MBA503 Southern New Hampshire University Starbucks Ratio Analysis Submit the Ratio Analysis portion of the final project. For this milestone, you will be analyzing the financial performance of Starbucks using the financial ratios of liquidity, solvency, and profitability (Critical Element III). Note: To calculate the ratio amounts, you may use the file Key Financial Ratios Explained and Set Up in Excel. This Excel document may also be used for your final project. Note: This chart was also included in the first module . It is included here again because you can use it for your final project. It explains and illustrates each financial ratio. This resource supports Milestone Two.https://www.slideshare.net/ahsanjawadca/2871f-rati… KEY FINANCIAL STATEMENT RATIOS

Liquidity ratios

rev. 3-19-2010

rev. Feb 2010

Example:

Current Ratio

Current Assets

Current Liabilities

2.0 to 1

Quick Ratio

“Acid Test”

Quick Assets *

Current Liabilities

0.9 to 1

A “2.0 to 1” ratio means that there is

$2.00 of current assets for every $1

in current liabilities, which suggests

that short-term creditors can be

reasonably sure of being paid.

If current liabilities are rising faster

than the current assets from which

they must be paid, company could

become insolvent (unable to pay

its debts) and eventually bankrupt.

Indicates extent to which claims of

If Current Ratio is OK, but Quick Ratio

short-term creditors are covered by

is low or declining, the cause may

“quick” assets*.

be excessive nonliquid inventory.

* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)

Asset Management Ratios

Accts Receivable Sales (credit only )

Turnover

Accounts receivable

6.0 times

Avg Number of

Days to Collect

365 (days in yea r)

A/R turnover ratio

60.8 days

Inventory

Turnover

Cost of Goods Sold*

Inventory*

4.0 times

Number of times per year

receivables were generated

and then paid (“turned over”)

Number of days customers are

taking to pay

Number of times merchandise

items are sold and restocked

(“turned over”) per year.

* Some publications use “Sales” as the numerator, and/or average inventory as denominator

Avg Number of

Days in Inventory

365 (days in year)

Inv. turnover ratio

91.3 days

If the turnover ratio is decreasing

or avg number of days to collec t is

increasing or is substantially greater

than credit terms (e.g., “30 days, net”),

then credit and collection policies may

need to be strengthened.

If the turnover ratio is decreasing

or number of days in Inventory is

increasing , inventory may becoming

outdated and possibly overstated

Number of days inventory remains

unsold

Debt (Leverage) (Long-term Solvency) Ratios

Debt to

Assets

Total Liabilities

Total Assets

0.50

The portion of the total financing

supplied by creditors as opposed to

the owner-stockholders.

Debt to

Equity

Total Liabilities

Total Equity

1.5

The financing supplied by creditors

as compared to financing supplied

by the owner-stockholders.

Times interest

Earned

EBIT*

Interest expense

3.2

Measures the extent to which operating

income can decline before firm is

unable to meet interest payments

Debt to Assets and Debt to Equity

are alternative benchmarks that

measure long-term solvency. Higher

ratios (high leverage ) mean greater

risk that cash flows from operations

will be insufficient to cover interest

and principal payments.

Low ratio = low margin of safety,

and can make it difficult to borrow.

* EBIT means “Earnings before Interest and Taxes”

Profitability Ratios (not applicable if net loss)

Net Profit

Margin (%)

Net Income

Sales (net)

5.1%

Net income as a percentage of sales.

If trend is down, product costs and/or

operating expenses are rising faster

than sales.

Low percentage = low safety

margin: higher risk that a decline in

sales will erase profits and result

in a net loss.

Gross Profit

on Sales (%)

Gross Profit

Sales (net)

35.2%

Gross Profit as a percentage of sales.

If low or declining, product costs may

be increasing and/or selling prices

decreasing (steeper discounts).

A low or declining Gross Profit %

indicates less ability to sell goods

at intended selling price, or rising

cost of goods, or both.

Measures how well management

is managing assets to generate

profit from operations.

A low or declining rate could mean

that assets are not being utilized

effectively.

Measures rate of return on stockholders

investment. (However, “dividend yield”

for stockholders is generally much less.)

Low return could be caused by high

debt, i.e., high interest expense.

Return

on Assets (%)

aka ROI

Return

on Equity (%)

Operating Income*

15.3%

Total Operating Assets

Net Income **

Total Equity **

18.4%

* Some publications use Net income (after tax) instead of Operating income (i.e., earnings before interest and income tax, or EBIT)

** If preferred stock exists, subtract Preferred Dividends from Net Income, and also subtract Preferred Stock from Total Equity

Market Value Ratios

Earnings per

Net Income *

$1.23

Share (EPS) Common shares outstanding

EPS is the “real” measure of profitability

used by potential investors (not used

by creditors).

* If preferred stock exists, subtract Preferred Dividends from Net Income.

EPS can decline despite an

increase in total earnings and thus

drive down the market price per

share.

Price/Earnings

Ratio (P/E)

High P/E ratio means that investors

perceive good growth potential—but

they could be (and often are) wrong.

Market Price

EPS *

16.5 times

The multiple-times-earnings that

investors are willing to pay, based on

their perception of future share price.

* If EPS is negative, ratio is “not applicable”

KEY FINANCIAL STATEMENT RATIOS

THIS YEAR

Amounts

Answer

LAST YEAR

Amounts

Answer

Liquidity ratios

Current Ratio

Quick Ratio, or

“Acid Test”

Current Assets =

Current Liabilities

=

=

Quick Assets *

Current Liabilities

* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)

Asset Management Ratios

Inventory

Turnover

Cost of Goods Sold

Inventory*

Accts Receivable

Turnover

Sales

Accts Receivable*

* Textbooks generally use “average” for the year (beginning + ending ) / 2, but it’s OK to use ending only

Debt (Leverage) (Long-term Solvency) Ratios

Debt to

Assets

Total Liabilities

Total Assets

Debt to

Equity

Total Liabilities

Total Equity

Times interest

Earned

EBIT*

Interest expense

* EBIT means “Earnings before Interest and Taxes”

Profitability Ratios (not applicable if net loss)

Net Profit

Margin (%)

Net Income

Sales

Gross Profit

on Sales (%)

Gross Profit

Sales

Return

on Assets (%)

aka ROI

Net Operating Income

Total Operating Assets

Return

on Equity (%)

Net Income

Total Equity

Market Value Ratios

Earnings per

Share (EPS)

Net Income

No. shares outstanding

Price/Earnings*

Ratio (P/E)

Market Price

EPS

Industry avg.

not relevant

prior year not required

* P/E ratio changes daily with market price. If EPS is negative, ratio is “not applicable”. Use “Basic” , not “Diluted”.

Industry

Average

Industry avg.

not relevant

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