In today’s increasingly competitive business environment, high quality of financial analysis and forecasting is essential for the long-term strategic success of any company. In the current paper, the most recent performance trends of Starbucks Corporation, a premium coffee retailer and roaster operating in the US, will be evaluated to see whether the company’s management is performing well in this domain.
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General Position and Business Environment
As of now, Starbucks is one of the world’s largest roasters, retailers, and marketers of premium coffee, with operations in over 75 countries globally (Starbucks, 2017). The industry in which it operates is coffee retail and coffee shops, and the key products are premium coffee drinks, snacks, tea and other beverages, and handcrafted coffee. The largest share of sales is attributable to the American markets (70%), with an additional 14% belonging to China and the Asia Pacific and 5% — to Europe, Middle East, and Africa. According to Garthwaite, Busse, Brown, and Merkley (2017), some of the key competitors of Starbucks are McDonald’s, Dunkin Brands, and Costa Coffee.
Three Selected Types of Risks
The first risk mentioned in the Starbucks annual report (Starbucks, 2017, p. 10) is the market risk, which may arise from the deterioration of economic conditions in the US and globally. Due to this factor, discretionary spending amounts of consumers can be negatively affected, which would make the consumers switch to cheaper alternatives than Starbucks. As for the liquidity problems, this type of risk can be faced by a company in a situation when its short-term assets are not sufficient to cover the amount of the pending short-term liabilities. If this situation happened, Starbucks would need to attract additional funding at the above-market rates, given that such funds would be required in the short run.
Lastly, the business risks defined by Starbucks include their failure to implement beneficial strategic initiatives and properly manage growth. These outcomes can be driven, for instance, by poor brand engagement and low levels of diversification.
Financial Ratio Analysis
Ratio analysis helps to explore the company’s financial health from different perspectives and observe its evolution over time.
The set of liquidity ratios reflect the ability of the company to cover its short-term liabilities with the amount of available short-term assets (Doumpos, Lemonakis, Niklis & Zopounidis, 2019). The two most popular measures of liquidity are the current and quick ratios, of which quick ratio is the most conservative as it does not include the number of inventories and other types of relatively less liquid current assets. Using the provided formulas and the data on financials provided in the Starbucks annual report (Starbucks, 2017), the ratios can be calculated as below.
Current Ratio = Current Assets / Current Liabilities
Current Ratio 2016 = 4,757.9 / 4,546.8 = 1.05
Current Ratio 2017 = 5,283.4/ 4,220.7 = 1.25
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
Quick Ratio 2016 = (4,757.9 – 1,378.5 – 347.4) / 4,546.8 = 0.67
Quick Ratio 2017 = (5,283.4 – 1,364.0 – 358.1) / 4,220.7 = 0.84
It can be seen that in both of the cases, the liquidity ratios of Starbucks fall short of the established standards (2:1 for the current ratio and 1:1 for the quick ratio), which is a negative factor. However, each of the ratios showed positive dynamics between 2016 and 2017, which means that the short-term risks associated with investing in the company were decreasing.
The set of solvency ratios are focused on the long-term risks associated with investing in the company and measure the ability of firms to fulfill their debt obligations. The three measured solvency ratios considered for Starbucks Corporation will be the debt-to-equity ratio, the debt ratio, and the interest coverage ratio.
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Debt ratio = (Debt / (Debt + Equity)) * 100%
Debt ratio 2016 = 8,421.8 / (8,421.8 + 5,890.7) * 100% = 58.84%
Debt ratio 2017 = 8,908.6 / (8,908.6 + 5,457.0) = 62.01%
It can be seen that the debt ratio of Starbucks is worse than the targeted 50%, and also deteriorated between 2016 and 2017. This means the growing degree of long term risk associated with investing into the company.
Debt to equity ratio = Debt / Equity
Debt to equity ratio 2016 = 8,421.8 / 5,890.7 = 1.43
Debt to equity ratio 2017 = 8,908.6 / 5,457.0 = 1.63
Again, the debt to equity ratio is higher than the standard of 1 and deteriorated with time.
Interest coverage ratio = Operating income / Interest
Interest coverage ratio 2016 = 4,171.9 / 81.3 = 51.31
Interest coverage ratio 2017 = 4,134.7 / 92.5 = 44.69
Interest coverage ratio deteriorated within the observed period, similarly to the other two solvency ratios.
Profitability ratios are a set of indicators that help to define whether a company can generate profit from its operations (Lalon & Hussain, 2017).
EPS = as reported in the consolidated statement of earnings
EPS 2016 = $1.91
EPS 2017 = $1.99
Earnings per share improved by 8 cents between 2016 and 2017, reflecting positive profitability dynamics.
Net profit margin = (Net Profit / Sales) *100%
Net profit margin 2016 = (2,817.7 / 21,315.9) * 100% = 13.22%
Net profit margin 2017 = (2,884.7 / 22,386.8) * 100% = 12.89%
Gross profit margin = (Gross Profit / Sales) *100%
Gross profit margin 2016 = (12,804.8 / 21,315.9) * 100% = 60.07%
Gross profit margin 2017 = (13,348.6 / 22,386.8) * 100% = 59.63%
Both of the two calculated profit margins deteriorated within the observed period, but by rather insignificant amounts.
Return on investment = (Net Profit / (Debt + Equity) *100%
Return on investment 2016 = 2,817 / (8,421.8 + 5890.7) * 100% = 19.69%
Return on investment 2017 = 2,884/ (8,908.6 + 5457.0) * 100% = 20.08%
Return on equity = (Net Profit / Equity) *100%
Return on equity 2016 = (2,817 / 5890.7) * 100% = 47.83%
Return on equity 2017 = (2,884/ 5457.0) * 100% = 52.86%
Both of the return ratios improved within the observed period, unlike the profit margins and similarly to the EPS indicator. Overall, it can be said that the profitability indicators show mixed evidence, while none of them changed significantly within the observed period.
Summing up the above, it can be seen that Starbucks Corporation was showing mixed dynamics in the majority of its financial ratios in the observed period. This means that executives are performing differently in various domains regarding the management of the company’s financial performance, according to the data provided in the latest financial report. For instance, while the liquidity indicators were improving, solvency ratios showed negative dynamics.
Doumpos, M., Lemonakis, C., Niklis, D., & Zopounidis, C. (2018). Analytical techniques in the assessment of credit risk. New York: Springer.
Garthwaite, C., Busse, M., Brown, J., & Merkley, G. (2017). Starbucks: A story of growth. Kellogg School of Management Cases, 1-20.
Lalon, R. M., & Hussain, S. (2017). An analysis of financial performance on non-bank financial institutions (NBFI) in Bangladesh: A study on Lanka-Bangla Finance Limited. International Journal of Economics, Finance and Management Sciences, 5(5), 251-262.
Starbucks. (2017). Starbucks annual report 2017 [PDF]. Starbucks Corporation. Web.