Berlin School of Business & Innovation (BSBI)

Global MBA

Module Accounting and Managerial finance

Accounting and Finance analysis of Starbucks

Individual Research Report

Year 2019

1|Page
Introduction
Company performance aims to evaluate its market position, assets and liabilities. It aims

to use ratio analysis to effectiveness of its operational and management efficiency. Primary

data is collected from annual reports from year 2017 – 2019. This paper presents in-depth

analysis on different ratios such as liquidity, profitability, solvency and market ratios. Ratio

analysis is conducted to evaluate short and long term liquidity of the firm and ability to meet

its financial obligations. It facilitate in forecasting risk taking ability and long term solvency,

extent to which it can take and repay debt, its assets utilization to generate optimal sales

revenue and potential return [ CITATION Var17 \l 1033 ].

Starbucks

Starbucks corporation was established in the year 1971 in USA, it is global coffee chain

headquarter at Seattle. Company has expanded its business tremendously with its presence in

28,218 locations [ CITATION www192 \l 1033 ]. It sell premium quality coffee, tea products,

lately it has also invented Frappuccino beverages, La Boulange pastries, and snacks. Key

mission of the company is to inspire and nurture human spirit. It aims to deliver premium

quality coffee with excellent customer service.

Industry analysis
Coffee industry is highly competitive in terms of price, service and product quality and

innovation. On industry life cycle it is mature stage with low growth rate. There is presence

of monopolistic competition, Starbucks is large size firm encountering competition from

regional and inter firm rivalry. Its key competitive advantage is its large size and wide market

presence. Key competitors of the brand include Costa Coffee, McDonald's, Dunkin' Donuts.

In terms of industry rivalry barrier to new entrant is low as it does not require high

2|Page
investment, it can be started with low investment at regional and local level. There is no

switching cost; however large companies like Starbucks enjoy economies of scale. There is

high threat of substitutes such as tea, juices, water, packaged drinks and soda. Sometimes

customer also preferred to have homemade premium coffee at low cost. Further, bargaining

power of buyer is high as coffee is a commodity enjoyed by many, however company tackle

this situation by offering different types of for customers at various price. Company uses high

quality Arabic beans, it offer premium quality product. According to data, an average

Starbucks customer has yearly income of $70,000, only 17% of its customers falling below

yearly income of $30,000. Suppliers have very low bargaining power as company works with

small farms, long term contract [ CITATION sto19 \l 1033 ].

Internal analysis
Starbucks have strong market position, high brand image with global presence and 39.8

percent market share. Starbucks management aims to expand its business in various new

markets through re-modelling stores, new technologies and aggressive product innovation.

Company aims to open 12000 new stores by year 2021. Key weaknesses of brand include

expensive product as many times customers switch to low cost offering. As it has several

stores in one market, there is risk of Self-Cannibalization due to overcrowding. Key market

opportunities include its recent deal with Alibaba to enter China market; it is also expanding

its business in different emerging markets. However, as the market is at mature stage,

competition is stiff, causing loss of opportunity. Price volatility in coffee industry impact

product prices significantly.

3|Page
Financial analysis

Liquidity

Liquidity ratio aims to analyse how successfully company employ its assets to ensure quick

conversion into cash. It establishes relationship between current assets and liabilities. Three sub types

include 1) Current ratio 2) Quick ratio or acid test 3) Cash Ratio

 
Liquidity Ratio
2017 2018 2019
Total Current Assets…(A) 5283.40 12494.20 5653.90
Total Current Liability (B) 4220.70 5684.20 6168.70
Liquid Assets: (C/A - Debtors) (C) 4413.00 11801.10 4774.70
Cash and Cash Equivalent (CCE) 2462.30 8756.30 2686.60
Current Ratio (A/B) 1.25 2.20 0.92
Quick Ratio (C/B) 1.05 2.08 0.77
Cash Ratio (CCE/B) 0.58 1.54 0.44

Current ratio

Current ratio helps in calculating cash availability with the firm by dividing current assets

by current liabilities. It is consider by investors to evaluate company stability and its financial

strength to meet its present and future liabilities. It’s a business survival tool consider by

debtors and creditors[ CITATION Fal14 \l 1033 ].

Formula

Current ratio = current assets / current liabilities

Calculation

Years 2017 2018 2019

Current ratio 1.25 2.20 0.92

Inference

4|Page
Higher current ratio shows stable position of the company, ideal figure is 2, however it is

difficult to accomplish in this competitive market. There is risk of deceiving figures in

current ratio as figure below one does not ensure poor financial position. Sometimes,

companies paying their creditors on monthly basis and have quick conversion of cash to pay

liability. In Starbucks, company have strong current ratio figure in 2017 i.e. 1.2, it increased

to 2.20 in 2018 showing very strong market position, however figure decreased to 0.92 in

2019 showing sudden decrease in liquid assets.

Quick acid test ratio

Quick ratio is stricter than current ratio as it include highly liquid assets to convert into

cash, it deduct inventory from current assets, representing near cash availability for

firm[ CITATION Dee14 \l 1033 ].

Formula

Acid test ratio = quick assets/current liabilities

Calculation

Years 2017 2018 2019

Quick ratio 1.05 2.08 0.77

Inferences

Analysis of ratio is similar to current ratio. In year 2017, quick ratio was 1.05 times which

increased significantly to 2.08 in the year 2018; it also decreased silently in year 2019 to

0.77. Ratio represent that Starbucks has constantly maintain good liquidity position.

Cash ratio

Cash ratio focus on estimating the amount of Liabilities Company can pay from its

operations; it is a widely used tool to evaluate liquidity position. It represents account

5|Page
receivable and inventory as tool to convert into cash. It is most fluctuating ratio due to quick

investment of cash into various portfolios[ CITATION Wey10 \l 1033 ].

Formula

Cash ratio = Cash and Cash Equivalent Assets / Current Liabilities.

Calculation

Years 2017 2018 2019

Cash Ratio
0.58 1.54 0.44
(C/B)

Inferences

According to analysis, in year 2018 Starbucks cash ratio increase to 1.54 from 0.58 in the

previous year, showing its high repaying ability. Further, there is slope in 2019 as figure

reduced to 0.44.

Profitability

As the name defines, it aims to evaluate income and profit generating abilities of the

organization. This ratio is employed by investors to evaluate future company prospects from

past performance and present resource availability [ CITATION Hen152 \l 1033 ]. It is

categorised as General profitability and overall profitability ratios. Key ratios include

1. Net Profit Margin

2. Gross Profit Margin

3. Return on Asset

4. Return on Equity

5. Operating profit margin

 
Profitability Ratio
2017 2018 2019
Gross Profit (U) 3743.30 3582.10 3779.90
Net Profit (V) 2884.90 4518.00 3594.60
Revenue (W) 22386.80 24719.50 26508.60
Gross Profit Margin (U/W * 100) (In %) 16.72 14.49 14.26

6|Page
 Net Profit after Tax Margin (V/W * 100)
12.89 18.28 13.56
( %)
Assets (X) 14365.60 24156.40 19219.60
Equity Capital (Y) 5457.00 1175.80 -6231.00
Net Operating Profit (Z) 4228.20 5758.90 4700.70
Equity Capital + Non-Current Liability
10144.90 18472.20 13050.90
(AA)
Return on Assets (V/X* 100) (In %) 20.08 18.70 18.70
Return on Equity (V/Y* 100) (In %) 52.87 384.25 -57.69
Return on Capital Employed (Z/AA * 100)
41.68 31.18 36.02
(%)

Net profit margin

Net profit margin ratio calculate net profit after tax to net sales, to evaluate total sales

profit after being all expenditure. This ratio helps proprietors in evaluating firm efficiency as

it include all non-operating income such as divided, interest and deduct all non-operating

expenditures such as loss of old asset, provision for loss etc. [ CITATION Pro06 \l 1033 ].

Formula

Net profit margin = net profit / net sales * 100

Calculation

Profitability 2017 2018 2019

ratio
Net Profit after 12.89 18.28 13.56

Tax Margin (V/W *

100) (%)

Inference

As stated, this ratio helps in evaluating product pricing, using this ratio management can

also set price level to reach the one with maximum profit correctly. In the year 2017, profit

margin was 12.89, which increased to 18.29 in the year 2018. However, net profit margin

7|Page
shows slump in year 2019 to 13.56. Major problems encountered by brand include increase in

number of outlet leading to cannibalization, increase in administrative cost, retail problems,

and competition from regional plays etc.

Gross profit margin

Gross profit margin helps in evaluating operational efficiency of the firm through raw

material and working process optimization [ CITATION Var17 \l 1033 ]. Its figure shows how

optimally raw material and labours are employed at task to gain maximum return.

Formula

Gross profit ratio= gross profit/net sales * 100

Calculations

Profitability ratio 2017 2018 2019

Gross Profit Margin (In %) 16.72 14.49 14.26

Inference

Gross profit margin was highest in the year 2017 to 16.72, it decreased to 14.49 in the

year 2018 and there is further decrease in 2019 to 14.26. Gross profit margin needs to be high

as it needs to cover several expenditures such as marketing, research, and cost of selling,

labour and equipment. According to Warren Buffet, gross profit margin less than 40 percent

(as in case of Starbucks) is considered as competition eroding margins. Management needs to

take strategic actions as it might be a signal of future sales decline [ CITATION gur19 \l 1033 ].

Return on assets

Return on asset aims to finds out organizational ability to utilize its assets efficiently to

generate profit[ CITATION Jak03 \l 1033 ].

Formula

Return on Assets=Total Assets/Net Income
8|Page
 Calculation

Profitability 2017 2018 2019

ratio
Return on Assets 20.08 18.70 18.70

(In %)
Inference

According to above analysis, in year 2017 return on assets for Starbucks was 20.08,

which decrease to 18.7 in 2018 and 2019. There is decline in return on assets when there is

rise in assets but profitability fails to rise at same level; or assets fail to perform optimally due

to competitive pressure or strategic failure.

Return on equity

Return on equity demonstrates the way company generate profit using investment fund

[ CITATION Bra17 \l 1033 ].

Formula

Return on Equity=Average Shareholders’ Equity/ Net Income

Calculation

Profitability 2017 2018 2019

ratio
Return on Equity 52.87 384.25 -57.69

(In %)
Inference

Rising return on equity is considered as good, it indicate rise in overall business

performance. Return on equity for Starbucks performed very differently in these three years.

In year 2017 it was 52.87 which rose significantly to 384.25 in the year 2018 showing strong

performance and profitability. However, in year 2019 it again slumped negatively to -57.69

showing increasing liabilities, poor performance and reducing liabilities.

9|Page
Efficiency and operation

It is among notable ratios as it measure company effectiveness to control its assets and

convert it into cash or sales. It also evaluates total expenses to net sales, showing company

efficiency in keeping its cost low[ CITATION Axe \l 1033 ].

 
Activity / Efficiency Ratio
2017 2018 2019
Revenue (I) 22386.80 24719.50 26508.60
Trade Receivable (J) 870.40 693.10 879.20
Creditors (M) 782.50 1179.30 1189.70
Cost of Sales (Q) 18643.50 21137.40 22728.70
Inventory (R ) 1364.00 1400.50 1529.40
Trade Receivable Turnover Ratio (K= I/J) 25.72 35.67 30.15
Trade Receivable Turnover Period (L =
14.19 10.23 12.11
365/K)
Trade Payable Turnover Ratio (N= I/M) 28.61 20.96 22.28
Trade Payable Turnover Period (P = 365/N) 12.76 17.41 16.38
Inventory Turnover Ratio (S= Q/R) 13.67 15.09 14.86
Inventory Turnover Period (T = 365/S) 26.70 24.18 24.56

Receivable and Payable Days

Accounts payable turnover ratio evaluates short term liquidity; it calculates rates at which

company make payment to its supplier. Times Company paid its debtors in a specific period

of time and number of average day it takes to repay. For Starbucks average account payable

ratio is 28.61 in the year 2017, 20.96 in the year 2018 and 22.28 in year 2019.

Account receivable facilitate in comparing size of company sales and uncollected bills.

Low account receivable ratio shows large accounts of receivable bills, whereas high ratio

indicates timely collection of dues. For Starbucks average trade receivable ratio is 25.72 in

the year 2017, 35.67 in the year 2018 and 30.15 in year 2019. Further average receivable

turnover period is 14.19 in the year 2017, 10.23 in the year 2018 and 12.11 in year 2019.

Higher turnover represent company inefficiency in managing its accounts.

10 | P a g e
Inventory Turnover

Inventory turnover ratio measures how fast firm organization sells its total inventory. It

calculates movement of goods. Strong ratio indicates reduce level of inventory, reduction in

risk of obsolesce and storage. Inventory management is trickier concept as high inventory

turnover ratio indicate low inventory in hand, it might lead to loss of customer and sales.

Formula

Inventory turnover ratio= cost of goods sold/average inventory

Calculation

Efficiency ratio 2017 2018 2019

Inventory

Turnover Ratio 13.67 15.09 14.86

(S= Q/R)
Inventory

Turnover Period (T = 26.70 24.18 24.56

365/S)

Inference

Inventory turnover ratio for Starbucks for the year 2017 was 13.67 with turnover period

of 26.70, in the year 2018 it was 15.09 and turnover period was 24.18; in the year 2019 it was

14.86 with turnover period of 24.56.

Gearing Ratio

Gearing ratio measures the proportion of company funds to equity, it facilitate in calculating
financial risk involved in business due to its debt. High gearing ratio represents high debt
and leverage as it is using debt to pay its operations, leading to poor financial position.
Further, if company debt is in variable interest rates then sudden rise in interest might cause
serious loss. However, high gearing ratio is less concern for industries with strong
regulations. Further low gearing ratio might represent conservative financial system.

11 | P a g e
  
Solvency / Gearing Ratio
2017 2018 2019
Total Equity Capital (D) 5450.10 1169.50 -6232.20
Total Assets (E) 14365.60 24156.40 19219.60
Operating Profit / Loss (F) 4134.70 3883.30 4077.90
Interest Expenses (G) 92.50 170.30 331.00
Total Long Term Borrowings (H) 3932.60 9090.20 11167.00
Interest Coverage Ratio (F/G) 44.70 22.80 12.32
Debt- Equity Ratio (H/D) 0.72 7.77 -1.79
Proprietary Ratio (D/E) 0.38 0.05 -0.32

Interest coverage ratio

Interest coverage ratio evaluates company ability to meet its interest payment obligations.

Formula

Interest Coverage Ratio= EBIT/ Interest Expense

Where:

EBIT=Earnings before interest and taxes

Calculation

Appendix 1

Gearing ratio 2017 2018 2019

Interest coverage 44.70 22.80 12.32

ratio

Inference

According to analysis interest coverage ratio for year 2017 was 44.70; for 2018 was 22.80

and 2019 are 12.32. This shows interest coverage ratio for Starbucks is lowering every year,

showing rise in debt expense burden and raising questions on company ability to meet its

interest expenditure.

Debt equity ratio

12 | P a g e
 The debt to equity ratio is evaluated to understand company liabilities vis-à-vis its

shareholder equity; therefore its ability to finance its operations and outstanding using its own

funds and market debts.

Formula

Debt to Equity Ratio = (short term debt + long term debt + fixed payment obligations) /

Shareholders’ Equity

Calculation

Gearing ratio 2017 2018 2019

Debt equity ratio 0.72 7.77 -1.79

Inference

Lower debt ratio shows stable and strong financial position; it is less risky to creditors.

Debt equity ratio of Starbucks for year 2019 was -1.79 which is very power, whereas 7.77 for

year 2018, 0.72 for the year 2017.

Proprietary ratio

The proprietary ratio aims to evaluate company usage of its capitalization for supporting
business. High proprietary ratio indicates sufficient amount of equity with company for
continuing its business operation. However, low ratio indicates high usage of debt.

Formula

Shareholders' equity ÷ Total tangible assets

Calculation

Gearing ratio 2017 2018 2019

Proprietary Ratio 0.38 0.05 -0.32

13 | P a g e
 Inference

Starbucks have very low proprietary ratio, showing high risk of financial debt and trade

payables. In the year 2017 it was 0.38, in the year 2018 it was 0.05 and in 2019 it was -0.32.

Investment and market related

Market value ratio is ownership ratio calculated to analyse present and future investment
in company. It facilitates to evaluate the way certain variable impact share values, future
market value of company stocks. Key ratios under this include

1. Earnings per Share (EPS) ratio

2. Market/Book ratio

 
Investment and Market Ratio
2017 2018 2019
Market Value per Share …(A) 53.71 56.84 88.42
Weighted averg no of shares in issue (B) 1449.50 1382.70 1224.20
Net income available to common shareholders
2885.10 4518.30 3599.20
(C )
14365.6 24156.4 19219.6
Total Assets (D)
0 0 0
Total Liabilities (Current & Non-Current) 22980.6 25450.6
8908.60
(E) 0 0
Book Value (F) = (D-E) 5457.00 1175.80 -6231.00
Net income available to common shareholders
2885.10 4518.30 3599.20
(G )
Earnings Per Share (H) = (C/B)
1.99 3.27 2.94
In '$'
Price to Earnings Ratio (I) = (A/H) 0.70 0.45 0.56
Traling Earning Growth Rate (J) - - 0.14
PEG Ratio (K) = (I/J) - - 4.04
Book Value per share (L) = (F/B) 3.76 0.85 -5.09
Price to Book Value Ratio (M) = (A/M) 14.27 66.84 -17.37

Price to earnings ratio

Price earnings ratio calculates company present share prices to its earnings per share, to

evaluate the amount which market is willing to pay for company’s earnings.

Formula

P/E Ratio=Earnings per share/Market value per share

14 | P a g e
 Calculation

Market ratio 2017 2018 2019

Price to earnings
0.70 0.45 0.56
ratio

Interpretation

Price to earnings ratio of the company shows downturn in last three years. In the year

2017 it was 0.70, which reduce 0.45 and in 2019 it was 0.56. There is depletion in its book

value, which might result into capital depletion if necessary action not taken.

Price to book value ratio

Formula

Price to book value = Market Cap ÷ book value

Calculation

Gearing ratio 2017 2018 2019

Price to Book

Value Ratio (M) = 14.27 66.84 -17.37

(A/M)

Inference

Summary and conclusion

15 | P a g e