Finacial analysis

Financial Analysis of Starbucks
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Financial Analysis of Starbucks
Assessing the performance of an organization is vital for organizations in that they can focus on the future of the organization. Normally the assessment is done for one year. Financial analysis of the organization’s financial statements provides all the relevant information for the assessment of the company’s position and performance. Financial analysis refers to how the organization interprets its financial statements providing a full understanding of the financial stability as well as the profits of the organization. Some financial statements provide information for proper financial analysis. Financial statements such as balance sheets and income statements are among the documents which financial experts use in conducting a financial analysis (Verma, 2017).
For organizations, conducting financial analysis is for specific purposes. The financial analysis gives information on how efficient the company operates. In addition to examining the operating efficiency of an organization, financial analysis informs the management of the sections of the organization where the performance is low. From such information, companies can make the necessary improvements. The financial analysis provides information that companies use for comparison between the present and past performances. In most cases, organizations analyze between the present financial year and the immediately previous year.

The management of an organization uses the information from financial analysis to make important decisions regarding the future of the organization (Ravinder & Anitha, 2013). The most common financial analysis that companies use is the Horizontal and Vertical analysis and Ratio analysis. While conducting this analysis, companies such as Starbucks are required to adhere to the relevant government and the generally accepted accounting principles (GAAP). These principles regulate the information regarding reporting. For a company like Starbucks, such analysis helps in achieving its goals.
To begin with, Horizontal and Vertical analysis are one of the measures of a company’s performance. With Horizontal analysis, the focus is on the change that occurs over a period. Normally it compares two financial years. As for the vertical analysis, the resulted figure is given as a percentage of a major component in the statement. Also referred to as the common-size analysis, the key items calculated from are the total assets and total revenues (Putra, 2009). In the case of Starbucks, the horizontal analysis of the accounts receivable revealed an increase in accounts receivable from $ 55,600,000 to $ 96,800,000, which represents an increase of 42.56%.

Regarding the vertical analysis, Starbucks revealed accounts receivable of 0.67% of the total assets. The figure represents a slight increase in comparison to 0.39% it posted the previous year.

When it comes to accounting for receivables, Starbucks estimates the receivables from some items that include its sales of equipment, outstanding license royalties, and food services. With this kind of policy, information from the various debtors is readily available, as this will inform the organization on which debtors settle their accounts early.
The horizontal and Vertical analysis was conducted about Asset Acquisition, Depreciation and Amortization. The analysis investigates three categories; fixed assets, intangible assets, depreciation, and amortization. The table below represents the Horizontal Analysis.

From the table, fixed assets increased by 8.51% from $ 4,533,800 in 2016 to $ 4,919,500 in 2017. As for the intangible assets, there was a decrease of 14/51% from $ 516,300 in 2016 to $ 441,400 in 2017. Regarding depreciation and amortization, there was a slight increase of 3.59% from $ 1,030,100 to $ 1,067100. As for the vertical analysis, the table below displays fixed assets, intangible assets, depreciation, and amortization.

The table indicates that fixed assets are 34.25% of the total assets, intangible assets are 3.07% of the total assets while depreciation and amortization constitute 7.43% of the total assets. When it comes to acquiring fixed assets, intangible assets and accounting for depreciation and amortization Starbucks emphasize that these items are accurately displayed in the respective financial statements. Accurately accounting for the above categories will ensure that stakeholders such as creditors, investors, and the management team make informed decisions that affect the company.
Another area where Horizontal and Vertical analysis is conducted is debt financing. Two categories of debt financing are examined which are the short-term and the long-term debt. With the Horizontal analysis, the table below displays the information retrieved.

From the above information, Starbucks Long-term debt increased by 23.46% from $ 3,185,300 in 2016 to $ 3,932,600 in 2017. As for the Short-term debt, Starbucks cleared all that it owed its lenders. This can be indicated by the zero-amount obtained in 2017. The vertical analysis revealed the information displayed in the table below.

From the table, it is evident that the Long-term debt in Starbucks contributed to nearly 44% of the total liabilities. Starbucks did not have any Short-term liabilities in the year 2017. In terms of debt financing, Starbucks issues bonds, borrowing from investors not forgetting debt securities. The bonds issued to increase the liquidity and financial leverage of Starbucks.
From the horizontal and vertical analysis, the next category of analysis includes the Ratio analysis. Ratio analysis is a way to show how different elements in a financial statement relate to each other (Nuhu, 2014). The ratios reveal key information about the company about other companies in the same industry and relating to previous years performance. There are some categories in ratio analysis, but Starbucks conducts its ratio analysis in terms of how profitable the company, how liquid and solvent is the organization.

The first group of ratios is the Liquidity ratios. Liquidity ratios measure the ability of any company in meeting their obligations financially. In simple terms, how a company can be able to cover its liabilities. For an organization to be considered as having good liquidity, their short-term liabilities must be in a way that can be covered by their short-term assets. For Starbucks, two liquidity ratios are analyzed; Current ratio and Acid Test ratio. With current ratio, the key measurement is the ability of the current assets to cover the short-term liabilities. The formula for obtaining current ratio is to divide current assets by current liabilities. From the table above, Starbucks Current ratio is 1.25. The ratio reveals that Starbucks can pay off its current liabilities by its current assets.
Apart from the Current ratio, there is the Acid Test Ratio. This ratio reveals how the company can settle its short-term liabilities by the use of quick assets. The category of assets that a company can convert into cash within a minimum time is known as quick assets. As for the Acid Test ratio, the ratio is 0.61. Starbucks short-term liabilities cannot be settled using their quick assets. Overall, the two ratios reveal that Starbucks has a lot of non-liquid assets.
Moving on from the liquidity ratios are the solvency ratios. Whereas the liquidity ratios focus more on the short-term liabilities of a company, solvency ratios deal more with the long-term liabilities. Solvency ratios determine whether or not a company can pay off its long-term debt. With solvency ratios, the two ratios investigated in Starbucks is Debts to Assets ratio and Debts to Equity ratio. In calculating the Debts to Assets ratio, dividing the total liabilities by the total assets will result in the ratio. The results obtained will indicate whether the company’s assets can cover the liabilities. In the case of Starbucks, the Debt to Assets ratio is 0.62. The ratio indicates that Starbucks can settle its liabilities using the assets it possesses. Debt to Equity ratio, on the other hand, indicates the degree to which the money contributed by the stockholders finances the liabilities of the company. The Debt to Equity ratio of Starbucks is 1.64. The ratio is an indication that Starbucks relies more on finances from suppliers than from the finances from its stakeholders. Regarding the solvency of Starbucks, the company in a better position to pay off what it owes by using the assets it has. However, it depends more on finances from its various supplies more than stakeholders’ money. These ratios measure how solvent the company will be in the long run.
The last group of ratios in the ratio analysis of Starbucks includes profitability ratios. Profitability ratio measures the performance of a company in terms how the company can come up with earnings in comparison to what it spends as expenses. In determining how profitable the company is, both Gross profit and Net profit margin are commonly used in determining the profitability of any organization. Gross profit margin is a representation of the percentage of gross profit about the net sales. For Starbucks, the Gross profit margin is 59.63%. Gross profit is obtained before accounting for expenses. At this point, Starbucks’s ability to generate sales is at the desired level. As for the Net profit margin of Starbucks, the ratio is 12.89%. The ratio represents low percentage which regarding safety margin is a low one. A low safety margin is an indication that any reduction of the sales will cancel the profits leading to losses. The use profitability ratios indicate that Starbucks is generating sales and profits at a satisfactory level.
Financial analysis cannot be complete without reporting the results in any financial year. While reporting the financial results, companies follow given standards set forward by the generally accepted accounting principle (GAAP). With these principle companies follow a given set of rules while reporting their financial statements to the general public. Among the items contained in the principles is the reporting of control procedures. Internal controls refer to procedures that are established for the sole purpose of safeguarding a company’s assets at the same time reducing any fraudulent activities and detect any errors in the company’s activities. Reporting of controlling procedures is required to provide information to the relevant stakeholders regarding the reliability of the procedures in question. For Starbucks this involves procedures for maintaining accurate records, all transaction for financial reporting are recorded, any unauthorized transaction is detected, and the management authorizes any transactions regarding acquisitions and expenditures. Information on these procedures informs the public on the effectiveness of Starbucks control procedures.
Reporting on segment information is important for a company that operates in a vast geographical location. Being an international company, the implication for Starbucks means that the different locations have different costs of operations hence record varying profits in the different locations. Reporting on information on the different locations reveal which areas are performing while at the same time revealing the underperforming sectors. The information will be key in determining areas that need improvement. For a company like Starbucks, apart from providing information on the different locations, the segment information provides performance data on the various product range. For the beverage products, Starbucks can make informed decisions on whether or not to continue producing a certain product or drop it from its variety of product range.
The estimates that a company makes need to be reported. While accounting for estimates, factors such as historical experiences and what the company expects in the future are put into consideration. In most cases, the estimates a company makes relates to the actual results in the future. Among the estimates that take effect include intangible assets, useful life, and depreciation of property and equipment. The effect of the estimates on the adjusted amounts is carried forward in the future. The estimates reveal the adjusted values amount are in the following financial year.
Generally accepted accounting principles (GAAP) provide rules concerning the reporting of investments and fair value accounting. Reporting of investments and fair value ensures that there is transparency in the organization. In Fair value reporting the principles allows a company to estimate certain values of their assets and liabilities on an ongoing basis (Ryan, 2008). This provides their true value at a particular time of the year. Starbucks reporting on investments and fair value reveal three types of investment at the company; Securities that are for sale, securities meant for trading and investments for equity. The fair value method determines the of available-for-sale and trading securities. Starbucks records Equity investments using the equity approach.
The last category in reporting financial statement is reporting of leases. The lease is just like a rental agreement. The only difference is that right enjoyed is that of the owner. Reporting for Leases is required as it can be used as a means to obtain financing, provides information on the company’s assets and liabilities and reveals the exposure to the risk of owning a certain asset. Apart from its retail stores, Starbucks also leases facilities meant for distribution and warehousing. Apart from that, Starbucks treat amortization of lease and rent expenses using the straight-line basis. The straight-line basis of accounting for lease takes effect from the day Starbucks enters into the facility for use.
Inconclusively, at the end of every financial year companies, are required to report on their operations. The report is in the form of financial analysis. With the financial analysis, the performance of the company is evaluated using some methods. Among the methods include Horizontal and Vertical analysis as well as Ratio analysis. Apart from these methods of performing financial analysis, companies need to report their financial statements. The generally accepted accounting principles (GAAP) provides guidance on how companies should report the financial statements. These principles are meant for a regulatory purpose concerning the reporting figures in the statements of accounts. Financial analysis on Starbucks revealed information regarding the company’s profitability, solvency, and liquidity as well as procedures used in accounting for items such as internal controls, segmentation, estimates, investments at fair value and leases. The information from the analysis will assist various stakeholders to make decisions.
References
Nuhu, M. (2014). Role of Ratio Analysis in Business Decisions: A Case Study NBC Maiduguri Plant. Journal of Educational and Social Research, 4(5), 105.
Ravinder, D. & Anitha, M. (2013). Financial Analysis- Study. Journal of Economics and Finance, 2(3), 10-22.
Ryan, S. G. (2008). Fair value accounting: Understanding the issues raised by the credit crunch. Council of Institutional Investors, (July, 2008), 1-24.
Putra, L.D. (2009). Horizontal Vs Vertical Analysis of Financial Statement. Accounting Financial Tax. Retrieved from http://accounting-financial-tax.com/2009/10/horizontal-vs-vertical-analysis-of-financial-statements/Verma, E. (2017). Financial Performance – Understanding its Concepts and Importance. Retrieved from https://www.simplilearn.com/financial-performance-rar21-article