Summary
The Starbucks Coffee Company has been dedicated to roasting and ethically sourcing high-quality Arabica beans since 1971. The business has become the world’s largest roaster and distributor of gourmet coffee. In this article, we will analyze Starbucks’ 10-Q filings to assess the Company’s financial health, performance, strengths, weaknesses, and key trends. Meal sales continued to be dominated by Starbucks, which accounted for 5% of total sales at an average price of $12.67. The other two were McDonald’s and Panera Bread. Again, Chick-fil-A was the highest-rated vendor (4.6 out of 5 stars).
Liquidity Analysis
A liquidity ratio study can help determine a company’s short-term solvency. As a result, it helps determine a company’s ability to meet its short-term obligations. Thus, liquidity refers to the speed at which a company’s assets can be converted into cash (Beaver, 2022). A company’s liquidity can be analyzed using the following ratios: current ratio, quick ratio, cash ratio, defensive interval ratio, and cash conversion cycle. Liquidity analysis also ensures the Company has enough cash flow to meet its liabilities (Adams, 2022).
Current Ratio
Current ratio = current assets/current liabilities
Current assets consist of Inventory, cash, accounts receivable, and other assets that can be liquidated within a year. Current liabilities, on the other hand, comprise accounts payable, outstanding costs such as wages and taxes, and short-term loans.
April 2022
Total current assets of Starbucks on April 3, 2022 = 7451.1.
Total current liability of Starbucks on April 3, 2022 = 9104.3.
Current ratio in April 2022 = 7451.1/9104.3 = 0.81841.
Current ratio = 0.82:1.
July 2022
Total current assets of Starbucks in July 2022= 7067.5.
Total current liability in July 2022= 8402.4.
Current ratio in July = 7067.5/8402.4 =0.8411.
Current ratio = 0.84:1.
Quick Ratio
It assesses companies’ capacity to pay for short-term debts/expenses by transforming their Liquid assets into cash. It is often referred to as the acid test, as it assesses the Company’s strength (Fernando, 2022). A firm with a quick negative ratio is likely to suffer more at the time of a crisis than a company with a quick positive ratio.
Quick ratio = quick assets/current liabilities
Some quick assets include cash and cash equivalents, marketable securities, and accounts receivable. Current assets can also be determined by subtracting inventories and prepaid expenses from total assets.
April 2022
Current liabilities = 9104.3.
Quick asset = 7541.1-1920-623.7 = 4997.3.
Quick ratio = 4997.3/9104.3 = 0.55.
Quick ratio = 0.55:1.
July 2022
Current liabilities = 8402.4.
Quick asset= 7067.5-2132-534.1 = 4400.9.
Quick ratio = 4400.9/8402.4 = 0.52.
Quick ratio =0.52:1.
Cash Ratio
This ratio only considers the most liquid assets (cash and marketable securities). The current assets used in this ratio only include cash and marketable securities.
Cash ratio = assets (cash + marketable securities)/current liabilities
Cash ratio of Starbucks in April 2022 = current asset (3919.4)/current liabilities (9104.3) = 0.43:1.
Cash ratio of Starbucks in July 2022 = current asset (3177.5)/current liabilities (8402.7) = 0.39:1.
Solvency Analysis
A solvent corporation has a positive net worth and a sustainable debt burden, meaning its assets exceed its liabilities. Solvency ratios assess the Company’s long-term financial health, whereas liquidity ratios evaluate a firm’s ability to meet its short-term obligations. The following are some of the most common solvency ratios (Adams, 2022).
Solvency ratio = (net income + depreciation)/all liabilities (long-term and short-term)
Debt-to-Equity (D/E) Ratio
It is used to determine a company’s debts relative to its equity. A high D/E ratio indicates that a company may be unable to pay its obligations. Borrowing in business is not necessarily a bad thing, but the equity ratio helps provide a clear picture of a firm’s financial condition.
Debt to equity = Total debt / Total equity
D/E ratio of Starbucks in April = 37782.7/8761.2 = 4.31 which is equivalent to 43%.
D/E ratio of Starbucks in July = 36815.1/8658.9 = 4.25 or 42%.
Note: It is important to remember that a corporation is regarded as financially sound if its solvency ratio exceeds 20%.
Debt-to-Assets
It calculates the percentage of a company’s assets funded by credit, whether long-term or short-term. Debt-to-Asset is calculated by dividing a company’s total debt by its assets (Girsh-Bock, 2022). A larger ratio implies a greater degree of indebtedness and, consequently, increased financial risk.
Debt to assets = Total debt / Total assets
Total Starbucks debt-to-asset ratio in April 2022 = 37782.7/29021.5 = 1:1.30.
Total Starbucks debt-to-asset ratio in July 2022 = 36815.1/28156.2 = 1:1.31.
Interest Coverage Ratio
A debt-to-profitability ratio indicates how effectively a business can cover its interest expenses on outstanding obligations. This method is frequently used by lenders, investors, and creditors to assess a company’s volatility concerning its present debt or for prospective loans (Adam, 2022)
Interest Coverage Ratio = EBIT/Interest Expense,
where: EBIT=Earnings before interest and taxes.
The interest coverage ratio of Starbucks during April 2022 = 1938.5/234.4 = 1:8.27.
The interest coverage ratio of Starbucks in July 2022= 3130.7/357.6 = 1:8.75.
Profitability Ratio
Profitability ratios are financial indicators used to evaluate a company’s ability to generate earnings compared to its sales, operational costs, balance sheet assets, or shareholders’ equity over time. The study uses data from a single point in time (Adam, 2022). Profitability is calculated using various formulas/ratios, namely:
EPS (Earnings Per Share)
Earnings per share, calculated by subtracting preferred dividends from net income and dividing the result by the number of common shares outstanding, is used to calculate profits per outstanding share of ordinary stock.
Price Earnings Ratio
It helps measure investors’ expectations of future profitability. It is calculated by dividing the market price per share by the total earnings per share.
PE = market price per share/total earnings.
PE of Starbucks in April 2022 = 104.74/0.001 = 1:104,740.
Return on Total Assets
Determines the net income earned for every $1 invested in assets. Investors can determine the efficiency of a firm by looking at its return on assets (ROA) statistic.
Return on Assets = Total Assets/Net Income.
ROA of Starbucks in July 2022 =28156.2/2403.3 = 1:11.72
Starbucks Revenues and Gains
Starbucks specializes in roasted retail coffee globally, its primary income source. Starbucks’ ancillary products, like its teas and other drinks, significantly contribute to the Company’s bottom line (Stig & Preston, 2014). Starbucks also benefits from its licensed retail, food service, and customer package businesses (Girsh-Bock, 2022). Starbucks’ consumer-packaged-goods segment distributes packaged coffee and tea products and a variety of ready-to-drink beverages and single-serve coffee and tea items to grocery stores, warehouse clubs, and specialty shops.
Starbucks Expenses and Losses
Buying coffee beans from farms and cooperatives in nations all over the world is Starbucks’ primary source of expense. They also have to pay for secondary expenses, ancillary things like cost-cutting measures, publicity, and brand promotion (Stig & Preston, 2014). The net income/loss from operations for Starbucks in 2022 was $3.283 billion, down $21.83 billion from the previous year.
Revenue Trends
Starbucks’ sales and marketing costs and its R&D expenditures have shown an upward trend in recent years. The corporation has a manageable 1:0.6 net interest income (cost) to operating income ratio (Stig & Preston, 2014). By dividing all operating costs by less depreciation and operating income, one arrives at the operating expenditure ratio (OER). Investors would want Starbucks to have a low operating expenditure ratio (OER) compared to sales, since it indicates efficient spending. In 2022, Starbucks paid $0.949 B in income taxes, a decrease of 17.99% from the previous year (Stig & Preston, 2014). This is a sustainable, manageable, and effective tax rate.
The revenue of Starbucks has steadily increased each year; on April 3, 2022, the total net revenue of Starbucks was $15686.By the end of the second quarter, the revenue was seen to increase to $23836 on July 3 of the same year (Adams et al., 2022).Starbucks’ 10-Q discusses some primary revenues: company stores, licensed stores, and others (Stig & Preston, 2014).Comparing Starbucks’s general and administrative expenses, it is evident that it has higher general and administrative expenses, recording a revenue of $1007.3 million in 2022.
The ratio of net income tax to income from operations = 46.2/2126.7 = 1:0.02.
The ratio compares a company’s operating income to its capacity to pay its debt’s interest costs. A higher ratio shows that a business has a more extraordinary ability to pay its interest costs; it is clear that the above ratio is safe for the Company.
Starbucks’ income tax does not appear to have any trends, with $239.7 in 2020, $1156 in 2020, and then a decline to $948.5 in 2021.
References
Adams H., J. Margret, M. Katrina. (2022). Interest coverage ratio: formula, how it works, and example.
Adams H., Michael J Boyle, Timothy Li. (2022). Solvency Ratios vs. Liquidity Ratios: What’s the Difference? Web.
Beaver S., (2022). Quick Ratio: How to Calculate & Examples. Oxford
Fernando J., (2022). Financial statements, balance sheet. Web.
Girsh-Bock M., (2022). Horizontal Analysis. Web.
Stig, B., & Preston, P. (2014). Warren Buffet Accounting book. Kogan Page.
Appendix
Table 1 – Balance Sheet
Table 2 – Income Statement