MBA 522: Financial Management
December 9, 2008
Tully’s Coffee Corporation
Established in 1992, Tully’s Coffee Corporation is a Seattle based coffee retailer and wholesaler. The main products offered by the company are baked food items, coffee products and pastries. Additionally, their coffee beans have exceptional sales in regional supermarket and grocery stores. The company currently operates over 100 stores in the western region of the United States and they have embarked upon a business venture in Japan where Tully’s is creating quite a coffee presence, they are also investigating expansions into other foreign markets. The Corporation started generating profits in the year 2006 (About Tully’s, 2007). Starbucks Corporation
Seattle-based Starbucks Corporation is the leading coffeehouse chain in the world. The company currently has operations in more than 44 countries. The main products offered by Starbucks include a wide variety of beverages, coffee beans and brewing equipment, and a wide assortment of snacks and sandwiches. The company also branched into marketing music and books (The Company, 2008). Ratio Analysis
Debt Equity Ratio1.345.22
Inventory Turnover Ratio12.1311.27
Gross Profit Ratio (%)23.3444.96
Net Profit Ratio7.1515.76
Return on Proprietors' Funds29.45-
Earning Per Share0.910.004
Current ratio may be defined as the relationship between current assets and current liabilities. It is also known as the working capital ratio (2: 1 ratio). It is calculated by dividing current assets by current liabilities. Current assets of a firm represent those assets which can be, in the ordinary course of business, converted into cash within a period not exceeding one year. Current liabilities are those obligations which are to be paid within a period of one year of current assets or by creation of current liabilities (Van Horne, Wachowicz & Bhaduri, 2005). Current ratio of the Starbucks Corporation and Tully’s Coffee Corporation is .79 and .51 respectively, during the year 2007. There is a difference in the current ratio of both companies, reflecting the weak liquidity position of both companies - and it illustrates that neither company has short term solvency. Liquidity position can be improved to some extent and can be made equivalent to industry average. The industry average of current ratio is .90: 1. The current ratio of Tully’s is unsatisfactory and reflects weak position of the company.
This ratio is also helpful in analyzing the short term financial position of a business. Quick ratio is the measure of the instant debt paying ability of the business enterprise, hence, it is called quick ratio (Van Horne, Wachowicz & Bhaduri, 2005). A quick ratio of 1:1 is considered as an ideal ratio. If the liquid ratio is more than 1:1, the financial position of the firm is deemed to be sound. On the other hand, if the ratio is less than 1:1 the financial position of the firm is unsound. Quick ratio of Starbucks is .30:1 and Tully’s ratio is .30:1. There is no difference between the quick ratios of Starbucks & Tully’s Coffee. Overall, the short term liquidity position of both firms is quite poor because the ratios are less than the desired norm. For instance, current ratio should be 2:1 whereas, it is less than 1:1. Similarly, the liquidity ratio is much less than 1 as compared to ideal standard of 1:1. Therefore, the companies will face difficulties in paying current obligations on maturity.
Debt Equity Ratio
This ratio indicates the relative proportion of debt and equity in financing the assets of a firm. Debt Equity ratio reflects the relative claims of creditors and shareholders against the assets of a firm. The industry average of ratio is .42:1. Debt equity ratio of Tully’s...