Analysis Of Profitability, Liquidity, And Solvency Ratios Of Starbucks

Milestone 2

The main purpose of the report is to analyse the competition and develop benchmarks of both profitability and expansion operations in Coffee Connection. As Starbucks has been identified as the most similar competitor, there have been several tools used to analyse the performance of the company and observations related to the challenges and success faced by it. The report has been divided into three milestones, where the first milestone is associated to analyse the vertical and horizontal analysis of the company. The second milestone is associated to calculate the ratio analysis by analysing the financial performance of Starbucks. Some of the ratios include profitability, liquidity and solvency ratios. The final milestone is associated to state the various types of consideration for following GAAP reporting requirements and the disclosures for Starbucks’ control procedure.

Based On the various types of the analysis the profitability ratio of the company has been calculated by evaluating Net Profit Margin and Return on Equity. It has been seen that the Net Profit Margin of Starbucks for the both the years is 0.01. The formula used is dividing the net profit of the company with revenue. It has been further seen that the overall profitability has shown a decreasing trend with decreasing net profit of 0.991% in 2015 to 0.747% in 2016. The main aspect of the return on equity has been calculated by dividing the revenue by net profit loss.

Based On the various types of the analysis the liquidly ratio of Starbucks has been calculated by evaluating Current Ratio. It has been further seen that the Current Ratio of Starbucks for 2015 was 1.09 while in 2016 it is 1.05. The formula used is dividing current assets by current liability. It has been further seen that the overall quick ratio has also shown a decreasing trend with decreasing trend with 1.09 in 2015 to 1.05 in 2016. The main aspect of the current ratio has been calculated by subtracting the inventory with total current asset and dividing the same with total current liability.

Based On the various types of the analysis the profitability ratio of the company has been calculated by evaluating the Debt Equity Ratio and Total Debt to Total Assets. It has been seen that the Debt Equity Ratio of the company has degraded in terms of the previous trend. It has been observed that in 2015 the debt equity ratio of the company in was 1.13 and 1.43. The formula used is dividing the net profit of the company with revenue. It has been further seen that the overall profitability has shown a decreasing trend with decreasing net profit of 0.991% in 2015 to 0.747% in 2016. The main aspect of the return on equity has been calculated by dividing the revenue by net profit loss.

Profitability Ratio

The financial report has been prepared by adhering to the United States of America

GAAP standards. The reporting of control procedures is required for the purpose of making estimated and the assumptions which are seen to have an effect on the reported amount of the assets, revenue, liabilities, revenues and the expenses (Weil et al., 2013). The reporting of the sections are seen to be particularly important for making the estimates of the cash and cash equivalents, available for sale securities, trading securities, cost and equity method of investments, fair value, derivative instruments, cash flow hedges and net investment hedges. The GAAP disclosures are further seen to be necessary measures for disclosing about the relevant values for the treatment of Property, Plant and Equipment, goodwill and various types of the insurance reserves. The necessity of the investments has been further seen in terms of short-term and long-term investments which are available for sale. The disclosure of the fair value has been able to show the receiving and selling of an asset or pay to transfer a liability (exit price) in an organized transaction between participants of the market (Deegan, 2013).

The important disclosure about the investments has been able to state that the company is responsible for evaluating the saleable securities for other than short-term impairment on a quarterly basis. The various types of the disclosure of the company has been further seen in terms of the Unrealized losses are charged against net earnings. Based on the disclosure related to the trading securities it has stated about the trading securities portfolio, which includes the marketable equity mutual funds and equity exchange-traded funds. The company has also shown the relevance significance with the inclusion of the long-term investments in the consolidated balance sheets. It has been further seen that the company is seen to be using the equity method of accounting which gives Starbucks the ability to exercise significant influence, but not control, on the investee. The disclosure of the trading securities has been recorded with the unrealized holding gains and losses recorded in interest income and other, net consolidated statements of earnings. The equity investments which are not seen to have the capacity to implement significant influence are seen to be accounted based on the evaluations of the long-term investments (S21.q4cdn.com, 2017).

Based on the fair value disclosure made by the company, the first level has been able to show the carrying value of cash and approximates for cash equivalents. This is due to the considerations of the short-term nature of these instruments. It has been further seen that the second level of the company has been further able to show the quote prices in active markets for alike assets which are not obtainable. The determination of the fair value of the company is done by the securities which are accessible for sale and over-the-counter forward contracts, collars and swaps based upon components such as the quoted market price of alike assets or a discounted cash flow model. The various inclusions of the fair value components of the company have been further seen in form of the interest rate curves and forward and spot prices for currencies and the commodities. This depends on the nature of the investment made (S21.q4cdn.com, 2017).

Liquidity Ratio Analysis

The importance of disclosure associated to leases is necessary for knowing about the classification of particular leases such as capital leases or operating leases. Some leases are classified as operating leases which is important to know from the balance sheet disclosure. Based on the disclosures made in the operating leases in the annual report 2015, Starbucks has been seen to be leasing retail stores, distribution centres, warehouse facilities, office spaces and roasting for various types of corporate Administration. Most of these arguments are seen to be containing the tenant improvement allowance for these premiums, rent holidays and contingent rent provisions. The company recorded the different rent liability for the tenant improvement allowances and prepaid rent asset in form of prepaid expenses for premium paid up front is to enter into lease agreements. Some leases provide contingent rents which are deemed as percentage of gross sales in excess of specified levels.

The company further made disclosure for construction of leased buildings for primary stores. Starbucks is qualified as a deemed proprietor of these buildings for important amount of involvement during the construction period and non-qualification for sales recognition under sales is back accounting guidance. The offsetting of the lease financial obligations as seen to be recorded in terms of long-term liability with current portion recorded in a crude occupancy cost along with accrued liability in the balance sheet.

Conclusion

The various findings from the milestone one has been able to state that in the first quarter of fiscal 2016, Starbucks replaced their 2013 credit facility with new $1.5 billion unsecured, revolving 2016 credit facility with various banks, of which $150 million may be used for issuances of letters of credit. It has been further affected that in May 2016, Starbucks issued long-term debt in an underwritten registered public offering. These changes would make their financing stronger. The horizontal and vertical analysis shows that there were increase in values of every long term and short-term debt. Through the depictions made in the second milestone it has been observed that the overall profitability of Starbucks has shown a decreasing trend with decreasing net profit of 0.991% in 2015 to 0.747% in 2016. It has been further seen that the overall quick ratio has also shown a decreasing trend with decreasing trend with 1.09 in 2015 to 1.05 in 2016. This shows a degrading liquidity position of the company over the years. In addition to this, the solvency position of the company has also degraded. In the final portion of the report it has been observed that the GAAP disclosures are necessary measures for disclosing about the relevant values for the treatment of Property, Plant and Equipment, goodwill and various types of the insurance reserves. The necessity of the investments has been further seen in terms of short-term and long-term investments which are available for sale. The disclosure of the fair value has been able to show the receiving and selling of an asset or pay to transfer a liability (exit price) in a systematic transaction among the market participants. Starbucks has been further seen to be leasing retail stores, distribution centres, warehouse facilities, office spaces and roasting for various types of corporate Administration. Most of these arguments are seen to be containing the tenant improvement allowance for these premiums, rent holidays and contingent rent provisions. 

Reference List

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

S21.q4cdn.com. (2017). [online] Available at: https://s21.q4cdn.com/369030626/files/doc_financials/2016/Annual/FY16-Annual-Report-on-Form-10-K.pdf [Accessed 11 May 2017].

S21.q4cdn.com. (2017). [online] Available at: https://s21.q4cdn.com/369030626/files/doc_financials/2015/Starbucks-Fiscal-2015-Form-10-K.pdf [Accessed 11 May 2017].

S21.q4cdn.com. (2017). [online] Available at: https://s21.q4cdn.com/369030626/files/doc_financials/2016/Annual/FY16-Annual-Report-on-Form-10-K.pdf [Accessed 11 May 2017].

S21.q4cdn.com. (2017). [online] Available at: https://s21.q4cdn.com/369030626/files/doc_financials/2015/Starbucks-Fiscal-2015-Form-10-K.pdf [Accessed 11 May 2017].

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

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