Running Head: STARBUCKS FINANCIAL ANALYSIS 1

Starbucks Financial Analysis

Shelley Dyrda

Southern New Hampshire University

Starbucks Financial Analysis 2

Financial Analysis: Starbucks Corporation

The purpose of the following study is to analyze the competition and develop

benchmarks for the purpose of improving profitability and expanding operations for the

marginally successful, Midwest-based Coffee Connection. The most similar competitor to the

Coffee Connection is the Starbucks Corporation, an American coffee company and coffeehouse

chain that is based in Seattle, Washington and includes more than 25,000 shops in 75 countries

(Hoovers, n.d.). Therefore, and in order to perform the analysis, there will be multiple tools used

to analyze the performance of the Starbucks Corporation as well as research and observations

pertaining to the success and challenges faced by Starbucks. The overall goal is to provide

information to the Coffee Connection business leaders by creating more in-depth financial

accounting statements and all the involved components in order to make better business

decisions related to performance and financial health within the coffee shop industry. All in all,

the result will aid in creating effective management and informed management decisions.

In order to obtain this goal and reach the desired results, the following study will first

focus on the analysis of the Starbucks Corporation’s financial condition by interpreting financial

information used for informing business decisions. This includes any horizontal and vertical

changes in Starbucks’ accounts receivables balances (via the balance sheet and income statement

accounts), fixed assets, intangible assets, depreciation, amortization, and short and long-term

debt for a two-year period (2014 – 2016). Additionally, the methods for accounting for

receivables and evaluating uncollectible receivables and how they affect they ways in which

information is communicated; the methods for fixed asset and intangible asset acquisitions as

well as depreciation and amortization (and asset categorization) and how they affect the balance

sheet, income statement, and statement of cash flows; and the debt financing that encompasses
Starbucks Financial Analysis 3

current and long-term liabilities and the issuance of bonds. Secondly, this study will analyze and

discuss the financial performance of Starbucks using financial ratios. This encompasses liquidity,

solvency, and profitability ratios and what each reveal about Starbucks, including the description

of benchmarks, standard measurements, and all types of analyses used once the ratio amounts are

known. Thirdly, this study will provide an overview of the importance of accounting regulations

and reporting requirements in the preparation of financial reports and consideration of the

governmental and GAAP reporting policies for what is mandated that is included in Starbucks’

financial statement. This includes required control procedures and reporting consisting of

segment information, estimates and assumptions required, investments and fair value required,

and leases required and the information disclosed about Starbucks’ regarding all of the above.

All in all, the information revealed should provide the Coffee Connection with a learning

experience about the overall financial health of a competing business as well as additional

suggestions for financial improvements.

Vertical and Horizontal Analysis: Starbucks Corporation

Overall, Starbucks’ net revenues increased from 2014 to 2015 and from 2015 to 20161.

Also, there was an increase between 2014 - 2016 in terms of cost of goods sold, which typically

encompasses the cost of materials to produce product, occupancy costs, and involved labor

costs2. Both of these factors are increasing which indicate that the overall performance of the

company is most likely trending positively and sales objectives are being achieved. It also

indicates that Starbucks is growing as a company because when a business is growing, the cost

of goods sold is a normal occurrence (Adkins, n.d.). Although, it could be argued that Starbucks

should strive for a decrease in the cost of goods sold since it will result “in a larger gross profit

1
See Appendix A – Net Revenue (row 8)
2
See Appendix A – Cost of sales (row 9)
Starbucks Financial Analysis 4

and an increase in net operating profit” (para. 5). Moreover, in performing a horizontal analysis,

which can indicate changes over time in financial line items and the direction a business is

taking, it reveals that Starbucks had a slight increase (6.93%) in accounts receivable from 2015

to 20163 (Harrison, Baylor, Horngren, & Thomas, 2014). Additionally, and in conducting a

vertical analysis, which reveals a relationship of a financial statement to its base and allows for

studies in key financial statistics, it highlights that fact that accounts receivable made up 5.79%

and 5.37% of the total assets in 2015 and 20164 (p. 749 & 780). While accounts receivables may

account for a lower percent in terms of all assets, it seems to have been consistent in the past two

years—indicating no unusual activity in this area. While this may be the case, there is a potential

possibility for a trending increase in the near future, as indicated by the 2015 to 2016 figures.

One can also conclude a possible relationship between accounts receivable and net revenues (p.

690-691). As net revenue rose, accounts receivable did as well, indicating a correlation. This is

when “trend line analysis” is useful – for comparing bad debts to sales over a period of time

(“Accounting Receivable Analysis,” n.d.). It can be argued that if “there is a strong recurring

trend in this percentage, management may want to take action” (para. 4). If Starbucks does

continue to trend upward in terms of bad debt, “management may want to authorize tighter credit

terms to customers” (para. 4). Accordingly, Starbucks’ “allowance for doubtful accounts is

calculated based on historical experience, customer credit risk and application of the specific

identification method” (“Starbucks Fiscal,” p.54). And “As of October 2, 2016 and September

27, 2015, Starbucks’ allowance for doubtful accounts was $9.4 million and $10.8 million” (p.

3
See Appendix B – Accounts Receivable (row 7)
4
See Appendix B – Accounts Receivable (row 7)
Starbucks Financial Analysis 5

54). This financial information is conveyed in the Starbucks Fiscal 2016 Annual Report where

the allowance for doubtful accounts is divided by the gross accounts receivable5.

In examining a horizontal analysis of the changes in Starbucks’ fixed assets, intangible

assets, depreciation, and amortization over time (2015 – 2016), the results reveal an increase of

10.90% in fixed assets (property, plant, and equipment, etc.), an increase of 9.15% in goodwill,

increase of and an increase in depreciation and amortization of 10.31% in 2016, 24.71% in 2015,

and a slight decrease of -0.79% in other intangible assets (trade names, trademarks, patents,

etc.)6. In examining the same as above in terms of a vertical analysis, the fixed assets make up a

total of about 32% of total assets and appear to be consistent overtime7. Within the same time

period, other intangible assets make up 4.19% and 3.60%, goodwill accounts for 12.69% and

12%, and depreciation and amortization account for 7.52% and 7.19%8. All of the factors and

figures above have remained within the same range within the past few years and therefore do

not reveal unusual activity that is troubling or worth investigating. There may be an increase in

fixed assets, but as the company may be growing, more equipment, furniture, improvements, etc.

may be needed. These fixed assets may make up a large portion of the total assets, but they are

vital to the business operations and cannot always be easily liquidated (“Property, Plant,” n.d.).

Land, on the other hand, is not amortized as its value can increase—it remains the same over

time on the balance sheet (para. 3). According to the Starbucks Fiscal 2016 Annual Report,

everything under the property, plant, and equipment, etc. category have carrying amounts as the

balance sheet date of long-lived, depreciable assets or physical assets or tangible assets

(“Starbucks Fiscal,” p. 54 & 71). All of the assets under this category demonstrate increases on
5
See Appendix D Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Financial-Reporting-Quality/Bad-
Debts#Allowance-for-Doubtful-Accounts-Receivable
6
See Appendix B – (row 13, 16, 17), Appendix C
7
See Appendix B – (row 13)
8
See Appendix B (row 13, 16, 17) and Appendix C
Starbucks Financial Analysis 6

the balance sheet. “Property, plant and equipment assets are grouped at the lowest level for

which identifiable cash flows are largely independent of the cash flows of other assets and

liabilities” (p.54). The cash flows does reveal an increase in operating costs and depreciation and

amortization from 2014 – 20169. While depreciated expenses related to production and

distribution facilities are reflected on the statement of earnings (p. 54). As for intangible assets

and goodwill, all increased in 2015 to 2016 and carry amounts as part of the balance sheet data,

net of accumulated amortization and impairment and/or impairment charges.

In examining a horizontal analysis of changes in Starbucks’ short-term debt, which

consists of the current liabilities, and long-term debt, it reveals a short-term debt increase of

24.64% from 2015 – 2016 and a long-term increase of 36.41%10. As for a vertical analysis, the

short-term debt accounted for 31.73% of the total liabilities in 2016, which is also an increase

from the previous year. The long-term debt, which accounted 22.35% of the total liabilities in

2016, also increased per the previous year11. Short-term debt can be an important factor in

determining the company’s performance since the debt is larger than the cash and cash

equivalent account (“Short Term Debt,” n.d.). This may be an indicator in terms of a cash

shortage and therefore there are a lack of funds to pay off the debt (para. 2). Since there are many

increases of debt, the analysis can serve as a possible alert for a course of action to be taken.

As for financing activities, the statement of cash flows show that the proceeds of long-

term debt have increased from 2014 to 2016. Additionally, the total accrued liabilities have

increased from 2015 to 2016. This could possibly mean that since the balance is high and if each

liability remains outstanding for a long time, this can create more cash flow. Starbucks also

utilizes short-term and long-term debt financing and this includes interest rate hedges to manage
9
Starbucks Fiscal 2016 Annual Report p. 48
10
See Appendix B (row 36 & 37)
11
See 10
Starbucks Financial Analysis 7

all interest expense related to the existing fixed rate debt (“Starbucks Fiscal,” p. 41). The

interests have shown increases as well. A component of long-term debt, including the interest

rates is the issuance of bonds (p. 71). According to the Starbucks Fiscal 2016 Annual Report,

Starbucks has issued bonds in 2016 and will continue to do until 2045 (that mostly encompass an

increasing interest rate and long-debt maturities) (p. 74). When a company typically issues a

bond, they will receive cash and report it in the cash inflow for that year, record it as a

corresponding liability, and will pay interest until the bond is repaid (Cromwell, n.d. & “Issuance

of Bonds,” n.d.). Since the interest rates and market are the same, Starbucks bonds will most

likely be sold at face value (“Issuance of Bonds,” para. 6).

Key Financial Statement Ratios and the Starbucks Corporation

Financial ratios are used to express a relationship between financial statement items,

provide historical data that management, at a company such as Starbucks, can use to identify

strengths and weaknesses, and to estimate a company’s future financial performance (Basu, n.d.).

There are three broad categories of financial ratios: liquidity, solvency, and profitability.

Liquidity “measures how quickly an item can be converted to cash” (Harrison, Baylor, Horngren,

& Thomas, 2014). It is typically managers, stockholders, and creditors who care about the

liquidity of a company’s assets (p. 271). Assets are mainly found on the balance sheet in the

order of a liability (p. 431). And long-term investments are typically less liquid than short-term

due to the fact that a company neither intends “nor has the ability to liquidate them within the

current year or operating cycle” (p. 431).

A liquidity ratio that is common is the current ratio, which is the ratio of current assets to

current liabilities (Basu, para. 2). The current ratio is calculated by dividing current assets by the

total current liabilities. “Acceptable current ratios vary from industry to industry and are
Starbucks Financial Analysis 8

generally between 1.5% and 3% for healthy businesses. If a company's current ratio is in this

range, then it generally indicates good short-term financial strength” (“Current Ratio,” n.d.). If

the value of the current ratio is considerably high, then it could indicate that a business may not

be using its current assets efficiently—it serves as a warning to problems in managing working

capital (para. 4). On the other hand, and when the ratio is low (current liabilities exceed current

assets), it could indicate that a company may be having difficulties meeting its short-term

obligations/current liabilities (para. 5). For example, and in terms of Starbucks, this could reveal

their ability to pay off its short-term bills. A high ratio would indicate a “safety,” which increases

their flexibility because some of the inventory and balances on the receivables may not be able to

be converted easily to cash (Baus, para. 2). In 2015 and 2016, Starbucks’ current ratios were

about 1.09 and 1.0312. Both years seem to have ended with similar results and were close to the

industry average of 1.1413. The current ratio is slightly larger than 1 and Starbucks should

continue to strive for one that is higher to provide additional “padding” against unforeseeable

events/incidental expenses that may arise. The ratio is within the “healthy” range and therefore is

an indicator of good short-term financial strength. Starbucks is most likely using their current

assets efficiently.

The quick ratio or acid test ratio is a liquidity ratio that reveals how well a company can

quickly convert its assets into cash to pay off current liabilities (Harrison, Baylor, Horngren, &

Thomas, p. 271). “The quick ratio is used to identify problems that a company may have paying

off its current liabilities”—when a company has assets but cannot convert any of them to cash to

pay debts (Arbuckle, n.d.). The quick ratios for Starbucks in 2015 and 2016 were .64 and .67—

12
See Appendix E
13
2015 industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Long-Term-Trends/Current-
Ratio#Comparison-to-Industry
Starbucks Financial Analysis 9

indicating a ratio below 114. However, a quick ratio of 1 or above is considered to be more than

satisfactory (para. 4). When a ratio is at 1, it most likely means the quick assets are equal to the

current liabilities (para. 4). Therefore, a company will not have trouble paying its short-term

debts (para. 4). It is probably best for Starbucks to achieve a higher ratio (above 1). Additionally,

the industry average falls at about .5515. This fact indicates that there are companies in the same

industry that may have twice as much in current liabilities as quick assets and have trouble

paying current liabilities (para. 4).

Accordingly, asset management ratios are important to analyzing how effectively a

business is managing its assets to produce necessary sales (Peavler, 2017). “Asset management

ratios are also called turnover ratios or efficiency ratios” (para. 1). The inventory turnover ratio is

one of the most important asset management ratios (para. 3). This number will reveal the number

of times inventory is sold and restocked each year (para. 4). For Starbucks, the inventory turned

over about 6 times in 2015 and 201616, which is lower than the industry average of roughly 817.

This could indicate that Starbucks may have a low turnover rate two years in a row and therefore

may not be selling products efficiently. This could be the result of expired or perished products

or purchasing too much inventory for demand (Kokemuller, n.d.).

The receivable turnover is a ratio that provides a business owner the state of the accounts

receivable (Peavler, para. 13). In other words, how many times each year a business cleans up or

collects their accounts receivable (para. 13). “The higher the receivables turnover, the better as it

means you are collecting your credit accounts on a timely basis. If your receivables turnover is

low, you need to take a look at your credit and collection policy and be sure they are on target”
14
See Appendix E
15
Industry MRQ - Source: http://csimarket.com/stocks/SBUX-Financial-Strength-Comparisons.html
16
See Appendix E
17
2015 Industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-
Activity#Inventory-Turnover
Starbucks Financial Analysis 10

(para. 14). For 2015 and 2016, the accounts receivable ratios for Starbucks were 26.65 and

27.7318, which are higher than the industry average of 22.4219 therefore pointing to a higher

receivable turnover. Therefore, Starbucks is collecting their credit accounts on a timely basis.

Furthermore, solvency is the ability for a company like Starbucks to meet long-term

financial obligations and assesses a company’s ability to continue into the future (Basu, para 2).

Solvency also relates to the ability of paying long-term debts and those connected to interest. To

be solvent, the value of the assets must be greater than the sum of its debt. It therefore becomes a

measure of financial stability (para. 3). “The debt-to-asset ratio is the ratio of total debt to total

assets” (para. 3). This can be used, for instance, to show how a company like Starbucks has

maybe taken on too much debt, and “used to measure an enterprise’s ability to meet its debt and

other obligations…whether a company’s cash flow is sufficient to meet its short-term and long-

term liabilities” (para. 5). Of course, the lower the solvency ratio, the greater a company will

default on their debt (para. 5).

Debts to assets, which is a solvency ratio, measures the percentage of a company’s assets

that have been financed with debt (Investopedia staff, 2016). “A higher ratio indicates a greater

degree of leverage, and consequently, financial risk” (para. 7). Respectively, the debt to asset

ratios for Starbucks in 2015 and 2016 were .19 and .2220. Accordingly, the industry average is

approximately .5321 and therefore, Starbucks’ debt to asset ratio comes in on the high side in

comparison to other establishments within the same industry. Being considerably high within the

industry, this could possibly mean greater risk that cash flows from operations will be

insufficient to cover interest and principle payments. The debt to assets ratio has also increased
18
See Appendix E
19
2015 Industry comparsion - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-
Activity#Receivables-Turnover
20
See Appendix E
21
Industry average debt to assets - Source: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=sbux
Starbucks Financial Analysis 11

slightly from 2015 to 2016 and Starbucks should watch this as only time will tell if the situation

will deteriorate in the future.

The debt to equity ratio indicates the degree of financial leverage that encompasses both

short and long term debt (para. 6). A rising debt to equity ratio also indicates higher interest

expenses and it may affect credit rating, which will make it more expensive to raise more than

debt (para. 6). Altogether, this a measure that will indicate how much debt Starbucks uses to run

their business. The debt to equity ratios for Starbucks in 2015 and 2016 were .40 and .6122 and

the and the industry average is .1723. Starbucks does have a higher debt to equity ratio in

comparison to the reported average, and having a high ratio in this area does not mean a

company has too much debt (Lewis, n.d.). “Instead, it simply means that it relies more heavily on

the debt than do other companies with a lower debt ratio” (para. 4). All in all, the debt to equity

ratio did increase slightly, but there is “no hard and fast rule about what is considered a good

debt ratio vs. bad debt ratio, investors should always seek professional consultation whenever

possible before making investment decisions (para. 5). However, the debt to equity ratio did

increase slightly from 2015 to 2016 and it is probably advised that investors keep track over a

period of time.

Times interest earned ratio is another ratio which measures the long-term solvency of a

business (Peavler, 2016). “It is commonly used to ascertain whether a prospective borrower can

afford to take on any additional debt” (para. 1). The ratio is calculated by dividing EBIT by the

interest expense. The results indicate how many times a company can pay the interest with

before tax income. The times interest earned ratios for Starbucks in 2015 and 2016 were 56.36

and 52.6424. There was a decrease from 2015 to 2016, but it was still well above the industry
22
See Appendix E
23
Industry average debt to equity - Source: http://csimarket.com/stocks/singleFinancialStrength.php?code=SBUX&Lte&hist=1
24
See Appendix E
Starbucks Financial Analysis 12

average of 37.9625. According to Peavler, this would mean that the company’s income is higher--

52 – 56 times higher than its yearly interest expense, and the higher the number, the better

chance a firm is able to pay the interest expense or debt service (para. 6 & 7). However, a high

ratio can also mean that a company such as Starbucks has an “undesirable” lack of debt or is

paying too much of the debt with earnings, which should ultimately be used for other items

(para. 8).

Profitability ratios are used to assess whether a business has the ability to generate

earnings compared to its earnings or other costs during a period time (“Profitability Ratios,”

n.d.). In other words, this type of ratio measures the efficiency with which a company like

Starbucks can turn business activity into a profit. Profitability ratios are the most popular metrics

used in financial analysis” (para. 1). Net profit margin is a probability ratio which consists of net

profits to revenues and shows how much of “each dollar collected by a company as revenue

translates into profits” (“Net profit margin,” n.d.). The ratio varies from company to company

and certain ranges can be expected in specific industries (para. 2). Also, low profit margins do

not always equate to low profits (para. 2). “Net profit margin is one of the most important

indicators of a business’s financial health. It can give a more accurate view of how profitable a

business is than its cash flow…a business can assess whether or not current practices are

working” (para. 6). The net profit margin ratios for Starbucks in 2015 and 2016 were 14.39%

and 13%26. This reveals a slight decrease from 2015 to 2016, and since the trend is down,

product costs and/or operating expenses might be rising faster than sales. All in all, the ratios

were higher than the industry average of 9.1%27.

25
Industry average interest coverage Q4 2016 - Source: http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=914
26
See Appendix E
27
Industry Average Industry Statistics - Sources: http://csimarket.com/stocks/singleProfitabilityRatios.php?code=SBUX&net
Starbucks Financial Analysis 13

The gross profit on sales ratio is total revenue minus the cost of goods sold, which

encompasses the cost associated with making and selling goods/products and the costs associated

with providing services. “Coffee shops tend to be labor-intensive operations, with the cost of

inventory representing a relatively small portion of revenue” (Butner, n.d.). Gross profit assesses

a company’s efficiency at using labor and supplies (“Gross profit,” n.d.). This ratio can be useful

for comparing a company’s production efficiency over time (para. 5). Gross profit margins vary

greatly by industry and food and beverage stores tend to have “razor-thin” profit margins (para.

8). The gross profit on sales ratios for Starbucks in 2015 and 2016 were 59% and 60%28. There

was a slight increase of 1% from 2015 to 2016 and therefore all seems to remain steady in this

area. The industry average is 57.99%29 and Starbucks comes in slightly above. The ratio does not

seem to be declining for Starbucks and could therefore indicate that the company has the ability

to sell goods at the intended selling price. According to Butner and since Starbucks did not have

a ratio that exceed 85% in either year, they were not throwing away too much coffee or food,

which does tend to increase food costs without increasing their revenue, and the pricing is

effective—not too low compared to the cost of inventory (para. 6).

The return on assets ratio reveals a company’s earnings in relation to its overall

resources. It is calculated as net income divided by total assets. The higher the ratio, the better

the company is managed (‘Return on Assets,” n.d.). It is an effective measure in times of

assessing a company within the industry (para. 3). The return on assets ratios for Starbucks in

2015 and 2016 were 22% and 20%30, indicating a 2% decrease from 2015 to 2016. The industry

28
See Appendix E
29
Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-
services-72/food-services-and-drinking-
30
See Appendix E
Starbucks Financial Analysis 14

average is 35.03%31 and since Starbucks has a lower average return on assets ratio than the

industry average, it can mean that assets are not being utilized effectively (para. 5).

Another profitability ratio is return on equity, which showcases how much after-tax profit

a company has earned in comparison to the shareholder equity. If there is a high return on equity,

it may mean that a business is most likely generating cash internally (Kennon, 2016). The higher

the return on equity compared to its industry, the better it is not positioned with risk (para. 2).

The return on equity ratios for Starbucks in 2015 and 2016 were 47% and 48%—a 1% increase

from 2015 to 201632. The ratios were well above the reported industry average of 25.23%33. This

may indicate that Starbucks is not achieved with extreme risk (para. 2).

Market value ratios evaluate stock trends and the economic status of a company within its

industry—whether the stock is overvalued, undervalued, or priced fairly (Peavler, 2016). The

earnings per share ratio measures a company’s net income per share of outstanding stock, which

demonstrates profitability to investors (para. 9). “Earnings per Share is one of the most important

measures of the current share price of a firm, and is used by investors to determine the company

overall profitability; especially when it is compared to the EPS of similar companies”

(“Starbucks profit margin,” n.d.). The EPS ratios for Starbucks in 2015 and 2016 were $1.94 and

$1.8634. “According to company disclosure Starbucks Corporation has Earnings Per Share of

about 1.9 times. This is much higher than that of the consumer sector, and significantly higher

than that of the restaurant industry, The Earnings Per Share for all stocks is over 1000% lower

than the firm” (para. 4). The price-earnings ratio (P/E) is the current price of a share of stock

divided by the company’s earnings (Peavler, para. 10). “Simply put, the p/e ratio is the price an
31
Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-
services-72/food-services-and-drinking-
32
See Appendix E
33
Industry Average - Source: http://csimarket.com/stocks/SBUX-Return-on-Equity-ROE.html
34
See Appendix E
Starbucks Financial Analysis 15

investor is paying for $1 of a company's earnings or profit” (Kennon, 2017). The price/earnings

ratio (P/E) for Starbucks in 2016 was 28.7535. The current reported industry average is 26.236,

which is slightly less than Starbucks’s 2016 P/E. This may indicate that Starbucks may be a little

more expensive on a relative basis in comparison to the industry, and investors may perceive

good growth potential.

The Rules of Financial Reporting and the Starbucks Corporation

The Financial Accounting Standards Board's accepted accounting principles, or GAAP,

set the accounting standards a company, such as Starbucks, must follow (Sullivan, n.d.). These

principles are put forth to prevent fraud and clerical errors that “may compromise the accuracy of

a company's financial statements” (para. 1). Internal controls can also reduce the loss and protect

a company’s assets and identify underperforming employees in accordance with an

organization’s policies and procedures (para. 1 & Center for Audit Quality, 2013). Additionally,

a company’s system of Internal Control Over Financial Reporting (ICFR) consists of controls

that provide assurance regarding reliable financial statements prepared under the GAAP

guidelines (Center for Audit Quality, p. 2). “Internal control systems need to be monitored — a

process that assesses the quality of the system’s performance over time. This is accomplished

through ongoing monitoring activities, separate evaluations or a combination of the two.

Ongoing monitoring occurs in the course of operations. It includes regular management and

supervisory activities, and other actions personnel take in performing their duties” (p. 3).

According to the Starbucks Fiscal 2016 Annual Report, “We maintain disclosure controls

and procedures that are designed to ensure that material information required to be disclosed in

our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended

35
See Appendix E
36
Current industry average - Source: http://financials.morningstar.com/valuation/price-ratio.html?t=SBUX&region=usa&culture=en-US
Starbucks Financial Analysis 16

(the "Exchange Act"), is recorded, processed, summarized and reported within the time periods

specified in the SEC’s rules and forms” (p. 87). The company’s disclosure controls and

procedures also ensure that the information disclosed under the Exchange Act is presented to

management, the principal executive office, and the principal financial officer (p. 87). The

annual report also indicates that management is responsible for establishing and maintaining

internal control over financial reporting and that all is in accordance with the accepted

accounting principles in the United States (p. 87). This includes “maintaining records that in

reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance

that transactions are recorded as necessary for preparation of our financial statements; providing

reasonable assurance that receipts and expenditures are made in accordance with management

authorization; and providing reasonable assurance that unauthorized acquisition, use or

disposition of company assets that could have a material effect on our financial statements would

be prevented or detected on a timely basis” (p. 87). In the guidelines and opinions of Starbucks,

it is reported that the company maintained effective internal control over financial reporting as of

October 2, 2016—based on the Internal Control - Integrated Framework (2013) (p. 87)37.

Besides these guidelines, Starbucks has also adopted a code of ethics (as defined by the SEC),

which covers corporate governance, for the chief executive officer, chief operating officer, chief

financial officer, controller, and other finance leaders38.

Besides internal control procedures, segment information is also required by a publicly-

held entity, such as Starbucks. The main reason behind business segment reporting is to

publically provide the performance of a company to its shareholders (“Business Segment

Reporting,” n.d.). For management, it is used to evaluate each segment’s income, expenses,

37
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
38
This code is publicly available on our website at www.starbucks.com/about-us/company-information/corporate-governance.
Starbucks Financial Analysis 17

assets, and liabilities to assess profitability or risky activity (para. 1). “Segment reporting is the

reporting of the operating segments of a company in the disclosures accompanying its financial

statements…Under GAAP, an operating segment engages in business activities from which it

may earn revenue and incur expenses, has discrete financial information available, and whose

results are regularly reviewed by the entity's chief operating decision maker for performance

assessment and resource allocation decisions” (“What is Segment Reporting,” para. 1 & 2).

According to the Starbucks Fiscal 2016 Annual Report, the organization has three

reportable operating segments—Americas (U.S., Canada, and Latin America), China/Asia

Pacific, EMEA (Europe, Middle East, and Africa), and a Channel Development segment

(including roasted whole bean and ground coffees, premium Tazo teas, Starbucks and Tazo-

branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino,

Starbucks Doubleshot and Starbucks Refreshers beverages) (p. 2). Starbucks also possesses a

non-reportable operating segment, which includes Teavana, Seattle’s Best Coffee and Evolution

Fresh, and Starbucks Reserve Roastery & Tasting Rooms (p. 2). The segment information in the

annual fiscal report includes the results of operations by segment (in millions): net revenues

(company-operated stores, licensed stores, and foodservice and other), operating expenses (cost

of sales including occupancy costs, store operating expenses, other operating expenses,

depreciation and amortization expenses, and general and administrative expenses), and operating

income (including income from equity investees where applicable).

The reporting of estimates and assumptions is also required for an organization in order to

improve accuracy of financial statements (McIntosh, n.d.). The estimate can be based on

historical information, documentation, and/or personal calculations (para. 3). “Investors and

analysts make decisions based on the financial statements. The accountant has an obligation to
Starbucks Financial Analysis 18

create these statements to the best of his/her ability. When the accountant knows that financial

activities occurred, even if the dollar amount is unknown, s/he needs to reflect those activities.

Estimating the value of those activities allows him/her to include that impact in the financial

statements” (para. 1). Starbucks indicates that in preparing financial statements in accordance

with accounting principles accepted by GAAP, it requires management to make estimates and

assumptions that “affect the reported amounts of assets, liabilities, revenues and expenses”

(“Starbucks Fiscal 2016 Fiscal Report,” p. 51). These include estimates pertaining to inventory

reserves, goodwill impairments, self-insurance reserves, income from unredeemed stored value

cards, stock-based compensation forfeiture rates, future asset retirement obligations and the

potential income of future tax consequences of events (p. 51). Furthermore, Starbucks indicates

that the application of critical accounting policies encompasses “those that management believes

are both most important to the portrayal of our financial condition and results and require the

most difficult, subjective or complex judgments, often as a result of the need to make estimates

about the effect of matters that are inherently uncertain” (p. 41).

In addition, the reporting of investments and fair value are also required by an

organization. “Fair value accounting is a financial reporting approach in which companies are

required or permitted to measure and report on an ongoing basis certain assets and liabilities

(generally financial instruments) at estimates of the prices they would receive if they were to sell

the assets or would pay if they were to be relieved of the liabilities” (Ryan, 2008). In other

words, companies report losses when the fair value of assets decrease or liabilities increase (p.

1). Fair value measurement is put into place so that businesses like Starbucks can “estimate as

best as possible the prices at which the positions they currently hold would change hands in

orderly transactions based on current information and conditions” (p. 3). According to Ryan
Starbucks Financial Analysis 19

(2008), for an enterprise to accomplish this, they must incorporate information about future cash

flows and current risk-adjusted discount rates into their fair value measurements (p. 3). “In

principle, fair value accounting should be the best possible measurement attributed for inducing

firms’ managements to make voluntary disclosures and for making investors aware of the critical

questions to ask managements” (p.5).

For Starbucks, fair value is the price they would receive to sell an asset or to pay to

transfer a liability between market participants (“Starbucks Fiscal 2016 Fiscal Report,” p. 52).

Accordingly, Starbucks determines the fair value based on the following using level 3 inputs.

The first level is the use of quoted prices in active markets for the same assets to determine value

(p. 52). When these prices are not available (level 2), it will be “based upon factors such as the

quoted market price of similar assets or a discounted cash flow model using readily observable

market data” (p. 52). In the third level, the fair value of auction rates securities is determined

with an internal valuation model consisting of interest rate curves, credit and liquidity spreads,

and effective maturity (p. 52).

Lastly, the reporting of leases is also required by an organization. “Under international

financial reporting standards, a lease is an arrangement where the lessor agrees to allow the

lessee to use an asset for a stated period of time in exchange for one or more payments”

(“Lease,” n.d.). A company that leases an asset under the operating lease arrangement, must

classify each payment as a rental expense (debiting the rental expense account and crediting the

lease payable account) (“Operating lease,” n.d.). “Once the periodic lease obligation is paid, the

company records credit to the cash account and debit to the lease payment account” (para. 5).

Starbucks leases “retail stores, roasting, distribution and warehouse facilities and office

space for corporate administrative purposes under operating leases” (p. 57). Most of Starbucks’
Starbucks Financial Analysis 20

“lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent

escalation clauses and/or contingent rent provisions. We recognize amortization of lease

incentives, premiums and minimum rent expenses on a straight-line basis beginning on the date

of initial possession, which is generally when we enter the space and begin to make

improvements in preparation for intended use” (p. 57). From time to time, Starbucks is also

involved in the construction of their leases buildings (stores) (p. 58). When they are claimed as

the owner of the buildings and do not qualify for sales recognition, Starbucks will record the cost

of the buildings in “property, plant and equipment” (p. 58). “The offsetting lease financing

obligations are recorded in other long-term liabilities, with the current portion recorded in in

accrued occupancy costs within accrued liabilities on our consolidated balance sheets. These

assets and obligations are amortized in depreciation and amortization and interest expense,

respectively, on the consolidated statements of earnings based on the terms of the related lease

agreements” (p. 58).

Also in the Fiscal 2016 Annual Report, Starbucks has recognized the new guidance under

the FASB in which leases are required to recognize a lease liability—the discounted obligation to

make future minimum lease payments and a right-of-use asset on the balance sheet (p. 60).

“Enhanced disclosures will also be required to give financial statement users the ability to assess

the amount, timing and uncertainty of cash flows arising from leases. The guidance will require

modified retrospective application at the beginning of our first quarter of fiscal 2020, with

optional practical expedients, but permits adoption in an earlier period” (p. 60). Starbucks

predicts that this new guidance will result in an increase in the assets and liabilities on the

consolidated balance sheets and an impact on the consolidated statements of earnings.

Key Findings
Starbucks Financial Analysis 21

In conclusion, the findings of the above analysis lead to a learning experience that stems from

the Starbucks’ financial statements and performance about determining the overall health of

companies. Additionally, the findings of the study may provide general suggestions for financial

improvements pertaining to Starbucks and serve as an example for the Coffee Connection.

Over a two-year period, Starbucks’ net revenues increased and so did the costs of goods

sold, which may indicate that the overall performance of the company is trending positively and

sales objectives are being achieved. Therefore, the Coffee Connection may want to follow suit in

order to be as successful as its competitor.

Performing a horizontal and vertical analysis can reveal changes over time in financial

line items, the direction a business is taking, a relationship of a financial statement to its base and

allows for studies in key financial statistics. In performing these types of analysis for Starbucks,

they showcase consistency pertaining to accounts receivables (indicating no unusual activity in

this area) and a possible trend in terms of bad debt. If bad debt does trend too highly,

management at either company may want to authorize tighter credit to its customers.

In examining a horizontal and vertical analysis of the changes in Starbucks’ fixed assets,

intangible assets, depreciation, and amortization over time (2015 – 2016), it reveals that all of the

factors and figures above have remained within the same range within the past few years and

therefore do not reveal unusual activity that is troubling or worth investigating. There may be an

increase in fixed assets, but as the company may be growing, more equipment, furniture,

improvements, etc. may be needed. Additionally, horizontal and vertical analysis has shown

increasing debt for Starbucks in the areas of short and long term. Again, this may be an indicator

of a cash shortage and lack of funds to pay off debt in the near future. Therefore, this analysis

can serve as a warning that debt needs to be watched closely due to the fact that a course of
Starbucks Financial Analysis 22

action may happen if it is to spiral out of control too quickly. As for financing activities, the

Coffee Connection should also consider following Starbucks’ procedures as they were able to

create more cash flow, manage all interests soundly, and therefore is able to sell bonds at their

face value.

In studying the key financial statement ratios (liquidity, solvency, and profitability) for

Starbucks, they can reveal the current and future financial health of the company. In comparing

liquidity ratios to the industry average, Starbucks remains to be healthy in this arena, and this is

an indicator of good short-term financial strength. Although a quick ratio analysis indicates that

Starbucks should strive for a ratio above 1, but all in all, they are still well above the industry

average of .55 and therefore, do not have as much trouble paying current liabilities. As for asset

management, Starbucks’ inventory did turnover at a lower rate than the compared industry

average. This can be a lesson in bettering the sales of products more efficiently, keeping a better

watch over the possibility of having too many expired/perished products, and purchasing too

much inventory. With this noted, there is room for improvement in this area that could therefore

result in a savings for the company. On other hand, the accounts receivable ratios for Starbucks

were higher than the industry average and indicate that they are collecting their credit accounts

on a timely basis. This is a healthy area in which the Coffee Connection should take note and

consider following the same procedures.

As for solvency ratios, Starbucks’ debt to asset ratio comes in on the high side in

comparison to other establishments within the same industry. Being considerably high within the

industry, this could possibly mean greater risk that cash flows from operations will be

insufficient to cover interest and principle payments. The debt to assets ratio has also increased

slightly from 2015 to 2016 and Starbucks should watch this as only time will tell if the situation
Starbucks Financial Analysis 23

will deteriorate in the future. The debt to equity ratio for Starbucks is also higher than the

reported average, but it may not be an indication of anything detrimental at the moment. It is

advised that if it is to rise for a company, it should be watched by investors. The times interest

earned ratio is also well above the industry average and Starbucks also has a better chance to pay

the interest expense or debt service or is paying too much of the debt with its earnings.

Hopefully, it is the case of the former and not the latter, and Starbucks may want to monitor its

debt a little more closely.

Also, the profit margin ratios, which were higher than the industry average, decreased

from 2015 to 2016 indicating that sales should be turned around to rise faster than product costs

and/or operating expenses. Likewise, the gross profit on sales ratio from 2015 to 2016 were also

higher than the industry average, but slightly increased over this period of time—indicating that

Starbucks is able to sell goods at the intended selling price. The return on assets ratio reveals a

decrease and a lower than industry average, which means that assets may not be utilized

effectively. The return on equity ratio increased for Starbucks from 2015 to 2016, and it was well

above the reported industry average by almost double, which indicates that performance

achievement is free of extreme risk.

The market value ratios were mostly higher than the industry average. The earnings per

share ratio for Starbucks were a little less than $2 in both 2015 and 2016. It is reported (in the

annual fiscal report) that this ratio tends to be much higher compared to others in the same

consumer sector/restaurant industry. This was also the trend with the reported P/E ratio, which

was also slightly above the industry average and therefore indicating a current healthy financial

state and growth potential.

Starbucks Financial Analysis 24

As for the rules of financial reporting for the Starbucks Corporation, the company seems

to adhere to the accepted GAAP guidelines—all reports are also processed in a timely manner.

Therefore, everything indicated in the fiscal 2016 annual report should be truthfully accurate free

of fraud and/or clerical error. This also includes financial information from the company’s three

reportable operating segments (see above). Additionally, Starbucks indicates that in preparing

financial statements, it requires management to make assumptions regarding but not limited to

assets, liabilities, revenues, and expenses. When examining the reports and the associated

calculations, the numbers are relatively close year over year. The reporting of investments and

fair value are also required on behalf of Starbucks. This mainly pertains to the sale of an asset or

to transfer a liability between market participants and is determined using 3 level inputs (see

above) that are fully disclosed. The reporting of leases is also required on Starbucks’ behalf,

which entail but not limited to retail stores, roasting, distribution, and warehouse and office

facilities. Overall, all lease obligations are reported in the appropriate places on the fiscal report.

Starbucks’ annual fiscal report also reveals the new guidance under the FASB in which leases

are required to recognize a lease liability. This policy will begin in 2020 and it is already

predicted that under this guidance, Starbucks will experience an increase in the assets and

liabilities on the consolidated balance sheets and an impact on the consolidated statements of

earnings.

Lastly, and despite a few hiccups in the areas of debt, the analysis mostly indicates that

Starbucks is on top of their game. Although, there may be some possible trends in areas

pertaining to debt, it is currently functional but should be watched closely. The performance of

the company is trending positively, sales objectives are being achieved (but could always be
Starbucks Financial Analysis 25

higher), and there is a sense of consistency (as there is no sign of unusual activity over a two-

year period).

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and-answers/what-is-segment-reporting.html

Appendix A. Starbucks Corporation Consolidated Statement of Earnings (Horizontal and

Vertical Analysis)
Starbucks Financial Analysis 30

Net revenues: Net revenues:

16,844.10 15,197.30 12,977.90 Company-operated stores 100.00% 10.84% 17.10% Company-operated stores 79.02% 79.31% 78.90%
2,154.20 1,861.90 1,588.60 Licensed stores 100.00% 15.70% 17.20% Licensed stores 10.11% 9.72% 9.66%
2,317.60 2,103.50 1,881.30 CPG, foodservice and other 100.00% 10.18% 11.81% CPG, foodservice and other 10.87% 10.98% 11.44%
21,315.90 19,162.70 16,447.80 Total net revenues 100.00% 11.24% 16.51% Total net revenues 100.00% 100.00% 100.00%
8,511.10 7,787.50 6,858.80 Cost of sales including occupancy costs 100.00% 9.29% 13.54% Cost of sales including occupancy costs 39.93% 40.64% 41.70%
6,064.30 5,411.10 4,638.20 Store operating expenses 100.00% 12.07% 16.66% Store operating expenses 28.45% 28.24% 28.20%
545.40 522.40 457.30 Other operating expenses 100.00% 4.40% 14.24% Other operating expenses 2.56% 2.73% 2.78%
980.80 893.90 709.60 Depreciation and amortization expenses 100.00% 9.72% 25.97% Depreciation and amortization expenses 4.60% 4.66% 4.31%
1,360.60 1,196.70 991.30 General and admistrative expenses 100.00% 13.70% 20.72% General and admistrative expenses 6.38% 6.24% 6.03%
-20.20 Litigation charge/(credit) 100.00% 0.00% -100.00% Litigation charge/(credit) 0 0.00% -0.12%
17,462.20 15,811.60 13,635.00 Total operating expenses 100.00% 10.44% 15.96% Total operating expenses 81.92% 82.51% 82.90%
318.20 249.90 268.30 Income from equity investees 100.00% 27.33% -6.86% Income from equity investees 1.49% 1.30% 1.63%
4,171.90 3,601.00 3,081.10 Operating income/(loss) 100.00% 15.85% 16.87% Operating income/(loss) 19.57% 18.79% 18.73%
390.60 Gain resulting from acquistion of joint ven 100.00% Gain resulting from acquistion of joint ventur 0.00% 2.04% 0.00%
-61.10 Loss on extinguishment of debt 100.00% Loss on extinguishment of debt 0.00% -0.32% 0.00%
108.00 43.00 142.70 Interest income and other, net 100.00% 151.16% -69.87% Interest income and other, net 0.51% 0.22% 0.87%
-81.30 -70.50 -64.10 Interest expense 100.00% 15.32% 9.98% Interest expense -0.38% -0.37% -0.39%
4,198.60 3,903.00 3,159.70 Earnings/(loss) before income taxes 100.00% 7.57% 23.52% Earnings/(loss) before income taxes 19.70% 20.37% 19.21%
1,379.70 1,143.70 1,092.00 Income tax expense (benefit) 100.00% 20.63% 4.73% Income tax expense (benefit) 6.47% 5.97% 6.64%
2,818.90 2,759.30 2,067.70 Net earnings including noncontrolling inte 100.00% 2.16% 33.45% Net earnings including noncontrolling interest 13.22% 14.40% -12.57%
1.20 1.90 -0.40 Net earnings (loss) attributable to noncont 100.00% -36.84% -575.00% Net earnings (loss) attributable to noncontroll 0.01% 0.01% 0.00%
2,817.70 2,757.40 2,068.10 Net earnings attributable to Starbucks 100.00% 2.19% 33.33% Net earnings attributable to Starbucks 13.22% 14.39% 12.57%
1.91 1.84 1.37 Earnings per share -- basic 100.00% 3.80% 34.31% Earnings per share -- basic 0.01% 0.01% 0.01%
1.90 1.82 1.35 Earnings per share -- diluted 100.00% 4.40% 34.81% Earnings per share -- diluted 0.01% 0.01% 0.01%
Weight average shares outstanding: Weight average shares outstanding:
1,471.60 1,495.90 1,506.30 Basic 100.00% -1.62% -0.69% Basic 6.90% 7.81% 9.16%
1,486.70 1,513.40 1,526.30 Diluted 100.00% -1.76% -0.85% Diluted 6.97% 7.90% 9.28%

Appendix B. Starbucks Corporation Consolidated Balance Sheets (Horizontal and Vertical

Analysis)
Starbucks Financial Analysis 31

Current assets: Current assets: Current assets:

Cash and cash equivalents 2,128.80 1,530.10 Cash and cash equivalents 598.70 39.13% Cash and cash equivalents 14.86% 12.32%
Short-term investments 134.4 81.3 Short-term investments 53.1 65.31% Short-term investments 0.94% 0.65%
Accounts receivable, net 768.8 719 Accounts receivable, net 49.8 6.93% Accounts receivable, net 5.37% 5.79%
Inventories 1,378.50 1,306.40 Inventories 72.10 5.52% Inventories 9.62% 10.52%
Prepaid expenses and other current assets 350 334.2 Prepaid expenses and other current 15.8 4.73% Prepaid expenses and other current assets 2.44% 2.69%
Total current assets 4,760.50 3,971.00 Total current assets 789.50 19.88% Total current assets 33.22% 31.98%
Long-term investments 1,141.70 312.5 Long-term investments 829.2 265.34% Long-term investments 7.97% 2.52%
Equity and cost investments 354.5 352 Equity and cost investments 2.5 0.71% Equity and cost investments 2.47% 2.83%
Property, plant and equipment, etc. 4,533.80 4,088.30 Property, plant and equipment, etc. 445.50 10.90% Property, plant and equipment, etc. 31.64% 32.93%
Deferred income taxes, net 885.4 1,180.80 Deferred income taxes, net -295.4 -25.02% Deferred income taxes, net 6.18% 9.51%
Other long-term assets 417.7 415.9 Other long-term assets 1.8 0.43% Other long-term assets 2.91% 3.35%
Other intangible assets 516.3 520.4 Other intangible assets -4.1 -0.79% Other intangible assets 3.60% 4.19%
Goodwill 1,719.60 1,575.40 Goodwill 144.20 9.15% Goodwill 12.00% 12.69%
TOTAL ASSETS 14,329.50 12,416.30 TOTAL ASSETS 1,913.20 15.41% TOTAL ASSETS 100.00% 100.00%
LIABILITIES AND EQUITY LIABILITIES AND EQUITY LIABILITIES AND EQUITY
Current liabilities: Current liabilities: Current liabilities:
Accounts payable 730.6 684.2 Accounts payable 46.4 6.78% Accounts payable 5.10% 5.51%
Accrued liabilities 1,991.10 1,755.30 Accrued liabilities 235.80 13.43% Accrued liabilities 13.90% 14.14%
Insurance reserves 246 224.8 Insurance reserves 21.2 9.43% Insurance reserves 1.72% 1.81%
Stored value card liability 1,171.20 983.3 Stored value card liability 187.9 19.11% Stored value card liability 8.17% 7.92%
Current portion of long term debt 400.00 Current portion of long term debt Current portion of long term debt
Total current liabilities 4,546.90 3,648.10 Total current liabilities 898.80 24.64% Total current liabilities 31.73% 29.38%
Long-term debt 3,202.20 2,347.50 Long-term debt 854.70 36.41% Long-term debt 22.35% 18.91%
Other long-term liabilities 689.7 600.9 Other long-term liabilities 88.8 14.78% Other long-term liabilities 4.81% 4.84%
Total liabilities 8,438.80 6,596.50 Total liabilities 1,842.30 27.93% Total liabilities 58.89% 53.13%
Shareholders' equity: Shareholders' equity: Shareholders' equity:
Common stock ($0.001 par value) -- authorized, 2,400.0 Common stock ($0.001 par value) -- a Common stock ($0.001 par value) --
shares; issued and outstanding,1,485.1 and 1,499.1 shares, authorized, 2,400.0 shares; issued and
respectively outstanding,1,485.1 and 1,499.1 shares,
respectively
1.5 1.5 0 0.00% 0.01% 0.01%
Additional paid-in capital 41.1 41.1 Additional paid-in capital 0 0.00% Additional paid-in capital 0.29% 0.33%
Retained earnings 5,949.80 5,974.80 Retained earnings -25.00 -0.42% Retained earnings 41.52% 48.12%
Accumulated other comprehensive income (loss) -108.4 -199.4 Accumulated other comprehensive i 91 -45.64% Accumulated other comprehensive income -0.76% -1.61%
Total shareholders' equity 5,884.00 5,818.00 Total shareholders' equity 66.00 1.13% Total shareholders' equity 41.06% 46.86%
Noncontrolling interest 6.7 1.8 Noncontrolling interest 4.9 272.22% Noncontrolling interest -0.05% 0.01%
Total equity 5,890.70 5,819.80 Total equity 70.90 1.22% Total equity 41.11% 46.87%
TOTAL LIABILIITES AND EQUITY 14,329.50 12,416.30 TOTAL LIABILIITES AND EQUITY 1,913.20 15.41% TOTAL LIABILIITES AND EQUITY 100.00% 100.00%

Appendix C. Starbucks Corporation Depreciation and Amortization (Horizontal and Vertical

Analysis)
Starbucks Financial Analysis 32

Horizontal Analysis Oct. 2, 2016 Sept. 27, 2015 Sep. 28, 2014
Depreciation and amortization 1,030.10 933.8 748.8

10.31% 24.71%

Vertical analysis Oct. 2, 2016 Sep. 27, 2015

Depreciation and amortization 7.19% 6.52%

Appendix D. Starbucks Corp., Allowance for Doubtful Accounts Receivable

Starbucks Financial Analysis 33

Starbucks Corp., Allowance for Doubtful Accounts Receivable

Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013 Sep 30, 2012 Oct 2, 2011
Selected Financial Data (USD $ in thousands)
Allowance for doubtful accounts 9,400 10,800 6,700 5,700 5,600 3,300
Accounts receivable, gross 778,200 729,800 637,700 567,100 491,500 389,800
Ratio
Allowance as a percentage of accounts receivable,
gross 1.21% 1.48% 1.05% 1.01% 1.14% 0.85%

Source: www.stock-analysis-on.net
Copyright © 2017 Stock Analysis on Net

2016 Calculations

1 Allowance as a percentage of accounts receivable, gross =

100 × Allowance for doubtful accounts ÷ Accounts
receivable, gross
= 100 × 9,400 ÷ 778,200 = 1.21%

Appendix E. Starbucks Key Financial Statement Ratios

Starbucks Financial Analysis 34

KEY FINANCIAL STATEMENT RATIOS

2016 2015 Industry

Amounts Answer Amounts Answer Average
Liquidity ratios

Current Ratio Current Assets = 4670.5 = 1.0272 3971 = 1.08851 1.14***

Current Liabilities 4546.9 3648.1

Quick Ratio, or Quick Assets * 3032 0.6668 2330.4 0.6388 0.55**

"Acid Test" Current Liabilities 4546.9 3648.1

* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)
** Industry MRQ - Source: http://csimarket.com/stocks/SBUX-Financial-Strength-Comparisons.html
***2015 industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Long-Term-Trends/Current-Ratio#Comparison-to-Industry

Asset Management Ratios

Inventory Cost of Goods Sold 8511.1 6.1742 7787.5 5.96104 8.20**

Turnover Inventory* 1378.5 1306.4

Accts Receivable Sales 21315.9 27.726 19162.7 26.6519 22.42***

Turnover Accts Receivable* 768.8 719

* Textbooks generally use "average" for the year (beginning + ending) / 2, but it's OK to use ending only
**2015 Industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-Activity#Inventory-Turnover
***2015 Industry comparsion - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-Activity#Receivables-Turnover

Debt (Leverage) (Long-term Solvency) Ratios

Debt to Total Liabilities 3202.2 0.2235 2347.5 0.18907 .53**

Assets Total Assets 14329.5 12416.3

Debt to Total Liabilities 3602.2 0.6122 2347.5 0.40336 .17***

Equity Total Equity 5884 5819.8

Times interest EBIT* 4279.9 52.643 3973.5 56.3617 37.96****

Earned Interest expense 81.3 70.5

* EBIT means "Earnings before Interest and Taxes"

**Industry average debt to assets - Source: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=sbux
***Industry average debt to equity - Source: http://csimarket.com/stocks/singleFinancialStrength.php?code=SBUX&Lte&hist=1
**** Industry average interest coverage Q4 2016 - Source: http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=914

Profitability Ratios (not applicable if net loss)

Net Profit Net Income 2817.7 13% 2757.4 14.39% 9.1%*

Margin (%) Sales 21315.9 19162.7

Gross Profit Gross Profit 12804.8 60% 11375.2 59% 57.99%**

on Sales (%) Sales 21315.9 19162.7

Return Net Operating Income 2817.7 20% 2757.4 22% 35.03%***

on Assets (%) Total Operating Assets 14329.5 12416.3
aka ROI

Return Net Income 2817.7 48% 2757.4 47% 25.23%****

on Equity (%) Total Equity 5890.7 5819.8

*Industry Average Industry Statistics - Sources: http://csimarket.com/stocks/singleProfitabilityRatios.php?code=SBUX&net

**Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-services-72/food-services-and-drinking-places-722/show
***Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-services-72/food-services-and-drinking-places-722/show
****Industry Average - Source: http://csimarket.com/stocks/SBUX-Return-on-Equity-ROE.html

Market Value Ratios

Earnings per Net Income 2817.7 $1.94 2757.4 $1.86 Industry avg.
Share (EPS) No. shares outstanding 1455.4 1484.8 not relevant

Price/Earnings* Market Price 55.77 28.747 prior year not required 26.2**
Ratio (P/E) EPS 1.94

* P/E ratio changes daily with market price. If EPS is negative, ratio is "not applicable". Use "Basic" , not "Diluted".
**Current industry average - Source: http://financials.morningstar.com/valuation/price-ratio.html?t=SBUX&region=usa&culture=en-US