Financial ratios are mathematical metrics used to analyze the performance of a company based on its financial statements. Financial ratios thus assist investors, creditors and management to comprehend the performance of the company and the areas that need to be improved. Ratios are therefore indispensable since they are used to compare the performance of difference companies based on the industry benchmark (Liang, Lu, Tsai, & Shih, 2016). These include, liquidity ratios, solvency ratios and profitability ratios among others. Thus, this paper aims to decipher financial performance of Starbucks with the help of financial ratios. This will be achieved through computations with the aid of a spread sheet program.

Liquidity ratios

These ratios analyze the ability of a company to meet its short term financial obligation as they fall due. In sense, liquidity ratios indicate cash level of the company and its potential to convert to liquidate other current assets. This section will demystify two liquidity ratios including current ratio and times interest earned ratio. The below spread sheet shows the overall computation of the aforementioned ratios.

LIQUIDITY RATIOS

CURRENT RATIO 2015 Ratio 2014 Ratio

CURRENT ASSETS $ 4,352.70 $ 4,168.70

CURRENT LIABILITIES $ 3,653.50 1.19 $ 3,038.70 1.37

TIMES INTEREST EARNED RATIO

EBIT $ 3,601.00 $ 3,081.10

INTEREST EXPENSE $ 70.50 51 $ 64.10 48

In view of the above ratios, Starbucks current ratio for the period 2015 and 2014 is 1.19 and 1.37 respectively. This means that there are twice are many current assets than current liabilities which is an indication that the company can comfortably pay off its short term financial obligations as they fall due (Schmidgall, &DeFranco, 2016). On the other hand, times interest ratio measures the number of times a company can pay off its interest expense from it income before tax. In this scenario, times interest ratio is 51 times and 48 times in the year 2015 and 2014 respectively which means that Starbucks is able to pay its interest using its income before tax.

Solvency ratios

It is also known as financial leverage ratio and measures the ability of a company to sustain its operations by comparing debt levels, equity and assets. Thus, solvency ratios measures the potential of the company to pay its long term financial obligations to creditors and other long term lenders. A better ratio shows that a company has a positive standing is more credit worthy. Among the ratios discussed in this case entails debt to equity ratio and debt ratio.

SOLVENCY RATIOS

DEBT TO EQUITY 2015 Ratio 2014 Ratio

TOTAL LIABILITIES $ 6,626.30 $ 5,479.20

TOTAL EQUITY $ 5,819.80 1.14 $ 5,273.70 1.04

DEBT RATIO

TOTAL LIABILITIES $ 6,626.30 $ 5,479.20

TOTAL ASSETS $ 12,446.10 1 $ 10,752.90 1

A debt ratio of 1 means that there are equal assets as much as liabilities and therefore a company need to sell its assets to pay its liabilities. Therefore, a lower debt ratio is highly prefer to a higher one (Schmidgall, &DeFranco, 2016). On the other hand, debt to equity ratio measures the total amount of assets funded by owner’s equity as opposed to debts.

Profitability ratios

It indicates the ability of the company to generate profits from its operations. Profit margin and return on assets measures the profitability of firm.

PROFITABILITY RATIOS

PROFIT MARGIN 2015 Ratio 2014 Ratio

NET INCOME $ 2,757.40 $ 2,068.10

NET SALES $ 19,162.70 0.14 $ 16,447.80 0.13

RETURN ON ASSETS

NET INCOME $ 2,757.40 $ 2,068.10

TOTAL ASSETS $ 12,446.10 0 $ 10,752.90 0

The profitability of Starbuck is average since its profit margin ratio is less than 1 which is the standard industry benchmark. However, there is no return on assets which means that the company need to invest more in fixed assets to achieve future profitability.

References

Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572.

Schmidgall, R. S., &DeFranco, A. (2016). How to best use financial ratios in benchmarking and decision making in clubs: Review of the decade 2003–2012. International Journal of Hospitality & Tourism Administration, 17(2), 179-197.