Starbucks Analysis

Starbuck is known for their seasonal and delicious coffee drinks. With over 10 billion
dollars in revenues and 16,850 shops in 40 different countries, they are the leading coffee
retailer in the world. With the growing popularity and brand of Starbucks coffee, we decided to
dig deeper into their financial statements and analyze how really stable this coffeehouse chain
out of Seattle, Washington really is. We did this by a financial ratio analysis which can tell us a
story about the company from a variety of aspects and comparing them to one of their biggest
competitors, Dunkin Donuts.

Financial Ratio Analysis

Financial analysis is used to examine a companys financial performance according to its
objective goals and strategies. Two principal tools are used in the analysis: ratio analysis and
cash flow analysis. Ratio analysis involves assessing how various transactions in a companys
financial statements relate to one another. This can be used to compare a companys present
performance to past performance or competitors performance in their industry. It provides the
foundation for making forecasts of future performance. Cash flow analysis is used to examine
the liquidity of a companys assets. It can further asses the management of operating, investing
and financing cash flows. We will use these two analysis tools to draw a conclusion on whether
we should invest in Starbucks based off its current financial position and past performance.

Returns Ratios
Returns on investments are important because they show if a company is efficiently
managing to generate the maximum profit they can achieve. Analyzing financial statements and
percentages against prior ones are useful, but there is a limit to what you can learn from one
statement alone. Cross referencing financial statements can lead to insights not found when
only using vertical or horizontal analysis. In this section we discuss four important return
measures: return on assets (ROA), return on equity (ROE), return on net operating assets
(RNOA) and return on financial leverage (ROFL).

Return on Assets

Return on assets, otherwise known as ROA, is displayed as a percentage and is an

indicator of how profitable a company is compared to its total assets. Return on assets gives
investors insight on how efficient management of a company is at using its assets to generate
profits. Return on Assets is calculated by dividing a companys annual earnings without interest
expense by its average total assets. The interest costs are not included to show the effect
without debt financing, by focusing on investing activities.
 Return on Assets
Year Starbucks Dunkin
Donuts
2011 0.24 0.01
2012 0.19 0.03
2013 0.00 0.05
2014 0.18 0.06
2015 0.18 0.03

Return on Assets
0.25

0.20

0.15

0.10

0.05

0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Return on Equity

Return on equity, also known as ROE, is a measure of profitability that calculates how
many dollars of profit a company generates with each dollar of shareholders equity.
Companies use ROE to determine equity used in gaining of profits. Return on equity is
calculated by dividing net income by average stockholders equity. This is used to measure the
overall performance of the company. A company can use debt to increase their ROE, however,
too much debt increases risk as the failure to make obligatory debt payments.

Return on Equity
Year Starbucks Dunkin
Donuts
2011 0.31 0.07
2012 0.29 0.20
2013 0.00 0.39
2014 0.42 0.45
2015 0.50 1.43
 Return on Equity
7.00
5.00
3.00
1.00
-1.00 2011 2012 2013 2014 2015
-3.00
-5.00
-7.00

Starbucks Dunkin Donuts

Return on Net Operating Assets

Return on net operating assets, also called RNOA, is conceptually similar to ROA, except
it excludes nonoperating aspects of the income statement. In order to calculate RNOA, the
companys income statement and balance sheet need to be separated in operating and
nonoperating assets to assess each separately. A company should first consider their NOPAT,
then consider components from NOA. RNOA is then found by subtracting average net operating
assets (NOPAT) from net operating profit after taxes (NOA). The res ults measure how well the
company is performing compared to its core objective. This ratio can also reveal weaknesses in
the operating strategy that werent already derived from ROE and ROA.

RNOA
Year Starbucks Dunkin
Donuts
2011 0.32 -0.01
2012 0.33 0.02
2013 -0.12 0.04
2014 0.33 0.05
2015 0.49 0.02
 RNOA
7.00
5.00
3.00
1.00
-1.00 2011 2012 2013 2014 2015
-3.00
-5.00
-7.00

Starbucks Dunkin Donuts

Return on Financial Leverage

Return on financial leverage refers to the effect that liabilities have on return on equity.
It uses two other ratios ROE and ROA. To gauge this effect, return on financial leverage is
calculated by subtracting return on assets from return on equity. Financial leverage can be used
to increase the return to shareholders. However, having too much financial leverage can be a
risky strategy for a company to use.

ROFL
Year Starbucks Dunkin
Donuts
2011 31.10 48.50
2012 32.80 33.60
2013 32.60 32.90
2014 34.60 31.30
2015 29.30 47.80
 ROFL
60.00

50.00

40.00

30.00

20.00

10.00

0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Conclusion

The four returns ratios discussed in our introductory paragraph were calculated and
gave us indicators on the profitability performance of the company. Starbucks RNOA was
consistently higher than Dunkin Donuts except for in 2013, when it dramatically dropped. Even
though it dropped, this showed that Starbucks was better at managing their assets to be more
efficient at generating revenue than Dunkin Donuts since their ratio immediately bounced back
the following year. Starbucks ROE also proved to be quite efficient. Starbucks ROE was
consistently higher than Dunkin Donuts, with the exception of 2013, we can conclude that
Starbucks was able to put each dollar a shareholder invested to better use. In the five-year
span, Starbucks RNOA ratio was 30 times Dunkin Donuts besides 2013 where Dunkin Donuts
had a greater ratio. Based on our results we are able to conclude that Starbucks is better at
meeting its core objective. Dunkin Donuts ROFL ratio was higher than Starbucks four out of the
five years we analyzed. This means Dunkin Donuts tends to rely more on Financial leverage.

Profitability Ratios
Companies calculate profitability ratios to measure their earnings in comparison to their
expenses and other costs incurred during a time period. The following ratios have been
calculated for Starbucks and Dunkin Donuts and will be analyzed in this section: net profit
margin, gross profit margin and operating profit margin. These ratios serve as indicators on how
well a companys management is at making financing and investment decisions.

Net Profit Margin

Net profit margin can be calculated by dividing the companys net income by its net
sales. A higher net profit margin indicates the company is producing more income per dollar of
sales. Net profit margin will show a companies ability to reinvest in the company or pay out
dividends to its shareholders.
 Net Profit Margin
Year Starbucks Dunkin
Donuts
2011 0.11 0.67
2012 0.10 1.38
2013 0.00 1.59
2014 0.13 1.85
2015 0.14 1.40

Net Profit Margin

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Gross Profit Margin

Gross profit margin can be calculated by dividing the companys gross profit (revenues -
cogs) by its total sales. This number shows how effective management is at allocating costs and
their ability to price their products above the costs to produce them. Unless there are drastic
changes in the industry this number should remain pretty constant over time.

Gross Profit Margin

Year Starbucks Dunkin
Donuts
2011 0.58 6.06
2012 0.56 6.86
2013 0.57 7.51
2014 0.58 7.74
2015 0.59 5.11
 Gross Profit
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5

Starbucks Dunkin Donuts

Operating Profit Margin

Operating profit margin measures how well a company can make a profit in sales after
all expenses from operations, including interest and tax, are acquired. Operating profit margin
can be calculated by dividing a companys total operating income by its total sales. Higher
operating profit margins indicate sales are increasing at a faster rate than its costs or the
companys management cost of control is working efficiently and effectively.

Operating Profit Margin

Year Starbucks Dunkin
Donuts
2011 0.01 0.17
2012 0.10 0.70
2013 0.00 0.65
2014 0.12 0.86
2015 0.14 0.37
 Operating Profit Margin
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
-0.10 2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Conclusion

Net profit margin, gross profit margin, and operating profit margin were all calculated
and gave us useful insights into the performance and financial health of Starbucks and Dunkin
Donuts. In 2013, Starbucks suffered from a grocery dispute causing $2.8 billion in litigation
charges as you can see the effect on our graphs during that year. Dunkin Donuts consistently
outnumbered Starbucks in comparing Net Profit Margins. After expenses were all paid, Dunkin
had more of its sales dollar left over possibly due to Starbucks having more expenses. Both of
the companys gross profit margins remained relatively steady over the five years. Dunkin
Donuts has a largely higher gross profit margin so you can assume they are making more profit
considering the costs being incurred. Dunkin Donuts operating profit margin is also consistently
higher than Starbucks OPM. This tells us that Dunkin Donuts sales are increasing faster than
their costs and furthermore outweighing Starbucks in this ratio.

Turnover Ratios
Turnover ratios show the internal structure of a companys efficiency and how it uses its
assets and manages its liabilities over time. Like the liquidity ratios, these ratios quantify the
productivity of the company by showing how well the company can handle and carry out day-
to-day operations. In this section the following ratios will be explained: inventory turnover,
accounts receivable turnover, asset turnover, property, plant, and equipment turnover, and
length of operating cycle.

Inventory Turnover

Inventory turnover is calculated by dividing cost of goods sold by inventory. This

measures how quickly a company can generate sales from its inventory. A higher inventory
turnover will show that sales were strong for the period as a low inventory turnover will show
excess inventory and a reduction in operating efficiency. A higher turnover tends to be common
in the food and beverage industry due to high sales and the need for inventory to be
replenished.

Inventory Turnover
Year Starbucks Dunkin
Donuts
2011 6.56 4.28
2012 5.27 4.56
2013 5.43 4.84
2014 6.23 4.32
2015 6.50 3.94

Inventory Turnover
7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Accounts Receivable Turnover

Accounts receivable turnover measures the companys ability to collect its outstanding
accounts receivables within the companys fiscal year. This is computed by dividing net sales by
the companys accounts receivables. A higher accounts receivable turnover is desired because it
indicates how quickly and efficiently a company can issue credit to its customers and can collect
payment from those outstanding credits. This is an important measure of value because
accounts receivable is like an interest-free loan, the longer it takes the company to get paid, the
more harm it causes to the company. The quicker your customers pays off the credit, the more
value the company has.
 Accounts Receivable
Turnover
Year Starbucks Dunkin
Donuts
2011 33.95 4.74
2012 30.49 5.07
2013 28.44 5.18
2014 27.59 5.01
2015 28.39 4.80

Accounts Receivable Turnover

40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Asset Turnover

The asset turnover ratio is a ratio that shows how efficient a company uses its assets to
generate sales. It does this by measuring a companys ability to produce sales from its assets, by
dividing net sales with average total assets. A higher asset turnover ratio means the company is
creating more revenues per dollar of assets.

Asset Turnover
Year Starbucks Dunkin
Donuts
2011 1.70 0.03
2012 1.71 0.04
2013 1.51 0.04
 2014 1.48 0.04
2015 1.65 0.05

Asset Turnover
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Property, Plant, and Equipment Turnover

The property, plant, and equipment turnover ratio can also be viewed as the fixed-asset
turnover ratio. This ratio measures how capable a company can produce net sales from fixed-
asset investments. The ratio is focused on reflecting how efficiently a company has used these
substantial assets to generate revenue for the firm. This ratio is calculated by dividing sales by
the average property, plant, and equipment. While a higher ratio is indicative of greater
efficiency in managing fixed asset investments while a low ratio specifies the lack of managing
their property, plant and equipment assets.

PPE Turnover
Year Starbucks Dunkin
Donuts
2011 1.94 2.44
2012 2.04 2.87
2013 2.03 4.26
2014 2.01 3.89
2015 2.10 3.84
 PPE Turnover
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Length of Operating Cycle

The operating cycle represents the period of time required for a company to turn cash
into goods, sell the goods, and receive cash from the customers in exchange for the goods . The
operating cycle is found by adding together the number of days is takes to collect accounts
receivables, the number of days it takes inventory to sell and the number of days it takes to pay
off accounts payable. We found the number of days of collection by dividing 365 days by the
accounts receivable turnover which represents how long it takes for the company to collect
their accounts receivables. We found the number of days of inventory by dividing 365 days by
inventory turnover to tell us how many days it takes the company to sell of their inventory. We
found the number of days payable by dividing 365 by accounts payable turnover which tells us
how long it will take the company to pay off their accounts payable. A company usually desires
a lower number because it indicates that capital is tied up in the business cycle for a short
amount of time.

Length of Op. Cycle

Year Starbucks Dunkin
Donuts
2011 96.73 162.27
2012 110.72 152.05
2013 105.55 145.96
2014 99.11 157.31
2015 97.58 168.71
 Length of Operating Cycle
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Conclusion

Starbucks has significantly outperformed Dunkin Donuts in all of the ratios in this group
except for one. According to our graph, over the past three years Starbucks inventory turnover
has been increasing while Dunkin Donuts has been decreasing. With this in mind, Starbucks
inventory turnover is greater than Dunkin Donuts because they have greater success with
selling their brand and turning over their inventory. For accounts receivable turnover, Starbucks
is significantly higher than Dunkin Donuts that automatically tells us that Starbucks manages
their credit and collects payment from their customers more efficiently than Dunkin Donuts.
Starbucks asset turnover in 2015 is 1.65 while Dunkin Donuts is .05 expressing that Starbuck is
better at using their assets to generate sales. Lastly, Starbucks operating cycle is shorter than
Dunkin Donuts tell us that it takes less time for Starbucks to turn cash into good and then sell
those goods than it takes Dunkin Donuts.
While Starbucks out performs Dunking Donuts in all of the ratios referenced above, they
fall behind in the PPE turnover. Having a lower PPE turnover states that Starbucks isnt as
efficient in using their fixed assets in creating revenue than Dunkin Donuts is. Overall, Starbucks
has more operating efficiency than their competitor because of the wide margin they have
created in each ratio.

Liquidity Ratios

Liquidity Ratios determine the ability of the company to pay off its short-term debt
obligations within the operating cycle. In other words, liquidity refers to the process of
converting noncash assets into cash. Having a high level of liquidity is important for a company.
A company needs to focus on converting noncash assets into cash quickly in order to pay off its
current liabilities. During our analysis we looked at two of the most important ratios: the
current ratio and quick ratio. In order to calculate these ratios, you will need to refer to the
balance sheet to find the variables used in the equations. For the current ratio you will use
current assets and current liabilities; the quick ratio will use the same variables but in a more
restricted way.

Current Ratio

A companys current ratio is calculated by dividing current assets by current liabilities. A

ratio larger than one shows the ability of the company to pay back its current liabilities with the
cash produced from operations. However, having a ratio that is significantly greater than 1 is
not necessarily a good thing. A large ratio can indicate that a company has assets sitting idle.
Idle assets are assets that are not being put to productive use. Therefore, idle assets are usually
undesirable. A company could face a short-term liquidity problem when some of its assets are
not easy to liquidate. If a companys ratio is less than one, it would be a good indicator that the
company might not have the means to convert noncash assets to cover the current liability
obligations.

Current Ratio
Year Starbucks Dunkin
Donuts
2011 1.83 1.28
2012 1.90 1.19
2013 1.02 1.34
2014 1.37 1.25
2015 1.19 1.33

Current Ratio
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Quick Ratio

The quick ratio measures the ability of a company to meet short-term liability
obligations by using the most liquid assets of the company. To find the quick ratio, divide the
quick assets by current liabilities. Quick assets include: cash, short-term securities/investments
and accounts receivable. It excludes inventories because they are considered the least liquid
asset. Eliminating inventories makes the quick ratio a more stringent test of liquidity. A
company should strive to have a high quick ratio in order to show they are financially stable in
the short-term aspect.

Quick Ratio
Year Starbucks Dunkin
Donuts
2011 1.17 0.91
2012 1.14 0.81
2013 0.71 0.89
2014 0.81 0.75
2015 0.64 0.76

Quick Ratio
1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00
2011 2012 2013 2014 2015

Starbucks Dunkin Donuts

Conclusion

Starbucks and Dunkin Donuts are both sufficiently liquid have enough current assets to
cover their current liabilities. To further understand the ratios a norm must be established for
each. For example, the quick ratio has a standard deviation of about 0.10. In 2013, the quick
ratio decreased by 0.43. Upon further review of the financials we found a 2.8 million dollar
accrual for litigation. The litigation effect on the current ratio presented itself as a 0.88
decrease on a ratio has a standard deviation of about 0.15. Starbucks really proves itself to be a
very healthy company by being able to maintain a current ratio over 1 during this financial set
back. A current ratio of 1 or greater means the company has at least 1 current asset to 1
current liability.

Solvency Ratios
Solvency ratios will show us a companys ability to meet its long-term debts. The two
solvency ratios used to further analyze Starbucks and Dunkin Donuts are Debt to Equity and
Times Interest Earned. These will break down the companies to finance operations and growth
by using different sources of funds. Debt is crucial to analyze to see how much of a firms assets
are being financed with borrowings. Equity is also important because it is what maximizes
shareholders wealth.

Debt to Equity

The debt to equity ratio identifies the liquidity of a firm by dividing total liabilities by
stockholders equity. The debt to equity ratio indicates how much debt from creditors a
company is using to finance its assets compared to the amount represented in shareholders
equity. A company emphasizing financing from creditors will have a higher Debt to Equity ratio
and a company using more debt from shareholders will have a lower Debt to Equity ratio.

Debt to Equity
Year Starbucks Dunkin
Donuts
2011 1.94 3.22
2012 2.04 8.01
2013 2.03 6.77
2014 2.01 7.47
2015 2.10 -15.48
 Debt to Equity
10.00

5.00

0.00
2011 2012 2013 2014 2015
-5.00

-10.00

-15.00

-20.00

Starbucks Dunkin Donuts

Times Interest Earned

Times interest earned will also show us the companys ability to meet its debt
obligations. Times interest earned is calculated by dividing earnings before interest and taxes
by the total interest expense. A ratio less than one will indicate that the company may have
trouble paying interest on borrowings. A ratio higher than one is considered to have an
adequate amount of income to pay for its borrowings. Although it may seem crucial to have a
higher number, a number too high can mean the company is using a majority of its earnings to
pay for debt rather than investing further into other projects.

Time Interest Earned

Year Starbucks Dunkin
Donuts
2011 51.91 2.95
2012 61.08 4.23
2013 -11.58 4.80
2014 48.07 5.98
2015 51.08 4.30
 Time Interest Earned
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
-10.00 2011 2012 2013 2014 2015

-20.00

Starbucks Dunkin Donuts

Conclusion

The two main solvency ratios examined for Starbucks and Dunkin Donuts better help
evaluate their ability to finance operations and growth by using different sources of funds, and
which sources of funds they are choosing to use, either from creditors or shareholders.
Starbucks generally has a lower Debt-to-Equity ratio than Dunkin Donuts illustrating that they
are relying more heavily on equity financing. In comparison to each other, we can assume
Starbucks is financing more through shareholders and Dunkin Donuts is financing more through
creditors. Starbucks is well ahead of Dunkin Donuts when it comes to paying interest earned
several times over. Their higher times interest earned ratio can be credited to keeping their
interest owed on short and long term debt at a minimum. Despite a fall in 2013, Starbucks
times interest earned ratio is an indicator that they are in good shape compared to industry
competitors Dunkin Donuts.

Overall Analysis

After calculating all of the ratios we noticed a common trend in our data; the ratios
began to dramatically change in 2013 compared to the others. As we began investigating
further, we found that Starbucks faced litigation charges from an old dispute. We feel the ratios
were inconsistent due to the charges. However, we do feel Starbucks would be a good company
to invest in for several reasons.
Starbucks was able to produce return ratios that were greater than Dunkin Donuts. This
meant the overall performance was better than their competitor, well above satisfactory levels
and profitable. In particular, the ROE showed they were able to put each shareholder dollar to
good use, which is particularly attractive to a potential investor. Although Dunkin Donuts
profitability ratios outnumbered Starbucks, we dont feel this should be a concern. The
difference between the two companies was due to the extreme difference of expenses that
each company incurs.
 Starbucks was able to outperform Dunkin donuts in all of the turnover ratios besides
their PPE turnover. Therefore, Starbucks is more efficient at branding and turning over their
inventory to generate cash, but they might not use their assets to fullest potential. Both
companies proved to be highly liquid in our liquidity ratio calculations. When it comes to
liquidity ratios a company should strive to be greater than one and both companies were
successful. Therefore, the liquidity ratios werent the main deciding factor as to why we would
want to invest, but they were a positive influence.
After comparing the two companies solvency ratios we drew the conclusion that
Starbucks had a tendency to rely more on equity financing than creditors. The solvency ratios
were extremely attractive because equity is important in maximizing shareholders wealth.
Although the company faced adversity in 2013, we feel it would be a wise decision to invest
based off the way Starbucks reacted. Starbucks did not let the litigation set them back. Their
ratios returned to typical figures.