Starbucks Solvency Case

STARBUCK’S ASSIGNMENT

Question 2

Short-term liquidity: Starbuck’s current ratio has increased from 1. 29 to 1. 83 between 2009 and 2011. At the same time its quick ratio has also increased to a healthy 1. 36 percent in 2011. It is clear that current liabilities are decreasing at a faster rate than current assets. Thus the company’s ability to meet its obligations in the short-term should not be a problem. Starbucks’ liquidity looks healthy going forward as it has a healthy receivables turnover at 33. 95 in 2011, whilst the average collection period is at 10. 75.

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Long-term Solvency: The debt to equity ratio dropped from 2010 levels where it was at 0. 74 to 0. 68 in 2011 which means that there has been a reduction in financial risk and an improvement in solvency. This may largely be explained by the increase in retained earnings. The interest coverage is between 4 and 5 times meaning that Starbucks is not at any high risk of default on its debt obligations. Thus the risk of insolvency is highly mitigated. Profitability: The return on equity (ROE) for Starbuck’s has improved greatly from 14. 12% in 2009 to 30. 91% in 2011.

The return on assets (ROA) has followed a similar trend growing from 9. 99% in 2009 to 25. 15% in 2011. This suggests that for any potential investors Starbuck’s is a lucrative proposition at least to the extent that past performance is a reliable predictor of future performance. P-E Ratios: Given its size Starbuck’s is not likely to see any extraordinary growth and as such a P-E ratio of 23. 65 in 2011 is reasonable even though it shows a drop from 2009 levels. Of an interest is the fact that over the same period Starbucks EPS have actually grown by up to 200% from 0. 53 to 1. 66.

It is clear that investors do not expect any rapid growth in the company’s net income but rather more stable growth. Question 3 With regard to short-term liquidity it is clear that Starbuck’s is doing better than the industry where the current ratio averages out at about 0. 7 and the quick ratio at about 0. 3. Insofar as solvency is concerned Starbuck’s also does better than the industry where debt-equity ratios have reached peaks of 128. 075, whilst industry interest coverage averages out at about 1 or 2 times. Thus Starbuck’s is more solvent than a lot of its peers in the industry.

Starbuck’s is also more profitable than the industry where both ROE and ROA average below 20%. Starbucks’ P-E ratio of 23. 65 in 2011 shows that the market expects Starbucks to grow its net income faster than the industry average growth rate which is given by an industry P-E ratio that averages out at about 16.

Question 4

Up until 2008 Starbucks registered stable growth, growing its ROE from 14. 10% in 2003 to 29. 81% in 2007. During this same period the return on sales number remained steady around 7%. However it’s ROE plummeted in 2008 to 13. 21%, only recovering in 2010 and peaking at 30. 1% in 2011. At the same time its return on sales dropped to a record 3% in 2008. The drop in 2008-2009 is partly explained by the economic downturn of 2008. Starbucks situation was certainly not helped by the fact that it had a liquidity problem that had persisted since 2005 with quick and current ratios below 1. 0. Starbucks has since seen its short-term liquidity improve with its quick and current ratios recovering in 2010 and 2011 to levels above 1. 0. Improved liquidity has also come with improved profitability with the return on sales number peaking at 10. 65% in 2011.

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