Starbucks Financial Analysis

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- Measure of a firm’s leverage: Debt to equity ratio = Total debt/total equity

2011 = 20,45%

2010 = 25,11%

It is said that a company having a debt to equity ratio higher than 2 is a risky investment.

In the case of Starbucks, the debt to equity ratio was in 2010 25,11% and 20,45% in 2011. There has then been a slight decrease in debt between fiscal year 2010 and 2011 and moreover the shareholder equity has increased by nearly 20% from 3 674,7 million dollars to 4 384.9 million dollars.

Having a debt to equity ratio lower than 1, means that Starbucks finances the majority of its assets with equity and not with financial liabilities. Starbucks has a relatively low financial leverage.

- Equity / Assets ratio

2011 = 59,61%

2010 = 57,66%

The equity to assets ratio is also another measure of a company’s leverage. It shows the relationship to the total assets of the company to the portion owned by the shareholders through their equity. In general terms an equity to assets ratio below 70% generally makes it difficult for a corporation to borrow money due to concerns about its solvency. In Starbucks’ case, there equity to assets ratio in 2010 was 57,66% and rose to 59,61% in 2011. This increase came essentially from an increase in shareholders’ equity, albeit there was also an increase in total assets, which was mainly due to a sharp increase in short term investments, available for sale securities and inventories (77,77% increase in stocks from 543,3 million to 965,8 million) between 2010 and 2011.

- Debt / Assets ratio

2011 = 12,19%

2010 = 14,48%

The debt to assets ratio complements the equity to assets ratio, it gives the percentage of assets that are financed through financial liabilities i.e. debt. In 2010, 14,48% of assets were financed by debt, and in 2011, 12,19% of assets were financed by debt. This decrease comes from an increase in total assets between 2010 and 2011, whereas the amount of debt has remained stable.

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- [pic 7]Times Interest Earned (Debt service ratio) = EBIT/Net interest expense

2011 = 51,91

2010 = 43,41

In the case of Starbucks, the times interest earned ratio was in 2010 of a very high and healthy level of 43,41, and it increased further to 51,91 in 2011. This increase is due to an increase in the earnings before interest and tax (EBIT), in fact the operating income rose by 21,78% from 1 419,4 to 1 728,5 from 2010 to 2011. The interest expense itself stayed stable over 2010 and 2011, respectively 32,7 and 33,3.

- Enterprise value = Market value of equity + Debt – Cash

2011 = 34 147 864 000

The enterprise value (EV) of Starbucks is 34 147 million $. This is obtained by taking the current market capitalization of Starbucks, 34 398 994 000 $ (as of the 25th of October 2012 on the NASDAQ index) adding the total debt and deducting the cash and cash equivalents. This is the amount an investor or another company will effectively have to pay if they wanted to take over the entire corporation. The enterprise value of a company is used by potential investors because it provides a clearer picture of the real value of the company as opposed to simply considering its market capitalization.

- Current ratio = Current assets / Current liabilities

2011 = 1,828

2010 = 1,549

The current ratio measures the company’s ability to pay its debt over the year; this would mean selling current assets to pay off the current liabilities. In 2010, Starbucks had a current ratio of 1,549 and in 2011 of 1,828. This critical ratio must be higher than 1, otherwise the company may have difficulties paying of short term liabilities (accounts payable). This is definitely not the case for Starbucks where the ratio is above 1, the ratio has indeed increased between 2010 and 2011, this means that Starbucks is solvable and indicates safe liquidity. But a current ratio that is too high can also indicate that the company is having problems, here the increase in the current ratio mainly derives from a high increase in stocks; indeed inventories have increased by 77,77%, and also its Accounts Payables have nearly doubled (+ 91,08%) between 2010 and 2011. This may mean that Starbucks is not efficiently using its current assets when it needs to in order to meet the requirements of increased Accounts Payables.

- Quick ratio = (Current assets – Inventories) / Current liabilities

2011 = 1,363

2010 = 1,244

The quick ratio is very similar to the current ratio, but where it differs is that it only takes into account the current assets that are extremely liquid, that means can be turned very easily and quickly into cash. For this reason we discard the inventories, because we don’t know exactly when and at what price the company will sell them. In the case of Starbucks, its quick ratio in 2010 was 1,244 and 1,363 in 2011. Their quick ratio is well above the crucial rate of 1/1, which means that Starbucks can meet its current financial obligations with the available quick funds on hand. Having said that, there is no need for the quick ratio to be much higher than 1, this may result in having too much cash and cash equivalents on hand.

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- Working capital = Current assets – Current liabilities

2011 = 1719,1

2010 = 977,3

The working capital is an analysis of the short term financial efficiency of a company. It specifically measures a company’s ability to pay off short term liabilities (current liabilities) with short term assets (current assets). The working capital of Starbucks was of 977,3 million at the end of 2010 and 1719,1 million at the end of