This paper analyzes the financial ratios of Starbucks to determine the financial health of the company. The data for the financial ratios comes from the company’s annual report for the fiscal year 2017 (Starbucks, 2017). The data for industry average came from CSIMarket website (CSIMarket Company) with the exception of industry current ratio that came from the website of The Retail Owners Institute (The Retail Owners Institute). CSIMarket provides quarterly ratios so the average of the ratios for four quarters of 2017 was calculated to arrive at the average for 2017.
Current ratio measures the short-term liquidity of the company. It tells us whether the company can fund its day-to-day operations. The desirable current ratio depends upon the industry but a minimum of 1 is usually preferred. Starbucks current ratio improved from 1.05 in 2016 to 1.25 in 2017 which is a positive development. In other words, Starbucks improved its ability to meet short-term obligations in 2017 as compared to 2016. The industry average was 0.8 in 2017 so Starbucks has a lower short-term default risk than the average player in the restaurant industry.
Quick ratio also measures the short-term liquidity of the company. However, it is a more reliable indicator of short-term liquidity because it focuses on the most liquid current assets. Starbucks quick ratio improved from 0.74 in 2016 to 0.93 in 2017 which is, again, a positive development. The average industry quick ratio was 0.61 in 2017 so Starbucks is doing a great job of managing short-term liquidity.
Long-Term Solvency Ratios
Debt to Equity ratio tells us about the capital structure of the company. It tells us whether the management prefers debt financing or equity financing. High debt to equity ratio is a cause of concern because it indicates high financial leverage and higher default risk in the long-term. Starbucks debt to equity ratio rose from 1.43 in 2016 to 1.63 in 2017, which means Starbucks is increasingly turning to debt to fund its expansion. It is possible that the debt funding might have been pursued in 2017 to take advantage of low interest rates. The industry average was only 0.03 in 2017 which is way lower than Starbucks. However, one should practice caution because the restaurant industry is made up of a large number of small players who might have limited resources so obtaining debt at reasonable rates is more difficult for them than Starbucks.
Times interest earned ratio tells us about the ability of the company to cover its interest payments and higher ratios are preferred. Starbucks times interest earned ratio declined from 51.31 in 2016 to 44.70 in 2017 which is a negative development. However, it is expected due to greater emphasis on debt funding. In addition, 44.70 is still very impressive figure so Starbucks clearly has no problem fulfilling its interest obligations. The industry average was 11.03 in 2017 so Starbucks is in a much stronger financial health than the average player in the restaurant industry.
Net profit margin tells us about the profitability of the company and higher net profit is preferable. Starbucks net profit margin declined from 13.22% in 2016 to 12.89% in 2017. It is not a desirable development but the company’s net profit margin is in line with the industry average of 12.34% in 2017. Starbucks does have an opportunity to improve its net profit margin by closely looking at expenses and identify areas of improvement.
Return on Assets (ROA) tells us how the company utilizes its assets to generate income. Starbucks ROA slightly declined from 29.15% in 2016 to 28.78% in 2017. However, the 2017 figure was still much higher than the industry average ROA of 9.27%. Starbucks utilizes its assets quite efficiently to generate income as compared to the average industry player. However, the company can further improve its ROA by improving profitability and/or disposing less profitable assets.
- CSIMarket Company. (n.d.). Restaurant Industry. Retrieved June 9, 2018, from https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=914
- Starbucks. (2017). Annual Report. Seattle, WA: Starbucks Corporation.
- The Retail Owners Institute. (n.d.). Full-Service Restaurants. Retrieved June 9, 2018, from https://retailowner.com/Benchmarks/Restaurants/Full-Service-Restaurants#4035687-current-ratio