About the report
The report is based on analyzing the financial performance and accounting policies for Starbucks Corporation. While the financial performance of the company will be evaluated using the tool of ratio analysis for the period of two years, the accounting policies of the company will be discussed using the latest annual report.
Accounting for assets, liabilities and equity
Note 1 of the financial statements discusses the procedures through which the company accounts for its assets, liabilities and equity. As for accounting assets and liabilities of the company, the company uses the provisions of Fair Value Accounting, under which fair value of the assets and the liabilities is determined as per set levels of the company, i.e. Level 1, Level 2 and Level 3.
As for equity also, the company uses fair value accounting, but since it is recorded on non-recurring basis and the fair value of the same is evaluated using an internally-developed valuation model, using inputs that include interest rate curves, credit and liquidity spreads, and effective maturity. All such provisions are related to Level 3 provisions of Fair Value Accounting so determined by the company while Level 1 and Level 2 are related to valuation assistance for assets and liabilities.
Inventory Valuation
The company in the supplementary notes to the financial statements declares that it record the inventory at lower of cost or market value. However, no information is given if the FIFO or LIFO method is followed.
Compliance to Sarbanes-Oxley Act
The company under Exhibit 31.1 and 31.2 of the annual report have disclosed the statements signed by the CEO and CFO of the company in compliance with Section 302 of the Sarbanes-Oxley act where each individual declare that they have reviewed the annual report of the company and all the financial statements of the company are true and contains the material information. The report also discusses the internal control procedures and fraud detection and disclosure to the relevant authority that includes external auditors and audit committee.
Internal Control
The company has established and maintained effective internal control policies over financial reporting which they evaluate through Internal Control — Integrated Framework (the "1992 Framework"), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Analyzing Common-Size Financial Statements
Referring to the vertical and horizontal financial statements of the company, we find that over a year, the financial performance of the company has improved significantly. As for the revenues, the figures surged by 10.45%, while the cost of goods sold in proportion to the revenue was reduced from 42.86% to 41.70%, thus sourcing the increase in gross profit margins by 12.68%.
As for net income also, the multiple increased by 228%, which in addition to gross profit margins was also sourced from decrease in the operating expenses by 26.34% that lead to high net profits of the company.
Ratio Analysis:
This section will discuss the financial performance of Starbucks Corporation for the period of 2013 and 2014 using the tool of ratio analysis under which multiple sections of ratios will be calculated, namely, Liquidity Ratios, Profitability Ratios, Efficiency Ratios, Debt Ratios and Market ratios.
a)Liquidity Ratios:
-Current Ratio: Current Assets/ Current Liabilities
-Quick Ratio: Cash+ Receivables/ Current Liabilities
Liquidity Analysis
Noted from the above financial data, the liquidity position of the company has gone strong with current ratio surging from 1.01 to 1.37. The major source of increase in the current ratio was sourced from 43.48% reduction in the current liabilities while the current assets also dipped by 23.8%.
We even tested the liquidity position of the company using the stringent measure, quick ratio and we received a similar trend as the multiple increased from 0.70 to 0.81. This indicates that the company has a capacity to honor its short-term debt.
b)Profitability Ratios:
-Net Income Ratio: Net Income/ Revenue
-Return on Equity: Net Income/ Total Equity
Profitability Analysis:
Referring to data above, we can see that the company has made a significant jump in its profitability margins as the net income of the company surged from 0.05% to 12.57%. The increased was sourced from increase in revenue and control in the operating expenses that lead to 228% increase in net profit on y/y basis.
Even the shareholders of the company will be ecstatic to see significant jump from 0.19% to 42.41% that was yet again sourced from high net income during 2014 that amounted to $2068 Million as compared to $9 Million in 2013.
c)Debt Ratio:
-Total Debt-Equity Ratio: Total Debt/ Equity
-Interest Coverage Ratio: Operating Expenses/ Interest Expense
Debt Analysis
The above financial data indicates that during a year, the company increased their reliance on debt financing as the Debt-Equity Ratio multiple increased from 0.28 to 0.38. However, the increase was justified as the interest coverage ratio surged from -11.60 to 48.14. This indicates that although the company have increased the proportion of debt financing in their capital structure, but it also have the capacity to honor its interest obligations as indicated by the increased Interest Coverage Ratio.
d)Efficiency Ratio
-Inventory Turnover Ratio: COGS/ Average Inventory
Efficiency Analysis
As for inventory turnover ratio, we can witness that during the year, the multiple increased from 5.42 to 6.22. This indicates that now it takes less time for the company to process and sell its inventory. Hence, capital is tied up in the inventory reserves for a lower period of time indicating the efficiency of the management over the use of the asset base.
e)Market Ratio
-PE Ratio: Market Price/ EPS
(Yahoo Finance, 2014)
Market Ratio Analysis
PE ratio carries great significance for the analyst and the shareholders as it directly the expectations relating to the future growth of the company. Important to note, during 2013, the PE ratio of the company jumped to 5922.2. However, this multiple was not sustainable and was sourced from extremely low EPS during 2013.
In comparison, the current year PE ratio is much appreciable and sustainable as the same has been sourced from increased market price of the stock and healthy EPS.
Conclusion:
Referring to the above conducted financial analysis of the company we have noticed that Starbucks Corporation has improved their financial performance over a year and this will boost the investor’s confidence.
Works Cited
SEC Filings 2014. (n.d.). Retrieved December 14, 2014, from Investor Relations-Starbucks: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-sec
Starbucks-Historical Prices. (n.d.). Retrieved December 14, 2014, from Yahoo Finance: https://in.finance.yahoo.com/q/hp?s=SBUX
Appendix:
Income Statement
Balance Sheet
