Starbucks Financial Preformance

Topics: Financial ratios, Generally Accepted Accounting Principles, Balance sheet Pages: 5 (1566 words) Published: April 3, 2011
II. Assessment of Starbucks’ Financial Condition

We evaluated the financial performance of Starbucks by computing various ratios based on the company’s most current audited financial statements. Specifically, we evaluated the firm’s liquidity, operating profitability, capital structure, and market value. Additionally, we identified Starbucks’ competitors and benchmarked the company’s performance against the peer group. Finally, we defined what we believe the key factors are causing the current condition. Our assessment and results are presented below. A. Liquidity

In measuring the firm’s overall liquidity, we used the current and acid-test ratios to analyze its ability to pay bills on time. The current ratio compares the company’s current assets to its current liabilities. Per Starbucks’ balance sheet, it has $2,756 mil. in current assets and $1,779 mil. in current liabilities. This relationship is estimated as follows: Current Ratio = Current Assets / Current Liabilities

= $2,756 mil. / $1,779 mil. = 1.55 times
Based on the current ratio, the company has $1.55 in current assets for every $1 it owes in short-term debt. A measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by subtracting inventories from current assets and dividing by its current liabilities. The rationale behind it is inventory can be less liquid than other current assets, therefore, the acid-test ratio is more conservative than the current ratio as it measures a company's ability to meet obligations in a worst-case scenario. For Starbucks, we calculate the acid-test ratio as follows: Acid-Test Ratio = (Current Assets – Inventory) / Current Liabilities

= ($2,756 mil. - $543 mil.) / $1,779 mil. = 1.24 times
Based on the acid-test ratio, the company is slightly less liquid, and has $1.24 in cash and receivables per $1 in current liabilities. In addition to looking at overall liquidity, we also measured the company’s liquidity of the individual asset categories by examining Starbucks’ accounts receivable and inventories. To determine how long it takes to turn the company’s accounts receivable into cash, we computed average collection period, assuming all sales were made on credit: Average Collection Period = Accounts Receivable /(Annual Credit Sales/365 days)

= $303 mil. /($10,707 mil. /365 days) = 10.33 days To estimate how long it takes to turn the company’s inventories into cash, we computed average collection period, assuming all sales were made on credit:

Days Sales Inventory = 365 days x Inventories/Cost of Goods Sold
= 365 days x $543 mil./ $4,459 = 44.4 days
We see that it takes Starbucks approximately 10 days to collect its receivables and it holds its inventory for 44 days on average. B. Operating Profitability
Profitability ratios answer important questions, such as: How good is a company running its business? Is it making any money? Does its performance seem to be getting better or worse? Profitability ratios can be grouped into two measures: the company’s ability to control its expenses and adequacy of returns on its investments. In measuring how well Starbucks controls its expenses relative to sales, we utilized the following ratios: gross profit margin, operating profit margin, and net profit margin. Gross margin is the amount of each dollar of sales that a company keeps in the form of gross profit. The higher the gross margin, the more of a premium a company charges for its goods or services. Starbucks’ gross profit margin for 2009 was 58%, which left $0.58 out of each dollar of sales to go to gross profits. Gross Profit margin = Gross Profits / Sales

= $6,248 mil. / $10,707 mil. = 58%
Operating Margin captures how much a company makes or loses from its primary business per dollar of sales. It is more complete and accurate indicator of a company’s performance than gross margin, since it accounts for important components of...
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