STARBUCK INCOME STATEMENT EXTRACT FOR THE YEAR ENDING 29TH SEPT 2019
LIQUIDITY RATIOS
Liquidity ratio is used to show the ability of a debtor to pay the current obligations without seeking external capital. Companies use liquidity ratios to measure its ability to meet obligations and safety margin. Examples of liquidity ratios are the current ratio, cash flow ratio, and quick ratio.
- The current ratio measures the firm’s ability to pay for current liabilities using its non-fixed assets, such as inventories, cash, and accounts receivable. A higher ratio shows that the Company has a better liquidity position.
Current Ratio= current assets/current liabilities
Current assets= $ 5653.9 million
Current liabilities=$ 6168.7 million
Current ratio= 5653.9/6168.7
= 0.92
- The quick ratio is also referred to as the acid test ratio. It measures the ability of a firm to pay for short-term liabilities with liquid assets. Therefore it does not include inventory in the current assets.
Quick ratio= (current assets- inventory- prepaid expenses)/current liabilities
Current Assets= $5653.9 million
Current liabilities=$ 6168.7 million
Inventory= $ 1529.4 million
Prepaid expenses= $488.2 million
Quick ratio= 5653.9-1529.4-488.2/6168.7
= 0.59
DEBT SERVICE RATIO
- The total debt service ratio is a measurement for debt service that lenders use when calculating the income section that has been spent on housing and similar payments. The ratio is used by mortgage institutions to check on borrower’s ability to pay a loan. It includes both non-housing and housing obligations.
For Starbuck Company the debt service ratio is calculated below;
Total Debt service = Mortgage Payment (Annual) + Property taxes+ other debts/ Gross income
Total debts= $25450.6million
Gross income=$ 26508.6 million
= Total debt service ratio= 25450.6/26508.6= 0.96
- Debt Service coverage ratio- This is the ability of a company to pay for short-term debt. It shows the ability of a company to meet obligations with cash. A high ratio means that a firm has sufficient cash to meet the obligations on time.
Debt Service coverage ratio= Net operating income/debt services
Net operating income for Starbuck Company= $3599.2 million
Debt Service= Interest and lease payment + Principal Payments
Interest= $ 331 million
Principal payments= $135.8 million
Debt service = 331+135.8=$ 466.8 million
Therefore debt service coverage ratio= 3599.2/466.8
= 7.71
PROFITABILITY RATIO
The profitability ratio measures the firm’s ability to make profits after meeting all expenses and costs related to income-earning. It is used to compare a company’s performance with other companies that provide related products.
Examples of profitability ratios include; operating margin, assets return, Sales return, and return on capital (equity). They are all used to show the Company’sCompany’s performance.
- Return on Asset (R.O.A) – It measures the ability of a company’s assets to generate income effectively. The ratio is calculated by dividing income for the year by the value of assets of a firm.
R.O.A= Net Income/Total Assets* 100
Net income=$3599.2 million.
Total Assets= $19219.6 million
= 3599.2/19219.6= 0.19
= 19%
It shows that the Company generates 19% of earning for every dollar the Company carry in assets.
- The Operating Margin (O.M) ratio shows the cost of rendering a service or producing a product that is not related to direct production, such as administrative costs. The ratio is obtained by dividing operating earnings by net sales.
Operating Margin= profit (operating)/ Sales (net)*100
Operating profit = $4099.7 million
Sales =$ 26508.6 million.
O.M= 4099.7/26508.6* 100= 15.47%
It implies that for every dollar realized from the sale, Starbuck Company spent 15.47 cents on costs unrelated to the direct production of coffee and other products.
STARBUCK SUMMARY OF RATIOS
PART II
STARBUCKS COOPERATION RATIO ANALYSIS FOR THE FINANCIAL YEAR ENDING 29TH SEPT 2019
INTRODUCTION
The accounting ratio is an expression used to show the relationship between two variables over a given period. Accounting ratios assist Company’sCompany’s in investment decision making and general business analysis.
Ratios show the interrelationship between different variables in the financial statement. Therefore, they are relevant to management, creditors, outsiders, and investors. Ratios are the best for determining profitability, solvency, liquidity, and efficiency of a company.
Importance of Ratios and their analysis
- Ratios assists in determining the relationship among variables after analyzing the Company’sCompany’s past performance.
- Ratios such as profitability ratios assist the management in preparing estimates and budgets for policy formulation. Plans are also implemented, thus helps in different items for budget preparations.
- Assists organizations take into account time aspects through trend analysis. It determines whether a firm is deteriorating or improving over a given duration. The given ratio is low or high and compared with the average standard ratio.
- It shows the extent of management efficiency in utilizing the assets of a company. An example is a return on asset ratio.
- Ratios help in making a comparison between firms providing identical products or different departments. An example of this is the profitability ratio used to benchmark.
- Ratios such as quick ratio and current ratio are used to determine whether the Company can pay for short-term debts. Through these ratios, the Company can measure the degree of leverage and profitability.
- With the assistance of ratio and its analysis, firms can communicate meaningful information to the investors, shareholders, and government to enable them makes the right decisions.
- Ratio analysis assists the government with matters of policy formulation. Government use ratios as tools for measuring the performance and efficiency of the industry.
- Assists in testing solvency problems. The debt to equity ratio assists creditors in assessing the creditworthiness of a company. Investors are interested in ratios before making long-term decisions.
STARBUCK COOPERATION RATIO ANALYSIS
The current ratio of Starbuck Company is a good indicator of financial performance. In ratio analysis, a current ratio of less than one indicates that a company will have problems covering bills that are monthly. Starbuck Starbuck’s current ratio is 0.92; this indicates that the Company will have slight issues in meeting short-term obligations.
A quick ratio of greater than one shows that the Company has enough assets to pay for current liabilities. Starbuck Corporation has a quick ratio of 0.52, which indicates that the Company’sCompany’s assets are not enough to pay for short-term obligations.
The total debt recovery ration of Starbuck Company is 0.96. The value is too close to one, which means that the Company is vulnerable, and if the cash flow reduces slightly, it will be unable to pay for its debt.
The return on assets of 19% of Starbuck Company generates 19% of revenue for every dollar in assets. The operating margin of 15.47% implies that for every dollar realizes from the sale. The Company spends 15.47 cents on costs, which are unrelated to the direct production of coffee and other products.
SUMMARY
Ratio analysis is regarded as the most crucial factor by companies. Starbuck Company should invest in more assets so that it can be able to increase the value of assets, and this will, in turn, improve the return on assets.
Starbuck corporation should devise ways to improve revenues through marketing, product differentiation, and product design. These will, in turn, improve return on assets and operating margin.
The management of Starbuck Company should make a decision taking into consideration the ratio analysis to improve performance and efficiency.