Introduction
Balance sheet analysis reviews an organization’s assets, liabilities, and owner’s equity, as viewed by its various stakeholders, to determine its current financial status. Obligations and equity are two elements that support a corporation’s assets (Fraser & Ormiston, 2014). In a publicly listed company like Starbucks Corporation, the owners’ equity, also known as shareholders’ equity, consists of the initial investment along with any retained earnings and constitutes a source of capital for the corporation. This paper evaluates Starbucks’ current assets, accounts receivable, inventories, equipment, property, current liabilities, long-term debt, and stockholders’ equity.
Financial Analysis
Current Assets
Current assets are the company’s assets that can be converted to cash within one year and consist of cash, accounts receivable, and inventory. Current and quick ratios help analyze current assets. Starbucks’ total current assets decreased from $9,756.4 million in 2021 to $7,018.7 million in 2022 (Sec.gov, 2023). This indicates that the company had a low current and quick ratio during the financial year 2022, as these ratios are used to assess a firm’s current assets.
Account Receivables
Accounts receivable represent the money that clients owe an enterprise for items or services they have acquired but have not yet been paid for. When clients obtain goods on credit, for instance, the outstanding balance is added to the accounts receivable, creating a commercial obligation. According to the Form 10-K obtained from SEC.gov (2023), Starbucks’ revenue increased from $940 million in 2021 to $1,175.5 million in 2022. Therefore, this demonstrates the company’s ability to recover accounts receivable and the proportion of its clients who pay off their loans.
Equipment and Property
Typically, material, plant, and equipment refer to a business’s tangible or immovable long-term assets with an expected lifetime of more than one year. This category includes structures, technology, land, office supplies, furnishings, and automobiles. According to the 10-K form, Starbucks’ equipment and property increased from $6,369.5 million in 2021 to $6,560.5 million in 2022 (Sec.gov, 2023). This reduced the chances of acquiring more debts as the company may use such assets to settle some liabilities.
Other Current Assets
Other current assets (OCAs) are significant items that an enterprise possesses, generates, or utilizes to produce income that can be converted into cash within an economic cycle. Starbucks’ other current assets lowered from $594.6 million in 2021 to $483.7 million in 2022 (Sec.gov, 2023).
Current Liabilities
Current liabilities are a business’s short-term financial obligations that are due within one year or during a typical operating period. An organization’s operational cycle, also known as the cash conversion cycle, is the duration it takes to acquire inventory and convert it into cash through sales (Fraser & Ormiston, 2014). Starbucks’ total liabilities increased from $8,154.4 million in 2021 to $9,151.8 million in 2022 (Sec.gov, 2023). Typically, these current liabilities are covered with current assets, which are resources consumed within a year.
Stockholder’s Equity
Stockholders’ equity is the amount of assets available after all commitments have been satisfied. It is computed as the difference between a company’s total assets and liabilities or the combination of share capital, reserves, and surplus minus treasury shares (Fraser & Ormiston, 2014). Starbucks experienced a deficit in its shareholders’ equity, increasing from $5,314.5 million in 2021 to $8,698.7 million in 2022 (Sec.gov, 2023). The deficit implies that Starbucks has more total liabilities than total assets.
Long-Term Debt
Long-term debt refers to indebtedness with a maturity date beyond one year and is typically distinguished from short-term debt. Starbucks’ long-term debts decreased from $13,616.9 million in 2021 to $13,119.9 million in 2022 (Sec.gov, 2023). A long-term obligation is a liability the originator must reimburse, although purchasers of debt instruments, such as securities, account for them as assets.
Strengths and Weaknesses
The following are some of the strengths that constitute the Starbucks Company. The increased current liabilities indicate that the firm has better current and quick ratios. If required, the current ratio informs the company and its stakeholders that it has sufficient liquid assets to meet its immediate liabilities and obligations (Arsyad et al., 2021).
On the other hand, a solid quick ratio demonstrates to stockholders that Starbucks can satisfy its short-term liabilities using its most liquid holdings. Additionally, Starbucks’ increased property and equipment enable the company to operate and expand. Over time, these assets depreciate and might be sold for their salvage value.
However, a decrease in Starbucks’ current assets in 2022 indicates that the firm had a minimal quick and current ratio, which are metrics used to analyze current assets. A lower quick ratio indicates that the corporation relies largely on inventories and may be severely deficient in other liquid assets, resulting in poor financial health. The low current ratio indicates that the corporation is less liquid and may have difficulty meeting its short-term liabilities, making it an inappropriate investment option (Arsyad et al., 2021). Moreover, the negative shareholders’ equity may indicate that Starbucks is experiencing a financial crisis or that the corporation has spent its retained income and any proceeds from its equity offering on reinvesting in the business, such as acquiring expensive property, structures, and machinery.
Recommended Strategy for Investment
The suggested technique for an investor looking to invest in Starbucks is growth investing, as it offers a substantial upside opportunity for future share returns. Since Starbucks has witnessed an increase in its current liabilities and accounts receivable, and a reduction in long-term debt, its stock is expected to rise soon. Therefore, growth investing would be optimal for those seeking shorter investment timeframes with a greater capacity than value investing.
An advantage of this strategy is that momentum can benefit growth corporations; once growth has begun, subsequent periods of continuing expansion and price appreciation are more likely. However, dependent on economic indicators, growth equities may be suitable for long-term holdings using this strategy. For instance, rising interest rates are detrimental to growth enterprises.
References
Arsyad, M., Haeruddin, S. H., Muslim, M., & Pelu, M. F. A. (2021). The effect of activity ratios, liquidity, and profitability on the dividend payout ratio. Indonesia Accounting Journal, 3(1), 36-44. Web.
Fraser, L. M. & Ormiston, A. (2014). Understanding financial statements (11th ed). Pearson Education.
Sec.gov. (2023). Inline XBRL Viewer. Web.