SCHOOL OF ARCHITECTURE, BUILDING & DESIGNFoundation of Natural & Built Environments (FNBE)

BASIC ACCOUNTINGLecturer: Chang Jau Hau

Assignment: Financial Ratio AnalysisCompany: Starbucks Corporation

Group Members: William Goh Ming Hann Erik Ong Chia Hong

Tan Ken Ric

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Table Of Content

NO TITTLE PAGE

1 Tittle Page 1

2 Table Of Content 2

3 Company Background 3

4 Ratio Analysis 4-5

5 Appendix 1: P/E Ration 6

6 Appendix 2: Investment Recommendation 7-8

7 Appendix 3:Starbucks Corporation Balance

Sheet

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8Appendix 4: Starbucks Corporation Statement

Of Earnings

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9Reference

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Company Background

Starbucks Corporation, doing business as Starbuck Coffee, is an

American global coffee company and coffeehouse chain. Starbucks is the

largest coffeehouse company in the world with 20737 stores in 63 countries.

The history of Starbucks starts back in 1971 when the first store opened in

Seattle, Washington. Jerry Baldwin, Zev Siegl and Gordon Bowker got the

idea from Alfred Peet (of Peet's Coffee fame). The store initially sold just

coffee beans and coffee making equipment rather than the drinks they have

become so famous. After about 10 years, Howard Schultz was hired as

Director of Retail Operations and came to the conclusion that they should be

selling drinks rather than just beans and machines. He couldn't convince the

owners, so he went his own way to start the Il Giornale chain of coffee bars

in 1986.

Starbuck’s mission is to inspire and nurture the human spirit. They will

always serve the best coffee possible. In the 1990s, Starbucks was offering

stock options to employees and went public. Today, Starbucks has expanded

to more than 17,000 stores in 55 countries around the world. Their biggest

presence is still in the United States, with 11,000 locations. You can find a

Starbucks in such diverse nations as Chile, Romania, Bahrain and Bulgaria.

The most recent expansion was to Budapest in June of 2010.

Starbucks went public on June 26, 1992.

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RATIO ANALYSIS

(In Millions)Profitability

Ratios2012 2013 Interpretation

Return on Equity (ROE)

Net profit × 100%

Average O/E

= 1383.8 × 100% 4798.4

= 28.8%

Net profit × 100%Average O/E

= 8.3

× 100%4798.4

= 0.2%

During the 2012 to 2013 period, the ROE has decreased from 28.8% to 0.2%.. This means that the owner is getting less return from his capital than last year.

Net Profit Margin (NPM)

Net P rofit × 100%

Net Sales

= 1383.8

× 100% 13299.5

= 10.4%

Net P rofit × 100%

Net Sales

= 8.3 × 100%14892.2

= 0.06%

During the 2012 to 2013 period, the NPM has decreased from 10.4% to 0.06%. This means that the business is getting worse at controlling its overall expenses.

Gross Profit Margin (GPM)

Gross P rofit × 100%

Net Sales

= 7486.2

× 100%13299.5

= 56.2%

Gross P rofit × 100%

Net Sales

= 8509.9 × 100%14892.2

= 57.1%

During the 2012 to 2013 period, the GPM has increased from 56.2% to 57.1%. This means that the business’s ability to control COGS has become stronger.

Selling ExpRatio (SER)

Total S . E × 100%Net Sales

= 4348.0 × 100% 13299.5

= 32.7%

Total S . E × 100%Net Sales

= 4743.3 × 100%

14892.2= 31.9%

During the 2012 to 2013 period, the SER has decreased from 32.7% to 31.9%. This means that the business is getting better at controlling its selling expense.

General ExpRatio (GER)

Total S . E × 100%Net Sales

= 801.2 × 100% 13299.5

= 6.0%

Total S . E × 100%Net Sales

= 937.9

× 100%14892.2

= 6.3%

During the 2012 to 2013 period, the GER has increased from 6.0% to 6.3%. This means that the business’s ability to control its general expense has worsened.

Financial Exp Ratio (FER)

Total F. E × 100%

Net Sales

= 32.7 × 100%

13299.5= 0.25%

Total F. E × 100%Net Sales

= 28.1 ×100% 14892.2

= 0.19%

During the 2012 to 2013 period, the FER has decreased from 0.25% to 0.19%. This means that the business is getting better at controlling its financial ratio.

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(In Millions)Profitability

Ratios2012 2013 Interpretation

WorkingCaptital

Total Current Asset Total Current Liabilities

= 4199.6 2209.8

= 1.90:1

Total Current Asset

Total Current Liabilities

= 5471.4 5377.3

= 1.02:1

During the 2012 to 2013 period, the WC ratio has decreased from 1.90:1 to 1.02:1. This means that the business ability to pay current liability with current assets is getting worse. In addition, it does not sastify the minimum requirement of 2:1.

Total Debt Total Liabilities × 100%

Total Asset

= 3104.7 × 100% 8219.2

= 37.8%

Total Liabilities × 100%

Total Asset

= 7034.4 × 100% 11516.7

= 61.1%

During the 2012 to 2013 period, the Td ratio has increased from 37.8% to 61.1%. This means that the business’s overall liability has increased. In addition, It is still above the 50% maximum limit.

Stock Turnover 365÷ COGS

Average Inventory

5813.3 = 365÷ 1176.35

=73.9 days

365÷ COGS Average Inventory

6382.3= 365÷ 1176.35

=67.3 days

During the 2012 to 2013 period, the ST ratio has decreased from 73.9 days to 67.3days. This means that the business is selling its product at a faster rate.

Debt Turnover 365÷ Credit Sales Average Debtors

485.9 = 365÷ 523.65

=393.36 days

365÷ Credit Sales Average Debtors

561.4 = 365÷ 523.65

=340.46 days

During the 2012 to 2013 period, the DT ratio has decreased from 393.36 days to340.46 days. This means that the business’s effectiveness in collecting debt is stronger.

Interest Coverage Interest Expense + Net Profit

Interest Expense

= 32.7+1383.8 32.7

= 43.3 times

Interest Expense + Net Profit

Interest Expense

= 28.1+8.3 28.1

= 1.30 times

During the 2012 to 2013 period, the IC ratio has decreased from 43.3 times to 1.30 times. This means that the business’s ability to pay its interest expense become weaker. In addition, the IC ratio does not sastified minimum requirement of 5 times.

*figure obtained from STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEET AND STATEMENT OF EARNINGS

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Appendix 1: P/E Ration

Price/ Earning or P/E Ratio

= Current share price Earnings per share (in number of times)

= 77.792.72

= 28.60

This ratio measures how expensive a share is. The higher the P/E ratio, the more expensive a share is. The P/E Ratio for Starbuck Corporation is 28.599. It means that the investor need to wait for 28.6 years to recoup the investment.

*figure obtained from http://data.cnbc.com/quotes/SBUX

APPENDIX 2: INVESTMENT RECCOMENDATION

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(a)PROFITABILITY

Starbucks Corporation fairly demonstrated a good profitability. Based on

the ratio analysis, the company was not doing quite well from the period

2012 to2013. The return on equity has decreased for 28.6%. It means the

owner is getting lesser return from his/her capital than last year. Next, the

company is getting worse at controlling its overall expense as their net profit

margin decreased for 10.34%. However, the business’s gross profit margin

have increased for 0.9% which means the business is getting better at

controlling the COGS. Besides that, the business is getting better at

controlling its selling and financial expenses as they decreased for 0.8% and

0.06%. However, the business’s ability to control its general expense is

worsened as it has increased for 0.3%.

(b)STABILITY

Stability of Starbucks Corporation was quite low as the working capital

does not meet the minimum requirement of 2:1 ratio which means the ability

of the business to pay current liability with current assets is weak and has a

increase of 23.3% in total debt. However, its stock selling is getting better as

the stock turnover has decreased from73.9 days to 67.3 days. Besides that,

the business is collecting the debt faster as the debt turnover decrease 52.9

days. In addition, the company is weak in paying its interest coverage as it

does not meet the minimum requirement of 5 times.

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(c)SHARE PRICE

The price of Starbucks Corporation is considered expensive as its P/E

ratio exceeds 15. It is 28.60.

In conclusion, the investor should not invest in Starbucks Corporation

as it doesn’t have high profitability and stability. Also, the share price is

expensive which take longer time for the investor to take back its original

principal.

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REFERENCE

Starbucks (2012) (2013), Annual Report.http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual

Starbucks (background)http://www.organicconsumers.org/starbucks/coffback.htm

CNBC (share price and earnings per share)http://data.cnbc.com/quotes/SBUX

Income Statementhttp://www.nasdaq.com/symbol/sbux/financials?query=income-statement

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