Discussions board Responses
LIQUID ITY RATIOS
Observations on liquidity ratios
Current ratios; this ratio declined from 2.2 in 2018 to 0.92 in 2019
Acid test; quick ratio declined from 1.54 in 2018 to 0.44 in 2019
Net working capital; the networking capital declined from 6810 in 2018 to -514.8 in 2019
Financial analysis of the liquidity ratios
Current ratios; the current ratios decline from 7.7 in 2018 to 1.78 in 2019. A ratio of 7.7 in 2019 means that the company was able to meet its short term obligations 7.7 times over. The ratio has dropped from 7.7 to 1.78 in 2019, as much as the ratio has dropped the company is still solvent but the financial stability has declined.
Acid test; the ratio dropped from 1.54 in 2018 to 0.44 in 2019. The 1.54 ratio means that the company can pay its short term debts without having to sell its stock because the ratio is more than one. But the ratio of 0.44 is dangerous because it shows that the company cannot meet its short term obligations without selling its inventory, this is because the ratio is less than one. Starbucks company is therefore insolvent.
Net working capital; the net working capital of Starbucks company declines from a positive figure in 2018 to a negative figure in 2019. This shows that the current liabilities of the company exceed its current assets. This is an alarm for bankruptcy. The company is insolvent.
SOLVENCY RATIOS
Solvency ratio observation
- Starbucks company had a higher long term debt to equity ratio is 2018 that in 2019. The ratio has declined from 7.7 in 2018 to 1.78 in 2019.
- Starbucks company had a higher total debt to equity ratio is 2018 that in 2019′ the ratio has declined from 7.7 in 2018 to 1.78 in 2019.
- Starbucks company had a lower debt ratio in 2018 that in 2019. The ratio has increased from 0.38 in 2018 to .058 in 2019.
Financial Analysis conclusion on solvency ratios
Long term debt to equity ratio; as much as the ratio has dropped from 7.7 in 2018 to 1.78 in 2019, the ratio is still too high. The ratio should be under 0.5. this ratio determines the financial leverage of the company, the higher the ratio the higher the leverage of the company.
Total debt to equity ratio; this ratio measures the connection between borrowed capital and the shareholders’ equity. The ratio decreases from 7.7 in 2018 to 1.78 in 2019, this is safe for the company because a decrease in the ratio decreases the bankruptcy chances.
Debt ratio; The variance in the debt ratio is less than 1. The company had a ratio of 38% in 2018 that means that only 38$ of the total assets are funded by the liabilities, as in, debt is 38% of the total assets. The ratio is 58% in 2019, this shows that 58% of the total assets of the company are financed by the liabilities. In case of insolvency, creditors will claim 58% of the total assets. The higher ratio increases the insolvency risk and also makes it hard for the company to get more loans. Therefore, the company needs to improve on this ratio by doing a debt? Equity swap by making a creditor be part of the shareholders of the company.
Financial analysis of Profitability ratios
This ratio is used to measure the firm’s ability to generate income. Starbucks company did not make any profit. The company made a net loss in both years therefore we cannot do the profitability ratios calculations and analysis.
Appendix
Calculations.
- Liquidity Ratios
- Current ratios
Current ratios = current assets/current liabilities
=5653.9/6168.7= 0.92 2019
=12494.2/5684.2= 2.2 2018
- Acid test
Quick ratios = quick assets/current liabilities
=2686.6/6168.7= 0.44 2019
=8756.3/5684.2= 1.54 2018
- Net working capital
= current assets-current liabilities
=5653.9-6168.7= -514.8 2019
=12494.2-5684.2= 6810 2018
- Solvency Ratios
- Long term debt to equity ratio
= long term debt/total equity
11167/6231=1.78 2019
9090.2/1175.8=7.7 2018
Total debt to equity ratio
= total debt/total equity
11167/6231= 1.78 2019
9090.2/1175.8=7.7 2018
Debt ratio
=total debt/total assets
11167/19210.6=0.58 2019
9090.2/24156.4=0.38 2018