Starbucks Solvency Case

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Starbucks Solvency Case

By | November 2012
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STARBUCK’S ASSIGNMENT

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.

Profitability:
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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