Starbucks Solvency Case

Topics: Financial ratio, Balance sheet, Generally Accepted Accounting Principles Pages: 2 (636 words) Published: November 25, 2012

Question 2
Short-term liquidity:
Starbuck’s current ratio has increased from 1.29 to 1.83 between 2009 and 2011. At the same time its quick ratio has also increased to a healthy 1.36 percent in 2011. It is clear that current liabilities are decreasing at a faster rate than current assets. Thus the company’s ability to meet its obligations in the short-term should not be a problem. Starbucks’ liquidity looks healthy going forward as it has a healthy receivables turnover at 33.95 in 2011, whilst the average collection period is at 10.75.

Long-term Solvency:
The debt to equity ratio dropped from 2010 levels where it was at 0.74 to 0.68 in 2011 which means that there has been a reduction in financial risk and an improvement in solvency. This may largely be explained by the increase in retained earnings. The interest coverage is between 4 and 5 times meaning that Starbucks is not at any high risk of default on its debt obligations. Thus the risk of insolvency is highly mitigated.

The return on equity (ROE) for Starbuck’s has improved greatly from 14.12% in 2009 to 30.91% in 2011. The return on assets (ROA) has followed a similar trend growing from 9.99% in 2009 to 25.15% in 2011. This suggests that for any potential investors Starbuck’s is a lucrative proposition at least to the extent that past performance is a reliable predictor of future performance.

P-E Ratios:
Given its size Starbuck’s is not likely to see any extraordinary growth and as such a P-E ratio of 23.65 in 2011 is reasonable even though it shows a drop from 2009 levels. Of an interest is the fact that over the same period Starbucks EPS have actually grown by up to 200% from 0.53 to 1.66. It is clear that investors do not expect any rapid growth in the company’s net income but rather more stable growth.

Question 3
With regard to short-term liquidity it is clear that Starbuck’s is doing better than the industry where the current ratio averages out...
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