Financial Ratios – Starbucks Corporation
Operating profit margin
The operating profit margin is also known as a return on sales. A firm such as Starbucks can use it to determine its profitability from the regular services and products it provides.
Operating Profit margin = Profits prior to taxation and interest deduction/Total sales
= $15,823,000/$23,518,000
= 0.65
This shows whether the daily operations are generating the profits required to sustain the company and provide the shareholders with sufficient return on their investment. A high operating profit margin is highly desirable. In 2019 and 2018, Starbucks recorded a higher operating profit margin due to high sales and profits (Macrotrends LLC., 2020). This year’s operating profit margin is low, which signifies a possible strategy failure. Starbuck’s profitability is dependent on the business’ competitiveness and efficient cost management.
Current ratio
The current ratio shows the financial capability to honor all current liabilities.
Current ratio = Current assets / Current liabilities
= $7,810,000/$7,350,000
= 1.06
The ratio should be higher than 1, which shows reliable financial strength in the short term. A high current ratio means that the company can meet its short-term financial obligations as and when they fall due. Starbucks’ current ratio has improved compared to the previous years, when it was less than 1 (Macrotrends LLC., 2020). This confirms improving financial resilience.
Debt to assets
This leverage ratio is important because it determines the company’s borrowed funds in comparison to the total assets.
Debt to assets = Total debts / Total Assets
= $37,765,000/$29,141,000
= 1.26
The debt ratio should be low to mitigate against future uncertainties that may disrupt the company’s ability to pay its creditors. A high debt ratio increases the risk in an organization.
Price-earnings ratio
This shareholder’s return ratio shows a company’s perception of the market.
Price earnings = Current market price per share / Earnings after tax for each share
= 85.92/$0.77
= 111.58
Risky and slow-growing organizations tend to have a lower price-earnings ratio. A high ratio shows that the company’s stock is costlier than an organization with a lower ratio. Thus, there is a lower value for investors’ funds. According to Starbucks’ financial statements, the stocks offer low value to potential investors, as the high price ratio of earnings is depicted (Macrotrends LLC., 2020).
Total assets turnover
A firm should be able to put its assets to profitable use. This activity ratio shows the company’s efficiency in the utilization of the current assets to generate profits through sales.
Total assets turnover = Total sales / Total assets
= $23,518,000 /$29,141,000
= 0.8
Starbucks’ current strategy leans towards providing a variety of products. However, these products tend to be very costly, reducing the number of sales that its outlets record (Azriuddin, Kee, & Hafizzudin, n.d). This makes it less competitive and incapable of capturing a wider market share that would provide more sales. The operating profit margin ratio raises concerns about Starbucks’ performance. It is lower than it has been in the past two years, showing reduced sales and profits (Macrotrends LLC., 2020). Starbucks is unable to charge higher prices due to high competition in the industry. This means that its profit margins are low, making it difficult to reduce the prices without adversely affecting the company’s profitability.
Strategic Alliances
The possibility of strategic alliances could affect the profitability ratios negatively in the short term. This is due to the adjustments that the new entity undergoes during the merging activity. The profitability ratios are reliable in revealing information regarding an alliance and its effectiveness. Each organization records unique performance following an alliance (Borhan, Mohamed, & Azmi, 2014). However, the profitability ratios show the performance of the new entity, enabling analysis of the alliance’s impact.
Starbucks’ current debt-to-asset ratio confirms that the company is highly leveraged. This implies a difficulty in accessing new capital in today’s financial climate. The company has borrowed largely, making it risky as the value of assets remains low. However, it can acquire loans from the banks, which would be expensive due to the current financial status. Starbucks will incur approximately 6.5 percent interest rates on borrowed loans. The current ratio, as well as the quick ratio, will be impacted by the capital influx. The liabilities will exceed the assets, leading to a ratio of less than 1, which shows less financial resilience. This means that Starbucks will experience more difficulties while trying to meet its current obligations. As a result, it may rely on immediate income obtained from regular sales.
References
Azriuddin, M., Kee, D. M., & Hafizzudin, M. (n.d). Becoming an International Brand: A Case Study of Starbucks. Journal of the Community Development in Asia, 33-43. Retrieved from https://pdfs.semanticscholar.org/df32/760cdd2d01e49ca3aa91d420bb936e43056a.pdf
Borhan, H., Mohamed, R. N., & Azmi, N. (2014). The impact of financial ratios on the financial performance of a chemical company. World Journal of Entrepreneurship Management and Sustainable Development, 10(2), 154-160.
Macrotrends LLC. (2020). Starbucks Current Ratio 2006-2020 | SBUX. Retrieved from Macrotrends: https://www.macrotrends.net/stocks/charts/SBUX/starbucks/current-ratio
Macrotrends LLC. (2020). Starbucks Financial Statements 2005-2020 | SBUX. Retrieved from Macrotrends: https://www.macrotrends.net/stocks/charts/SBUX/starbucks/financial-statements
Macrotrends LLC. (2020). Starbucks Total Assets 2006-2020 | SBUX. Retrieved from Macrotrends: https://www.macrotrends.net/stocks/charts/SBUX/starbucks/total-assets
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Question 
The purpose of this assignment is to evaluate the financial condition and performance of the firm you and your CLC group members have selected for analysis.
Financial Ratios – Starbucks Corporation
Refer to Tables A-1 through A-5 in Appendix II of the text for the operational definitions of and formulas for numerous common financial ratios, including profitability, liquidity, leverage, activity, and shareholders’ return. Using these formulas, complete at least one ratio from each of the five categories, though you may apply as many of the ratios for which you can find the required information in the firm’s financial reports. On your calculations page, specify for which formulas you are solving.
In an assessment of approximately 750 words, address the following:
Determine which of the ratios provides the most key insights into the firm’s current level of performance. How can you assess whether the results of your calculations are positive or negative? Explain which of the ratios gives you a reason to be concerned with the organization’s current strategy and why.
The Organizational and Operational Plans assignment references the possible benefits and risks of forming a strategic alliance. What would be the risks of forming a strategic alliance in terms of the firm’s profitability ratios? Which of those five ratios is most likely to reveal immediate information for analysis of the alliance’s effectiveness?
Considering today’s financial climate, how likely is it that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of the liquidity ratios will be impacted by the influx of capital if borrowed?
Submit your calculations with your written response.
You will be required to incorporate instructor feedback from this paper into the Assessing and Managing Risk assignment in Topic 7.
Prepare this assignment according to the guidelines found in the APA Style Guide located in the Student Success Center. An abstract is not required.
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
You are required to submit this assignment to LopesWrite. Refer to the LopesWrite Technical Support articles for assistance.
Benchmark Information
This benchmark assignment assesses the following programmatic competencies:
BS Business Analytics; BS Business Management; BS Finance
2.2 Apply strategies for analyzing and synthesizing data and evaluating risk in making business decisions.
BS Business for Secondary Education
6.6 Demonstrate skills for the effective communication of business information and concepts.