About the paper
The paper relates to performing a brief financial analysis for two coffee retailers, Starbucks and Dunkin Group. As part of this analysis, we will be using latest year financial statements of both the companies and will conduct the analysis using the liquidity ratio and Dupont ratio. The outcome of these ratios will help us in understanding how each company stands relative to its competitor in the industry.
About the companies
Important to note, the objective of this analysis is to compare the financial standing of two companies in the same industry, but of different size. Here, Starbuks continues to be the industry behemoth with revenue figures of $19163 million, while Dunkin has recently reported revenue figures of $811 million. On the other hand, while Starbucks holds a global market share of 32.6%, Dunkin Group holds the market share of 23%. Therefore, while the two companies operates in the same industry, however, Starbucks is a relatively gigantic company compared to Dunkin. Hence, in order to learn more about their true financial position, ratio analysis is an appropriate tool.
Liquidity Analysis
Also called working capital ratios, liquidity ratios assist the analysts in ascertaining the ability of a company to honor short-term debt. Below we have calculated the current ratio, which happens to be the most used and popular liquidity ratio:
-Current Ratio: Current Assets/ Current Liabilities
Starbucks: 4353/3654= 1.19
Dunkin Group: 558/419= 1.33
Referring to the above figures, we can clearly see that how the current ratio standardized the raw financial figures while the amount of current assets and current liabilities of Starbucks are nearly nine times to that of Dunkin. However, the outcome of the ratio analysis confirmed that Dunkin is comparatively more liquid than Starbucks, and is thus more capable in honoring the short-term obligations as and when the need arise.
DuPont Analysis
Even though we could have ascertained the profitability position of the company using the plain Return on Equity(ROE) multiple, however, ROE as a multiple can be easily use to dupe the shareholders by making them believe that it’s a good investment even when it is not. The beauty of ROE multiple is that it can be computed with net income and shareholder equity, and since net income can be easily manipulated, shareholders can fall in the trap of accounting manipulation. Therefore, to avoid any such malfeasance, investors are educated about the ROE multiple using Dupont identity, which decodes ROE into multiple components so that investors could learn the real source of return generation by the company. Below we have included the Dupont expression for decoding ROE multiple of Starbucks and Dunkin Group:
ROE: Net profit/ Revenue* Revenue/ Total Assets* Total Assets/ Total Equity
ROE = (Net profit margin) * (Asset turnover) * (Equity multiplier)
Starbucks: 2757/19163* 19163/12446*12446/5818
= 14.38*1.53*2.13
= 46.86%
Dunkin Group: 105/811* 811/3197* 3197/221
= 12.94* 0.25*14.46
= 46.77%
As we can see from the above calculations, while both the companies have nearly equal ROE multiple, however, Starbucks is generating returns for the shareholders in a way more sustainable way. Important to note, the net profit margin of Starbucks is higher than that of Dunkin Group, however, what is most noteworthy is the financial leverage. While the former company is operating with financial leverage of merely 2.13, the latter is operating with high financial leverage of 14.46. This indicates that Dunkin Group is operating with a high risk level and is generating returns with high risk. In addition, even the asset turnover of Dunkin Group is significantly lower than that of Starbucks and confirms lower asset efficiency management policies of the company.
Conclusion
On the basis of the outcome of the above ratio analysis, we can confirm that even though Dunkin is marginally more liquid than that of Starbucks, however, the Dupont analysis confirmed more sustainable and less risky business approach of Starbucks. Our analysis revealed that even while Dunkin is earning lower net margin than Starbucks, it is operating with the significant level of high risk of high financial leverage. In other words, the company is not able to earn higher reward despite of assuming high risk. Lastly, Dunkin Group is generating minimal asset turnover compared to Starbucks and this confirms that the management is not able to use its asset base appropriately to generate the revenue figures.
In the nutshell, the above trend uncovered through financial ratios gave us some useful information for these two companies and their financial standing.
References
Dunkin Group. (2015). Annual Report 2015. Dunkin Group.
Persinos, J. (2015, November 13). Starbucks vs. Dunkin' Donuts: Which Is The Better Stock to Buy Now? Retrieved September 4, 2016, from https://www.thestreet.com/story/13365079/1/starbucks-vs-dunkin-donuts-which-is-the-better-stock-to-buy-now.html
Starbucks Inc. (2015). Annual Report 2015. Starbucks Inc.
