Starbucks Financial Analysis

Starbucks Analysis

Starbuck is known for their seasonal and delicious coffee drinks. With over 10 billion dollars in revenues and 16,850 shops in 40 different countries, they are the leading coffee retailer in the world. With the growing popularity and brand of Starbucks coffee, we decided to dig deeper into their financial statements and analyze how really stable this coffeehouse chain out of Seattle, Washington really is. We did this by a financial ratio analysis which can tell us a story about the company from a variety of aspects and comparing them to one of their biggest competitors, Dunkin Donuts.

Financial Ratio Analysis

Financial analysis is used to examine a company’s financial performance according to its objective goals and strategies. Two principal tools are used in the analysis: ratio analysis and cash flow analysis. Ratio analysis involves assessing how various transactions in a company’s financial statements relate to one another. This can be used to compare a company’s present performance to past performance or competitor’s performance in their industry. It provides the foundation for making forecasts of future performance. Cash flow analysis is used to examine the liquidity of a company’s assets. It can further asses the management of operating, investing and financing cash flows. We will use these two analysis tools to draw a conclusion on whether we should invest in Starbucks based off its current financial position and past performance.

Returns Ratios

Returns on investments are important because they show if a company is efficiently managing to generate the maximum profit they can achieve. Analyzing financial statements and percentages against prior ones are useful, but there is a limit to what you can learn from one statement alone. Cross referencing financial statements can lead to insights not found when only using vertical or horizontal analysis. In this section we discuss four important return measures: return on assets (ROA), return on equity (ROE), return on net operating assets (RNOA) and return on financial leverage (ROFL).

Return on Assets

Return on assets, otherwise known as ROA, is displayed as a percentage and is an indicator of how profitable a company is compared to its total assets. Return on assets gives investors insight on how efficient management of a company is at using its assets to generate profits. Return on Assets is calculated by dividing a company’s annual earnings without interest expense by its average total assets. The interest costs are not included to show the effect without debt financing, by focusing on investing activities.

2011 2012 2013 2014 20150.00

0.05

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0.25Return on Assets

Starbucks Dunkin Donuts

Return on Equity

Return on equity, also known as ROE, is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders’ equity. Companies use ROE to determine equity used in gaining of profits. Return on equity is calculated by dividing net income by average stockholders’ equity. This is used to measure the overall performance of the company. A company can use debt to increase their ROE, however, too much debt increases risk as the failure to make obligatory debt payments.

Return on AssetsYear Starbucks Dunkin

Donuts2011 0.24 0.012012 0.19 0.032013 0.00 0.052014 0.18 0.062015 0.18 0.03

Return on EquityYear Starbucks Dunkin

Donuts2011 0.31 0.072012 0.29 0.202013 0.00 0.392014 0.42 0.452015 0.50 1.43

Return on Net Operating Assets

Return on net operating assets, also called RNOA, is conceptually similar to ROA, except it excludes nonoperating aspects of the income statement. In order to calculate RNOA, the company’s income statement and balance sheet need to be separated in operating and nonoperating assets to assess each separately. A company should first consider their NOPAT, then consider components from NOA. RNOA is then found by subtracting average net operating assets (NOPAT) from net operating profit after taxes (NOA). The results measure how well the company is performing compared to its core objective. This ratio can also reveal weaknesses in the operating strategy that weren’t already derived from ROE and ROA.

RNOAYear Starbucks Dunkin

Donuts2011 0.32 -0.012012 0.33 0.022013 -0.12 0.042014 0.33 0.052015 0.49 0.02

2011 2012 2013 2014 2015

-7.00-5.00-3.00-1.001.003.005.007.00

Return on Equity


2011 2012 2013 2014 2015

-7.00-5.00-3.00-1.001.003.005.007.00

RNOA


Return on Financial Leverage

Return on financial leverage refers to the effect that liabilities have on return on equity. It uses two other ratios ROE and ROA. To gauge this effect, return on financial leverage is calculated by subtracting return on assets from return on equity. Financial leverage can be used to increase the return to shareholders. However, having too much financial leverage can be a risky strategy for a company to use.

ROFLYear Starbucks Dunkin

Donuts2011 31.10 48.502012 32.80 33.602013 32.60 32.902014 34.60 31.302015 29.30 47.80

2011 2012 2013 2014 20150.00

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ROFL


Conclusion

The four returns ratios discussed in our introductory paragraph were calculated and gave us indicators on the profitability performance of the company. Starbuck’s RNOA was consistently higher than Dunkin Donuts except for in 2013, when it dramatically dropped. Even though it dropped, this showed that Starbucks was better at managing their assets to be more efficient at generating revenue than Dunkin Donuts since their ratio immediately bounced back the following year. Starbuck’s ROE also proved to be quite efficient. Starbuck’s ROE was consistently higher than Dunkin Donuts, with the exception of 2013, we can conclude that Starbucks was able to put each dollar a shareholder invested to better use. In the five-year span, Starbuck’s RNOA ratio was 30 times Dunkin Donut’s besides 2013 where Dunkin Donuts had a greater ratio. Based on our results we are able to conclude that Starbucks is better at meeting its core objective. Dunkin Donuts ROFL ratio was higher than Starbucks four out of the five years we analyzed. This means Dunkin Donuts tends to rely more on Financial leverage.

Profitability Ratios

Companies calculate profitability ratios to measure their earnings in comparison to their expenses and other costs incurred during a time period. The following ratios have been calculated for Starbucks and Dunkin Donuts and will be analyzed in this section: net profit margin, gross profit margin and operating profit margin. These ratios serve as indicators on how well a company’s management is at making financing and investment decisions.

Net Profit Margin

Net profit margin can be calculated by dividing the company’s net income by its net sales. A higher net profit margin indicates the company is producing more income per dollar of sales. Net profit margin will show a companies ability to reinvest in the company or pay out dividends to its shareholders.

Net Profit MarginYear Starbucks Dunkin

Donuts2011 0.11 0.672012 0.10 1.382013 0.00 1.592014 0.13 1.852015 0.14 1.40

2011 2012 2013 2014 20150.000.200.400.600.801.001.201.401.601.802.00

Net Profit Margin


Gross Profit Margin

Gross profit margin can be calculated by dividing the company’s gross profit (revenues-cogs) by its total sales. This number shows how effective management is at allocating costs and their ability to price their products above the costs to produce them. Unless there are drastic changes in the industry this number should remain pretty constant over time.

Gross Profit MarginYear Starbucks Dunkin

Donuts2011 0.58 6.062012 0.56 6.862013 0.57 7.512014 0.58 7.742015 0.59 5.11

1 2 3 4 50.001.002.003.004.005.006.007.008.009.00

Gross Profit


Operating Profit Margin

Operating profit margin measures how well a company can make a profit in sales after all expenses from operations, including interest and tax, are acquired. Operating profit margin can be calculated by dividing a company’s total operating income by its total sales. Higher operating profit margins indicate sales are increasing at a faster rate than its costs or the company’s management cost of control is working efficiently and effectively.

Operating Profit MarginYear Starbucks Dunkin

Donuts2011 0.01 0.172012 0.10 0.702013 0.00 0.652014 0.12 0.862015 0.14 0.37

2011 2012 2013 2014 2015-0.20

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Operating Profit Margin


Conclusion

Net profit margin, gross profit margin, and operating profit margin were all calculated and gave us useful insights into the performance and financial health of Starbucks and Dunkin Donuts. In 2013, Starbucks suffered from a grocery dispute causing $2.8 billion in litigation charges as you can see the effect on our graphs during that year. Dunkin Donuts consistently outnumbered Starbucks in comparing Net Profit Margins. After expenses were all paid, Dunkin had more of its sales dollar left over possibly due to Starbucks having more expenses. Both of the company’s gross profit margins remained relatively steady over the five years. Dunkin Donuts has a largely higher gross profit margin so you can assume they are making more profit considering the costs being incurred. Dunkin Donuts operating profit margin is also consistently higher than Starbucks OPM. This tells us that Dunkin Donut’s sales are increasing faster than their costs and furthermore outweighing Starbucks in this ratio.

Turnover Ratios

Turnover ratios show the internal structure of a company’s efficiency and how it uses its assets and manages its liabilities over time. Like the liquidity ratios, these ratios quantify the productivity of the company by showing how well the company can handle and carry out day-to-day operations. In this section the following ratios will be explained: inventory turnover, accounts receivable turnover, asset turnover, property, plant, and equipment turnover, and length of operating cycle.

Inventory Turnover

Inventory turnover is calculated by dividing cost of goods sold by inventory. This measures how quickly a company can generate sales from its inventory. A higher inventory turnover will show that sales were strong for the period as a low inventory turnover will show

excess inventory and a reduction in operating efficiency. A higher turnover tends to be common in the food and beverage industry due to high sales and the need for inventory to be replenished.

Inventory TurnoverYear Starbucks Dunkin

Donuts2011 6.56 4.282012 5.27 4.562013 5.43 4.842014 6.23 4.322015 6.50 3.94

2011 2012 2013 2014 20150.001.002.003.004.005.006.007.00

Inventory Turnover


Accounts Receivable Turnover

Accounts receivable turnover measures the company’s ability to collect its outstanding accounts receivables within the company’s fiscal year. This is computed by dividing net sales by the company’s accounts receivables. A higher accounts receivable turnover is desired because it indicates how quickly and efficiently a company can issue credit to its customers and can collect payment from those outstanding credits. This is an important measure of value because accounts receivable is like an interest-free loan, the longer it takes the company to get paid, the more harm it causes to the company. The quicker your customers pays off the credit, the more value the company has.


Year Starbucks Dunkin Donuts

2011 33.95 4.742012 30.49 5.072013 28.44 5.182014 27.59 5.012015 28.39 4.80

2011 2012 2013 2014 20150.005.00

10.0015.0020.0025.0030.0035.0040.00



Asset Turnover

The asset turnover ratio is a ratio that shows how efficient a company uses its assets to generate sales. It does this by measuring a company’s ability to produce sales from its assets, by dividing net sales with average total assets. A higher asset turnover ratio means the company is creating more revenues per dollar of assets.

Asset TurnoverYear Starbucks Dunkin

Donuts2011 1.70 0.032012 1.71 0.042013 1.51 0.042014 1.48 0.042015 1.65 0.05

2011 2012 2013 2014 20150.000.200.400.600.801.001.201.401.601.80

Asset Turnover


Property, Plant, and Equipment Turnover

The property, plant, and equipment turnover ratio can also be viewed as the fixed-asset turnover ratio. This ratio measures how capable a company can produce net sales from fixed-asset investments. The ratio is focused on reflecting how efficiently a company has used these substantial assets to generate revenue for the firm. This ratio is calculated by dividing sales by the average property, plant, and equipment. While a higher ratio is indicative of greater efficiency in managing fixed asset investments while a low ratio specifies the lack of managing their property, plant and equipment assets.

PPE TurnoverYear Starbucks Dunkin

Donuts2011 1.94 2.442012 2.04 2.872013 2.03 4.262014 2.01 3.892015 2.10 3.84

2011 2012 2013 2014 20150.000.501.001.502.002.503.003.504.004.50

PPE Turnover


Length of Operating Cycle

The operating cycle represents the period of time required for a company to turn cash into goods, sell the goods, and receive cash from the customers in exchange for the goods. The operating cycle is found by adding together the number of days is takes to collect accounts receivables, the number of days it takes inventory to sell and the number of days it takes to pay off accounts payable. We found the number of days of collection by dividing 365 days by the accounts receivable turnover which represents how long it takes for the company to collect their accounts receivables. We found the number of days of inventory by dividing 365 days by inventory turnover to tell us how many days it takes the company to sell of their inventory. We found the number of days payable by dividing 365 by accounts payable turnover which tells us how long it will take the company to pay off their accounts payable. A company usually desires a lower number because it indicates that capital is tied up in the business cycle for a short amount of time.

Length of Op. CycleYear Starbucks Dunkin

Donuts2011 96.73 162.272012 110.72 152.052013 105.55 145.962014 99.11 157.312015 97.58 168.71

2011 2012 2013 2014 20150.00

20.0040.0060.0080.00

100.00120.00140.00160.00180.00

Length of Operating Cycle


Conclusion

Starbucks has significantly outperformed Dunkin Donuts in all of the ratios in this group except for one. According to our graph, over the past three years Starbucks inventory turnover has been increasing while Dunkin Donuts has been decreasing. With this in mind, Starbucks inventory turnover is greater than Dunkin Donuts because they have greater success with selling their brand and turning over their inventory. For accounts receivable turnover, Starbucks is significantly higher than Dunkin Donuts that automatically tells us that Starbucks manages their credit and collects payment from their customers more efficiently than Dunkin Donuts. Starbucks’ asset turnover in 2015 is 1.65 while Dunkin Donuts is .05 expressing that Starbuck is better at using their assets to generate sales. Lastly, Starbucks’ operating cycle is shorter than Dunkin Donuts tell us that it takes less time for Starbucks to turn cash into good and then sell those goods than it takes Dunkin Donuts.

While Starbucks out performs Dunking Donuts in all of the ratios referenced above, they fall behind in the PPE turnover. Having a lower PPE turnover states that Starbucks isn’t as efficient in using their fixed assets in creating revenue than Dunkin Donuts is. Overall, Starbucks has more operating efficiency than their competitor because of the wide margin they have created in each ratio.

Liquidity Ratios

Liquidity Ratios determine the ability of the company to pay off its short-term debt obligations within the operating cycle. In other words, liquidity refers to the process of converting noncash assets into cash. Having a high level of liquidity is important for a company. A company needs to focus on converting noncash assets into cash quickly in order to pay off its current liabilities. During our analysis we looked at two of the most important ratios: the current ratio and quick ratio. In order to calculate these ratios, you will need to refer to the balance sheet to find the variables used in the equations. For the current ratio you will use

current assets and current liabilities; the quick ratio will use the same variables but in a more restricted way.

Current Ratio

A company’s current ratio is calculated by dividing current assets by current liabilities. A ratio larger than one shows the ability of the company to pay back its current liabilities with the cash produced from operations. However, having a ratio that is significantly greater than 1 is not necessarily a good thing. A large ratio can indicate that a company has assets sitting idle. Idle assets are assets that are not being put to productive use. Therefore, idle assets are usually undesirable. A company could face a short-term liquidity problem when some of its assets are not easy to liquidate. If a company’s ratio is less than one, it would be a good indicator that the company might not have the means to convert noncash assets to cover the current liability obligations.

Current RatioYear Starbucks Dunkin

Donuts2011 1.83 1.282012 1.90 1.192013 1.02 1.342014 1.37 1.252015 1.19 1.33

2011 2012 2013 2014 20150.000.200.400.600.801.001.201.401.601.802.00

Current Ratio


Quick Ratio

The quick ratio measures the ability of a company to meet short-term liability obligations by using the most liquid assets of the company. To find the quick ratio, divide the quick assets by current liabilities. Quick assets include: cash, short-term securities/investments and accounts receivable. It excludes inventories because they are considered the least liquid asset. Eliminating inventories makes the quick ratio a more “stringent” test of liquidity. A company should strive to have a high quick ratio in order to show they are financially stable in the short-term aspect.

Quick RatioYear Starbucks Dunkin

Donuts2011 1.17 0.912012 1.14 0.812013 0.71 0.892014 0.81 0.752015 0.64 0.76

2011 2012 2013 2014 20150.000.200.400.600.801.001.201.40

Quick Ratio


Conclusion

Starbucks and Dunkin Donuts are both sufficiently liquid have enough current assets to cover their current liabilities. To further understand the ratios a “norm” must be established for each. For example, the quick ratio has a standard deviation of about 0.10. In 2013, the quick ratio decreased by 0.43. Upon further review of the financials we found a 2.8 million dollar accrual for litigation. The litigation effect on the current ratio presented itself as a 0.88 decrease

on a ratio has a standard deviation of about 0.15. Starbucks really proves itself to be a very healthy company by being able to maintain a current ratio over 1 during this financial set back. A current ratio of 1 or greater means the company has at least 1 current asset to 1 current liability.

Solvency Ratios

Solvency ratios will show us a company’s ability to meet its long-term debts. The two solvency ratios used to further analyze Starbucks and Dunkin Donuts are Debt to Equity and Times Interest Earned. These will break down the companies to finance operations and growth by using different sources of funds. Debt is crucial to analyze to see how much of a firm’s assets are being financed with borrowings. Equity is also important because it is what maximizes shareholders wealth.

Debt to Equity

The debt to equity ratio identifies the liquidity of a firm by dividing total liabilities by stockholders equity. The debt to equity ratio indicates how much debt from creditors a company is using to finance its assets compared to the amount represented in shareholders equity. A company emphasizing financing from creditors will have a higher Debt to Equity ratio and a company using more debt from shareholders will have a lower Debt to Equity ratio.

Debt to EquityYear Starbucks Dunkin

Donuts2011 1.94 3.222012 2.04 8.012013 2.03 6.772014 2.01 7.472015 2.10 -15.48

2011 2012 2013 2014 2015

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Debt to Equity

Starbucks Dunkin Donuts Series3Series4 Series5 Series6

Times Interest Earned

Times interest earned will also show us the company’s ability to meet its debt obligations. Times interest earned is calculated by dividing earnings before interest and taxes by the total interest expense. A ratio less than one will indicate that the company may have trouble paying interest on borrowings. A ratio higher than one is considered to have an adequate amount of income to pay for its borrowings. Although it may seem crucial to have a higher number, a number too high can mean the company is using a majority of its earnings to pay for debt rather than investing further into other projects.

Time Interest EarnedYear Starbucks Dunkin

Donuts2011 51.91 2.952012 61.08 4.232013 -11.58 4.802014 48.07 5.982015 51.08 4.30

2011 2012 2013 2014 2015-20.00-10.00

0.0010.0020.0030.0040.0050.0060.0070.00

Time Interest Earned

Starbucks Dunkin Donuts Series3Series4 Series5 Series6

Conclusion

The two main solvency ratios examined for Starbucks and Dunkin Donuts better help evaluate their ability to finance operations and growth by using different sources of funds, and which sources of funds they are choosing to use, either from creditors or shareholders. Starbucks generally has a lower Debt-to-Equity ratio than Dunkin Donuts illustrating that they are relying more heavily on equity financing. In comparison to each other, we can assume Starbucks is financing more through shareholders and Dunkin Donuts is financing more through creditors. Starbucks is well ahead of Dunkin Donuts when it comes to paying interest earned several times over. Their higher times interest earned ratio can be credited to keeping their interest owed on short and long term debt at a minimum. Despite a fall in 2013, Starbucks times interest earned ratio is an indicator that they are in good shape compared to industry competitors Dunkin Donuts.

Overall Analysis

After calculating all of the ratios we noticed a common trend in our data; the ratios began to dramatically change in 2013 compared to the others. As we began investigating further, we found that Starbucks faced litigation charges from an old dispute. We feel the ratios were inconsistent due to the charges. However, we do feel Starbucks would be a good company to invest in for several reasons.

Starbucks was able to produce return ratios that were greater than Dunkin Donuts. This meant the overall performance was better than their competitor, well above satisfactory levels and profitable. In particular, the ROE showed they were able to put each shareholder dollar to good use, which is particularly attractive to a potential investor. Although Dunkin Donuts profitability ratios outnumbered Starbucks, we don’t feel this should be a concern. The difference between the two companies was due to the extreme difference of expenses that each company incurs.

Starbucks was able to outperform Dunkin donuts in all of the turnover ratios besides their PPE turnover. Therefore, Starbucks is more efficient at branding and turning over their inventory to generate cash, but they might not use their assets to fullest potential. Both companies proved to be highly liquid in our liquidity ratio calculations. When it comes to liquidity ratios a company should strive to be greater than one and both companies were successful. Therefore, the liquidity ratios weren’t the main deciding factor as to why we would want to invest, but they were a positive influence.

After comparing the two companies’ solvency ratios we drew the conclusion that Starbucks had a tendency to rely more on equity financing than creditors. The solvency ratios were extremely attractive because equity is important in maximizing shareholders’ wealth. Although the company faced adversity in 2013, we feel it would be a wise decision to invest based off the way Starbucks reacted. Starbucks did not let the litigation set them back. Their ratios returned to typical figures.

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Starbucks Financial Analysis