategy very important (Sakal, 2018). The organization should consider partnerships with other international organizations, such as Alibaba, to accelerate market penetration. In the coming years, China should be a good option for Starbucks’ investment projects.
Starbucks should consider expanding product mix and offering as its new growth strategy. In the past, Starbucks’ expansion strategy involved the opening of new outlets to target more customers. However, due to overcrowding in the market, there have been cases of self-cannibalization, where one store takes customers from other stores (Sakal, 2018). Therefore, due to the growing inefficiencies with this strategy, the organization should consider strengthening its product portfolio as a way of attracting and retaining customers. Future investments should consider developing comprehensive product portfolio around beverages, refreshments, health and wellness, and its core food offering (Sakal, 2018). The organization’s lunch and evening programs can help attract more sales if proper innovations are put into them.
Finally, the organization should also evaluate the ongoing technological advancements and access their viability in its future investments. The introduction of the stored value card program has helped increase the level of customer loyalty. In addition, the introduction of mobile payment methods as one of the payment options has improved the customer experience in Starbucks’ stores (Sakal, 2018). Therefore, based on the current and past benefits of adopting technology in its operations, the organization has the potential to improve returns and the efficiency of its future investments by exploring new technologies.
The analysis of the internal and external business environment is important, particularly when exploring future investments opportunities. The financial position of the organization, particularly its ability to raise capital, is important for future investments. Furthermore, revenue projection should be conducted to evaluate the future financial conditions of the organization. In addition to that, external factors such as the level of competition in the market might guide organizational strategies when making an investment decision and exploring it.
Investment Decision
Based on the business and financial analysis, investing in Starbucks Corporation’s shares is not a good option. While the organization recorded a positive improvement in its net profits, its profitability level reduced. The organization’s profit margin on sales, which reduced from the previous year, is a sign that Starbucks’ inventories are not utilized effectively (Henry et al., 2012). Furthermore, the organization’s earnings per share reduced by more than 400%. The significant decrease in earnings per share is a sign that an investor will get lower returns on his or her investment.
Aside from its profitability, the organization’s position to settle short-term obligations is not effective. With a current ratio of 0.92, the organization’s current assets cannot fully settle the organization’s current liabilities. Therefore, the organization’s ability to acquire finances will be affected. Furthermore, due to the unhealthy financial condition, the organization’s future investment plans might be affected.
In addition to the organization’s profitability and financial conditions, other factors, including the external business environment and the fair value per share, will be evaluated (Fridson & Alvarez, 2011). The external business environment, in the form of competition, might affects the organization’s performance and thus the return on investment. In addition, a thorough analysis of the current valuation of Starbucks’ shares will be conducted to determine if the stocks are overvalued or undervaluation. The fair value per share of the organization’s stocks will be calculated. The calculation will consider the adjusted market value of debt, noncontrolling interests, short-term and long-term investments, as well as the equity and cost investment. A comparison between the current market prices, the fair market prices, the expected growth rate, potential future investments as well as the financial condition of Starbucks will be used to determine the viability of investing in the organization.
References
Damodaran, A. (2002). Investment Valuation 2nd Edition University with Investment Set.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner’s guide (Vol. 597). John Wiley & Sons.
Henry, E., Robinson, T. R., & van Greuning, J. H. (2012). Financial analysis techniques. Financial reporting & analysis , 327-385.
Sakal, D. V. (2018). Company Analysis of Starbucks Corporation.
Wicker, P., & Breuer, C. (2014). Examining the financial condition of sport governing bodies: The effects of revenue diversification and organizational success factors. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations , 25 (4), 929-948.
Yahoo is now a part of Verizon Media. (2020). Retrieved 6 May 2020, from https://finance.yahoo.com/quote/SBUX/financials?p=SBUX
