Financial ratios are used to predict the liquidity, solvency profitability, as well as the performance of a given company within a specified period. Thus, investors and other shareholders need to understand accurately the meaning of each ratio before making any investment related decision (Lewellen, 2004). This paper provides an in-depth financial analysis of Starbuck with more emphasis on the company’s liquidity, solvency and profitability ratios. After calculation of each ratio, a short explanation will be given to highlight the revelation brought about by each ratio.
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Some of the liquidity ratios, in this case include the quick ratio and current ratio.
One can calculate a company’s quick ratio by taking into consideration the quick cash of the company expressed over the total current liabilities of the company.
Quick Ratio = [Cash + any investment in the short-run+ total company’s receivables]/ Total Current Liabilities.
Starbucks Corporation recorded deterioration in its quick ratio from 2012 to 2013 (1.3 to 0.8), as well as from 2014 to 2015, (1.3 to 0.8) after an improvement from 2013 to 2014, (0.8 to 1.3). A quick ratio is used to examine the extent to which quick assets in a company are used to cover short-term creditors’ claims. Basing argument on the details above, it is evident that the ability of Starbucks to cover its current liabilities deteriorated from 2012 to 2013 and 2014 to 2015. However, between 2013 and 2014, Starbucks was in a good position to ensure that all its current liabilities are covered to the maximum (Starbucks Corp., 2016).
The current ratio of Starbucks Corporation dropped between 2012 and 2013, as well as between 2014 and 2015. In spite of such a drop, an improvement in the current ratio was recorded in between 2013 and 2014. The current ratio of Starbucks was 1.9, 1.02, 1.37, and 1.19 in 2012, 2013, 2014 and 2015 respectively. This information reveals that the current liabilities of Starbucks were high in 2013 but decreased between 2013 and 2014. In addition, there was an increase in the liabilities in the following year.
According to Lewellen (2004), a high current ratio indicates that the concerned company has the ability to pay reasonably its short-term creditors. For the case of Starbucks, its current ratio fluctuates from one year to the other.
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Liquidity ratios are very important in accessing the financial stability of a company. It is important to compare the current and quick ratios before making any conclusion regarding the liquidity of any given company. In a case where the liabilities are very high compared to the company’s assets, such a company is on the verge of becoming insolvent. In the case of Starbucks, it is evident that the company is able to pay its debts (Starbucks Corp., 2016). However, the decline in quick and cash ratios from 2014 to 2015 depicts a case of non-liquid inventories that are in excess. For this reason, the company ought to monitor and control its non-liquid inventories.
Debt to assets
The debt to assets of Starbucks improved from 2012 to 2013 (0.38 to 0.61), deteriorated from 2013 to 2014 (0.61 to 0.51), before a slight improvement from 2014 to 2015 (0.51 to 0.53). A debt to assets ratio is used to express the fraction of financing that comes from creditors as opposed what owner-shareholders can contribute. As such, a high debt to assets ratio shows that the given company relies more on creditors than on its assets for its total financing.
Debt to Equity
The debt to equity increased between 2012 and 2013 (0.6 to1.6), registering a significant deterioration between 2013 and 2014, (1.6 to 1.0). However, there was an insignificant improvement between 2014 and 2015, (1.0 to 1.1). Debt to equity ratio expresses the total finance received from creditors in comparison to financing from owner-stockholders.
Solvency ratios are necessary for ascertaining how much of a company’s assets and equity is used in financing its liabilities. In the long-run, debt to equity and debt to assets are often considered to be alternative benchmarks in the measurement of the solvency of a given company. In the case of Starbucks Corporation, it is evident that the company had a relatively low debt to equity ratio in 2012, compared to the other three years (Starbucks Corp., 2016). This shows that Starbucks used a significantly small amount of its total equity in financing debts in 2013 (Latif & Qurat-ul-ain, 2014). In addition, the company has a low debt to assets ratio. The implication is that Starbucks Corporation has a low risk in terms of its cash flows being used in covering the company’s debts.
Return on Equity
The Return on Equity of Starbucks Corporation decreased from 2012 to 2013 (27% – 2%) but increased considerably for the next three years (2%, 40%, 50%). The Return on Equity of any company is used in the measurement of the amount of revenue that a given company gets after a certain investment.
Return on Assets
There was a decrease in the company’s return on assets between 2012 and 2013 (31% to 4%), before an improvement from 2013 to 2015 (4%, 47%, 50%). Investors use companies’ Return on Assets ratio to ascertain how effective a given company is in the management of its assets in their daily operations to generate profit.
Profitability ratios play a significant role to shareholders, potential and the concerned company. This is attributable to the fact that such ratios express the effectiveness of a company in using shareholders’ capital, as well as in the generation of profit based on available assets (Wahlen, Baginski, Bradshaw & Stickney, 2011). Often, a decline in the ROA and ROE implies that the concerned company is not using its assets well to generate profit and that it has high interest expenses that lead to high debt. In the case of Starbucks, the ROA and ROE are high except in 2013. The implication is that Starbucks has low debt due to low expenses on interests, and that its assets are used well to generate profit for the company.
From the financial analysis of Starbucks, it was evident that the company is in a stable financial position both in terms of profitability, and solvency. This explains why the company was able to sustain effects of the economic crisis (Latif & Qurat-ul-ain, 2014). Such a position can be attributed to the fact that the company has low debt, implying that little shareholders’ equity and assets are used in financing debts. However, to remain profitable, the company should ensure that it eliminates debts, works on having low non-liquid inventory, and use its assets effectively in profit generation.
Latif, M., & Qurat-ul-ain, H. (2014). Starbucks sustained during economic crisis. International Journal of Accounting and Financial Reporting, 4(1), 1-15.
Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics, 74(2), 209-235.
Starbucks Corp. (2016). Stock analysis on net: Income Statement. Web.
Wahlen, J., Baginski, S., Bradshaw, M., & Stickney, C. (2011). Financial reporting, financial statement analysis, and valuation. Mason, OH: South-Western Cengage Learning.
Appendix: Liquidity, Solvency and Profitability ratios of Starbucks Corporation
|Current Assets |
|Quick Ratio = Quick Cash/ C. Liabilities||1.3||0.8||1.3||0.8|
|Current Assets (C.A) |
Current Liabilities (C.L)
Current Ratio= C.A/C.L
|Debt to Equity |
|Debt to Assets |
|Return on Assets (ROA) |
|Return on Equity (ROE) |
|ROE = Net income/Total Equity||0.27 |