Starbucks Corporation Financial Analysis PDF

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Starbucks Corporation: Financial Analysis Felicia Young Southern New Hampshire University

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Introduction Starbucks was created by J. Baldwin, G. Bowker, and Z. Siegel in 1971. It is one of the world’s larger coffeehouses and coffee retail chains. The corporation has stores in over 65 countries across North America, the Asia Pacific, Europe, Middle East and Africa (EMEA), and Latin America. “Starbucks is known for purchasing, roasting and selling whole bean coffees along with handcrafted coffee, tea beverages and a variety of fresh food items. Starbucks also licenses its trademarks through other channels such as licensed stores, grocery and national foodservice accounts (MarketLine Company Profile, 2019, Pg. 3)”. In 2018, Starbucks documented that it made a total revenue of $24,719.5 billion, an 11.4 % increase from last year. This financial analysis will demonstrate the increase and decrease of Starbucks' finances, along with demonstrating how debt financing and ratio analysis help show stockholders how healthy the corporation can be or can’t be.

Horizontal and Vertical Analysis for 2017 and 2018 Therefore, the method that demonstrates the modifications in the expanse of the financial statement items over the years is called the horizontal analysis (Tuovila, 2019). It is also called the trend analysis. The horizontal analysis uses two or more financial years to show the changes in dollars or percentage. “The earliest financial year is the one usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period (Tuovila, 2019, Pg. 2).” Thus, the proportion of the financial statement that shows the difference of other items is called the vertical analysis. Furthermore, line items on the income statement can be shown as a increase or decrease in gross sales (Averkamp, 2019). Also, line items on the balance sheet can be documented as a increase or decrease of total assets or liabilities. The cash flow statement demonstrates how each cash flow or outflow as an increase or decrease of the amount of cash flows.

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➢ Horizontal Analysis: Accounts Receivables Additionally, the attachment of the financial report depicts that the net accounts receivables within the financial year that ends in 2018 dropped around $177,300,000, a -20.37% drop, which shows that the credit sales had dropped in 2018. The net account receivables in 2017 gained a 13% increase from last year. This demonstrates that fewer goods had been sold on account in 2018 than in the last year. The firm’s risk had also dropped during the year due to the account receivables increasing.

➢ Vertical Analysis: Accounts Receivables Furthermore, the gross accounts receivable dropped in 2018 to 2.87% from 6.06% in the previous year. Whereas the gross accounts receivable in 2016 was 5.37 %. In 2018. The net accounts receivable had dropped from the previous year by 3.19%. This shows a minute change in the firm’s accounts receivable. The net account receivables in 2017 gained a 0.69 % increase. The horizontal and vertical analyses both show the same percentage contrast of a downward trend.

➢ Methods of accounting for accounts receivable: Therefore, the client reports account receivable when there has been no payment on the product. This helps document the balance sheet of all decreases that have arisen from handing out credit to the clients. “The receivable from Starbuck’s financial report shows the products, the royalties from all licenses, the accounts receivables from foodservice and Price George business customers, and all sales (Starbucks Form 10-K, 2018, Pg. 48)”. These documents show all the allowances for the doubtful accounts that center on the utilization of the identification technique, credit risk, and the historical understanding.

➢ Horizontal Analysis: Asset Acquisition, Depreciation, and Amortization As a result, the attachment of the financial report, one can deduce that the corporations’ fixed assets surged during the fiscal year around $385,070,000 which implies that the company acquired more financial

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assets during the year. In 2018, the net PPE gained a 20.52 % increase, the depreciation and amortization expenses had gained a 23.29% increase, the intangible assets had gained a 136.11% increase, and goodwill gained a 130.09% increase. In 2017, the net PPE gained a 9 % increase, depreciation and amortization costs gained a 3 % increase, intangible assets had dropped around 15% and goodwill had dropped around 10%. This implies the firm developed its investments during the fiscal year by 12%.

➢ Vertical Analysis: Asset Acquisition, Depreciation, and Amortization Subsequently, the vertical analysis demonstrates the difference of the asset acquisition, depreciation, and

amortization. The gross fixed assets are 24.54% of the total assets, which signifies a decrease to last year’s 34.25%. In 2018, the net PPE had dropped by 9.71%, depreciation and amortization expenses had dropped by 1.88%, intangible assets had gained a 1.24% increase, and the goodwill had gained a 3.95% increase. In 2017, the net PPE had gained a 2.6% increase, the depreciation and amortization expenses had gained a 0.2% increase, the intangible assets had dropped by 0.53 % and the goodwill had dropped by 1.29%. The horizontal and vertical analysis shows the same increase and decrease in percentage change for all items.

➢ Methods for fixed assets and intangible asset acquisitions Therefore, Starbucks corporation has reported that the cost of the fixed assets and assets under the

capital lease were higher than the expanding depreciation (Starbucks Form 10-K, 2018). The expenses documented all the essential fixed assets like domestic labor and overhead. “The straight-line technique is used to help calculate the depreciation, the estimated assets range between 30 to 40 years for buildings and 2 to 15 years for equipment (Starbucks Form 10-K, 2018, Pg. 48)”. The Starbucks corporation mostly applies the original lease terms to help estimate the useful lives of the leases that have renewal dates at option.

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Implications on financial statements ➢ Straight-line depreciation method On the contrary, the frequently used depreciation technique when measuring depreciation cost on the

income statement is called the straight-line depreciation technique. The Straight-line method calculates the depreciation and amortization. This is the course of costing an asset over the years. To measure the straight-line depreciation method simply divide the change between the asset's expense and its expected salvage amount by the number of years it is expected to be used (Averkamp, 2019). The measurement is simple straight-forward, and it does the job for most corporations.

➢ Acquisition of assets Furthermore, the asset acquisition is the investment of a corporation by purchasing its assets instead of its stock. “In most jurisdictions, an asset acquisition typically also involves an assumption of certain liabilities (Harrison, W. T., Horngren, C. T., & Thomas, C. W. 2015, Pg. 14 ).” All assets that are gained from expense will permit the assets that have been received along with the accompanying depreciation cost on the balance sheet and income statement (Starbucks Form 10-K, 2018). The expenses escalate with the cost of the leases on the Starbucks income statement. Furthermore, the leasing will influence the maintenance expenses, depreciation expenses, and other expenses.

➢ Horizontal and Vertical Analysis: Debt financing Additionally, the horizontal analysis for debt financing had increased in 2018 by 131.15% compared to last year. The long-term debt in 2017 was 0.23% higher than last year. This shows that the corporation took more risks in 2018 than in 2017 since the long-term debt had gained a drastic increase. Also, the vertical analysis for the debt financing amount will show the firm’s total assets in percentage. There was a slight drop in debt financing from 27.38% in 2017 to 37.63% in 2018. The increase in debt financing between 2017 and 2018 is 10.25%.

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➢ Modes for Debt Financing Therefore, the Starbuck corporation finances its capital investments for the construction of its new restaurants. Other finances that the Starbucks corporation source is investment balance, cash flow from debt and operations, and cash. Overall long-term debt financing is used to finance the growth of Starbucks.

➢ Long-term Liabilities Although Starbucks stated they made gains in sales, those sales resulted in lower operating income. The earnings for this year would have been unimpressive if it was not for the share buybacks, the acquisition in China and the lower overall taxes. Due to the costly sales growth, Starbucks stock is not pricey. Due to this unsustainable trend, it is considered that Starbucks stock is not safe.

Furthermore, the company is in stagnation when it comes to growing their customer base. This is due to them deriving cash from each customer transaction without producing good customer interaction. Starbucks might consider the consolidated net revenues of $6.3 billion to be a big gain but looking at the operating results shows a different picture. This gain was not attained in a healthy way. For example, the operating cost had dropped from 6.4% to $956.6 million in the fourth quarter. The total operating income for this year had dropped from 6.1% to $3.88 billion. In my opinion after looking over the numbers, that the sheer size of the company reached its growth.

Ratio Analysis: Introduction Consequently, the trend line for one corporation outcome over a massive number of financial statement periods that would show all the company’s good or bad changes can be determined by the ratio analysis. “A Ratio analysis is a method that helps gain stakeholders' observation into corporation liquidity, working capability, and profitability by analyzing the material incorporated in the financial reports (Kenton, 2019, Pg.

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03).” The stakeholders can analysis Starbucks' overall achievements and calculate its financial well-being for the time between 2016 to 2018 in correlation to other corporations by administering ratios.

➢ Liquidity Ratios Liquidity Ratios compute the corporations’ resourcefulness to balance their shortened agreements once their due date arrives. “Those kinds of ratios help compare the liquid assets to the amount of the current liabilities that are documented in the balance sheet (Bragg, S. 2019, Pg. 1).” Also, the greater the ratio, the greater the outcome the corporation has at paying off their commitments in a timely manner. Examples of liquidity ratios are the current ratio, quick ratio, and cash ratio.

➢ Current ratio Furthermore, between 2016 to 2017 financial year, the Starbucks current ratio had decreased but then strengthened from 2017 to 2018. “Current ratio is a form of the liquidity ratio that is mainly to help calculate the corporation’s financial durability and takes down the total amount of times the entire present assets exceed the corporations’ entire present liabilities (Harrison, Horngren, & Thomas, 2015, Pg. 09)”. To make sure the entire present assets' amount will settle the short-term commitments once, all businesses need to seek to preserve a present ratio of 1.0. Starbucks present liabilities are reduced than the current assets, the stakeholders will be able to tell this due to the present ratio being above 1.0 since 2016. The prevailing liabilities are reduced more than the present assets are an excellent approach for it helps the corporation have extra cash that can be used when unexpected unanticipated contingencies arise. The increasing trend between 2017 and 2018 shows that the corporation has a thicker working capital cycle via its efficient management practices. Starbucks' present ratio demonstrates to be higher than the industry’s ratio, you can tell this because the present ratio for the consumer services industry is 0.63. Starbucks will need to use higher levels of functioning capital in comparison to the opposition.

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➢ Quick Ratio Therefore, the quick ratio calculates’ how well a corporation can match its shortened financial liabilities. “The quick ratio is also known for being the acid-test ratio (Harrison, Horngren, & Thomas, 2015, Pg. 04).” During the period of 2016 – 2017, Starbucks' quick ratio had slightly decreased, but in 2017 – 2018 the quick ratio had increased. This shows that the corporation does have the leverage to help mitigate against any liquidity risk. The quick ratio is reduced than the industry's ratio which indicates that there was a minor stake in liquid assets in comparison to the industry, stakeholders can tell this due to the quick ratio for the consumer services industry being 1.53.

➢ Solvency Ratios Thus, solvency ratios are used mostly with lenders and in-house credit departments to figure out the competence of customers to take care of their debts. “The solvency ratios calculate the ability the corporation sustains in its operations indefinitely (Bragg, S. 2019, Pg. 3).” It does this in comparison to the corporations’ debt levels with equity, assets, and profits. The ratio helps the growing concern issues, along with the corporations’ capacity to meet their debt agreements. Examples of solvency ratios are the current ratio, quick ratio, debt to equity ratio, and interest coverage ratio.

➢ Debt to Equity Ratio Additionally, the debt to equity ratio is used to calculate the amount that a corporation is financing its work through debt versus the only owned cash flow. Looking at the debt to equity ratio it demonstrates that between 2017 and 2018 there was an increase, which shows that there was a lower reliance on debt to finance its investments. Starbucks' debt to equity ratio is reduced than the industry average, the stakeholders can see this with how the debt to equity ratio for the consumer services industry is 0.72. The debt to equity ratio shows that the Starbucks corporation uses lower levels of debt to help minimize the risks of bankruptcy and rising agency costs.

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➢ Debt to capital ratio Moreover, the debt-to-capital ratio measures the corporations’ financial bargaining chip. “It calculates the company's interest-bearing debt, both short- and long-term liabilities and dividing it by the total capital (Peavler, 2019, Pg. 3).” The debt to capital ratio for the consumer services industry is 5.8, which shows that the Starbucks corporations’ debt-to-capital ratio expanded between 2017 to 2018. This also means that the debt to capital ratio is greater compatability to the industry average, which is a sign of financial weakness for the firm.

➢ Profitability Ratios Profitability ratios calculate the corporations understanding to develop earnings compared to its cost and other suitable costs that have occurred in a certain time period. They are usually taken in comparison to the revenues of diverse groups of costs within the income statement (Bragg, S. 2019). The ratios are mainly considered good when they advance over a trend line or are greater than the competition. Contribution margin ratio, gross profit ratio, and net profit ratio are examples of profitability ratios.

➢ Profit Margin Ratio In addition, the profit margin ratio calculates the total of net income obtained with each dollar of sales developed in comparison to the net income and net sales of a corporation. The profit margin ratio is also called the return on sales ratio or gross profit ratio. The profit margin ratio shows an improvement between 2016 and 2017, along with an increase between 2017 and 2018. The net profit margin for the consumer services industry is 3.9, this informs that the Starbucks ratio is higher than the industry. The profit margin ratio shows that the Starbucks corporation is higher in net profit per unit of the sale in comparison to its competitors. Starbucks' strong brand name and management costs help.

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➢ Return on Assets Furthermore, the return to assets helps show the rate of profit a corporation obtains in association with its overall collateral (Harrison, Horngren & Thomas, 2015). It shows that the return on assets had improved between 2016 and 2017 and increased even more between 2017 and 2018. Starbucks Corporation has a higher ratio than the industry. The stakeholders will be able to see that the ROA for the consumer services industry is 6.3. This also shows that the corporation's return to assets is higher than their competitors due to having a higher ROA than the industry average, this overall shows that the corporation is very efficient in taking the funds used to buy assets and turning it into net profits. The profit margin ratio measures the amount of net income obtained with each dollar of sales developed in comparison to the net income and net sales of a corporation.

The Rules for Financial Reporting 2017 - 2018 ➢ Control Procedures As a result, the Securities Exchange Act was formed with a perception to help strengthen the confidence in the American capitalistic system. “The Internal controls are important to stockholders, society, and the government because all have a large impact on continuing confidence in corporate reporting, corporate accountability and the corporate image of corporations (Spacey, 2016, Pg. 17)”. Starbucks divulges its control procedures that show factual financing documentation. This shows that all disbursements, receipts, and recorded purchases are legitimate and have management approval and show that any unauthorized use of any financial documentation can be spotted easily and prevent any wrong.

➢ Segment Information Furthermore, the SEC had sanctioned the acknowledgment of segment profits and revenues around the period of 1969-1970. The focus for this is to heighten the earning potential and the risk of different corporations (Bragg, 2019). “Starbucks reports its financial information for four operating segments: Americas, China/ Asia Pacific, EMEA (Europe, Middle East, Africa, and Channel Development. Besides, the firm has some non-

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reportable operating business segments which include Teavana, Evolution Fresh, Seattle's Best Coffee, and their Digital Ventures Business (Starbucks Form 10-K, 2018, Pg. 43)”. Certain items make up specific operating segments with different stages of risk and profit like different kinds of products and specific regions. Starbucks does comply with the SEC and discloses the right material of the firms' segment financial performance. ➢ Estimates and Assumptions For that reason, all corporations are required to document specific estimates in the annual Form 10-K. The Securities and Exchange Commission made it binding in 2005 for corporations to add a risk part within their documentations to help show the specifics that make the corporation risky or speculative. The documents focus on helping investors become more informed about the corporation. In 2018, the Starbucks corporation documented risk factors like a data breach, brand value, growth management and much more. The Starbucks corporation suggests that its revenue increased between 15% to 20%. ➢ Investments and Fair Value Also, the Securities and Exchange Commission defined the fair amount calculation during the year 2006. Over time, the fair value became less expressed. “Fair value is defined as the price to sell assets or to pay for the transferred liability from one business to another at the measurement dates (Tomohiro & Takuma 2017, Pg. 19)”. Corporations are required to document all the investments at fair value. In 2018, Starbucks documented investments of around $2.0 billion. This demonstrates that the new stores, investment...