Financial Analysis Report of Starbucks

Introduction:

It is the intention of this financial analysis report  to clearly and concisely explain the business methods and decisions of Starbucks Corporation in order to provide data and analysis for the comparison to Coffee Connection in an effort to mirror successes whenever possible and prevent the duplication of unsuccessful strategies that may have already transpired. Starbuck has been chosen as it is a similar competitor with a demonstrated record of sound business decisions resulting in growth and profitability. 

The overall financial health of Starbucks will be thoroughly examined and documented with both explanations of calculations and the interpretations of the figures and data. The calculation contained within this report will adhere to the guidelines of Generally Accepted Accounting Principles (GAAP) adopted by the U.S. Securities and Exchange Commission (SEC). Most data will be sourced from Starbucks Corporation’s Fiscal Year 2018 Annual Report Form 10-K.

Horizontal and Vertical Analysis of Accounts Receivable, Fixed Assets, and Debt Financing:

Starbuck Corporation recognized and increase in in Total Revenue and Net Income over the period examined. The analysis was performed in both currency and percentage to more easily show the differences and enable references to be made over multiple reference points. The exercise made for an easy year to year comparison and demonstrated the basic trends displayed. An account receivable is the money owed to a firm from the sale of goods or services on credit (Kenton, 2019). The amount that the company is owed from this extension of credit is recorded in its general ledger under the heading Accounts Receivable. Accounts receivable are considered current assets (Kenton, 2019). An asset is considered current if they can be expected to be paid within a year (Hayes, 2019). The unpaid balance in this account is reported as part of the current assets listed on the company's balance sheet. Horizontal analysis compares account balances and ratios over different time periods (Boyd, Epsine, Holtzman, Loughren, Sampath, Tracy, Tracy, and Welytok, 2019).

In this report an analysis of two years is compiled and compared. The analysis computes the percentage change in each income statement account (Boyd et al, 2019). Accounts receivable demonstrated a decline from Sept. 30, 2018, of 693.1 million to Oct. 1, 2017, of 870.4 million. This represented a 20.37% decrease in Accounts Receivable. It is important to remember in this instance that Accounts Receivable is only one part of the larger Total Asset center. Total Assets changed from 14,365.4 (FY17) million to 24,165.4 million (FY18). One large change of note that occurred in FY18 was the Prepaid expenses line that represented 1,462.8 in FY18 from 358.1 in FY17 (in millions). In this case it important to remember that overall Total Assets are representing a significant increase. Starbucks documented under an apparent accrual basis method although not specifically stated. Revenue is recorded when earned and expenses are recorded when consumed. Starbuck states in it 2018 Form 10-K that during the past five fiscal years they have not “made any material changes to the accounting methodologies” (Starbucks, 2018).

Starbucks states regarding their accounting procedures that “Company accounting policies or their application, or GAAP, as pre-determined and disclosed by company policy to ensure that audit committee both internal and entities external are using appropriate methods for comparison” (Starbucks Corp, 2015). It also states that any changes in GAAP are to be immediately reported. This disclosure to practice gives us confidence that the procedures used are understood, duplicatable, and sound reporting practice. A Fixed Asset is defined as “a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income” (Kenton, 2019). This is often referred to as Property, Plant, and Equipment (PPE).  These Fixed Assists or Non-Current Assets are not quickly converted to cash (Kenton, 2019). The real value of PPE is in its ability to provide the foundation for an enterprise to build its product or service (Kennon, 2019). Starbucks noted a change in their Property, Plant, and Equipment line from FY-17 of 4919.5 to FY-18 of 5929.1 (in millions). This represents a 12.1 percent increase in PPE.

An intangible asset is “a non-physical asset having a useful life greater than one year” (Bragg, 2018). Starbucks noted a 136.11% increase from FY-17 441.4 to FY-18 1042.2 (dollars in millions) in Intangible Assets. On page 73 of Starbucks report that is referenced it notes an increase in Intangible Assets such as trademarks, tradenames, patents, and “other” to accrue a total indefinite-lived intangible asset line of 231.0 (dollars in millions). This is an increase over the previous fiscal year of 1.64%. This is noted in the Starbucks Corporation 2018 Form 10-K. Depreciation and amortization are similar in that they both treated as reductions from fixed assets in the balance sheet, are non-cash expenses, and their carrying amounts can be written down (Bragg, 2019). The difference is that amortization charges off the cost of an intangible asset, while depreciation does so for a tangible asset (Bragg, 2019).

Starbucks utilizes the Cost Method in investment reporting. With the Cost Method, the investment stays on the balance sheet at its original cost and if dividends from the investment are realized than those dividends get treated as revenue. Starbucks also notes that the equity method of accounting may be required depending on its total percentage ownership interest. “The Equity Method Generally accepted accounting principles, or GAAP, require you to use the equity method when you have significant influence, but not control, over another company” (Keythman, 2018). The equity method requires a journal entry when a stock is acquired. When the other company reports a profit or loss, and when it pays a dividend, an entry must be made (Keythman, 2018). Asset Acquisition, Depreciation, and Amortization all show significant growth and demonstrated in a review and horizontal analysis. Particularly the increase in property, plant, and equipment lines and an impressive reporting of Total Assets from approximately 12 billion to 24 billion from FYs 17 to 18 (Starbucks Corporation, 2018). Starbucks states in its 2018 From 10-K that they “utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt” (Starbucks Corporation, 2018). Debt Financing An increase in debt could be a sign that an enterprise is headed into a questionable financial existence (Mohr, n.d.).

Long Term Debt was marked increased from 17 to 18 and more than double during the period examined. It would appear from the overall findings of the report at Starbucks was well prepared to invest and add to it long term debt as the reports show a positive grown and indicate relative heath in its business. According to a report in QRS magazine using Starbucks reports, in the past five years, Starbucks’ store count has increased from 18,066 to 27,339. It has gone from serving 61 million customers per week to 91 million. Revenue is up to $22 billion from $13 billion and the company’s market cap has ballooned from $39 billion to $78 billion (Klein, 2018).  Growth in these areas in combination with no real shakeups in the industry lends to a healthful outlook. There will be a point however when growth will not only be able to be relied on in terms of new stores and customers served.  Starbucks has seemingly taken this yet still remote future and turned to an acknowledgment that new strategies such as digital ordering and payment systems, expanding coffee and food options, home coffee markets, and building its Teavana brand (Trefis Team, 2016). With a strong present and good plan, Starbuck stands to continue to maintain its high share of the coffee and beverage market.

Ratio Analysis:

The two liquidity ratios that are evaluated in this report are the Current Ratio and the Quick Ratio. These two ratios indicate the ability to pay off short-term debt with liquid assets. The current ratio measures the ability of an organization to pay its bills in the short-term. This ratio is often used to assist in decision making as to whether investors and creditors should deal with an enterprise. The current ratio is calculated by dividing the total of all current assets by the total of all current liabilities (Bragg, 2018). The quick ratio is used to evaluate whether a business has enough liquid assets to pay its bills once the assets are turned into the cash. This ratio is calculated by the cash, marketable securities, and accounts receivable entries (Bragg, 2018).

Inventory is not included in the quick ratio as it may not be able to be turned into cash quickly. The solvency ratios that have been evaluated are the Return on Assets (ROA) and the Return on Equity Ratios (ROE). The Return on Assets is an indicator of how profitable a company is in relation to its total assets. The ROA shows how efficient a company is at using assets to make profits. Return on assets is displayed as a percentage. The formula is Net Income divided by Total Assets (Hargrave, 2019). The Return on Equity Ratio is a way to calculate performance. The formula is net income divided by shareholders' equity (Hargrave, 2019). These ratios are used to demonstrate how effectively a business is utilizing its assets. The profitability ratios analyze are Net Profit Percent ratio and the Gross Profit of Sales ratio. The Net Profit Percent is a ratio that shows the relationship between net profit after tax and net sales. It is computed by dividing the net income by net sales (Accounting for Management, 2017). The Gross Profit Margin is used to see a business’s financial health and business model by showing the amount of money left from sales after subtracting the cost of goods sold. It is shown as a percentage (Kenton,2019).

References

• Boyd, K., Epstein, L., Holtzman, M., Sampath, V., Tracy, J., Tracy, T., & Welytok, J. (2019). Horizontal and Vertical Analysis. Retrieved July 13, 2019, from https://www.dummies.com/business/accounting/horizontal-and-vertical-analysis/
• Bragg, S. (2018, December 17). Examples of Intangible Assets. [online] Accounting Tools. Retrieved July 14, 2019, from https://www.accountingtools.com/articles/what-are-examples-of-intangible-assets.html
• Bragg, S. (2018, August 29). Liquidity ratios. Retrieved July 7, 2019, from https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios
• Bragg, S. (2019, May 3) The Difference Between Depreciation and Amortization. [online] Accounting Tools. Retrieved July 27, 2019, from https://www.accountingtools.com/articles/what-is-the-difference-between-amortization-and-depreciation.html
• Hargrave, M. (2019, July 03). How to Use Return on Assets When Analyzing a Company. Retrieved July 7, 2019, from https://www.investopedia.com/terms/r/returnonassets.asp
• Hayes, A. (2019). Understanding Current Assets. [online] Investopedia. Available at: https://www.investopedia.com/terms/c/currentassets.asp [Accessed 4 Jul. 2019].
• Kennon, J. (2019, January 21).  Property, Plant, and Equipment on the Balance Sheet. [online] The Balance. Retrieved July 30, 2019, from https://www.thebalance.com/property-plant-and-equipment-on-the-balance-sheet-357290
• Kenton, W. (2019). Accounts Receivable (AR). [online] Investopedia. Available at: https://www.investopedia.com/terms/a/accountsreceivable.asp [Accessed 4 Jul. 2019]
• Kenton, W. (2019, June 30). Why Gross Profit Margin Matters. Retrieved July 7, 2019, from https://www.investopedia.com/terms/g/gross_profit_margin.asp
• Kenton, W. (2019, June 21) Fixed Assets. [online] Investopedia. Retrieved July 21, 2019, from https://www.investopedia.com/terms/f/fixedasset.asp
• Keythman, Bryan. (2018, April 18) Equity Method of Accounting for Investment Journal Entries. [online] Azcentral. Retrieved August 2, 2019, from https://yourbusiness.azcentral.com/equity-method-accounting-investment-journal-entries-12952.html
• Klein, D. (2018, March 01). What the Future Really Holds for Starbucks. Retrieved June 21, 2019, from https://www.qsrmagazine.com/finance/what-future-really-holds-starbucks
• Mohr, Angie. (n.d.). How Debt Financing Impacts a Company's Balance Sheet. Small Business – Chron.com. Retrieved from http://smallbusiness.chron.com/debt-financing-impacts-companys-balance-sheet-61685.html
• Starbucks Corp. (2015, June 23). STARBUCKS CORPORATION AUDIT AND COMPLIANCE COMMITTEE CHARTER. Retrieved June 20, 2019, from http://globalassets.starbucks.com/assets/ac32ce4e2c854d16856643020c45be9e.pdf