Financial Analysis of Starbucks

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It all started on March 31, 1971 in Seattle, Washington, when three friends who met when they were students at the University of San Francisco opened a place called «Starbucks» to sell roasted coffee beans. Convinced of the quality of the product, they conveyed their passion for the secret of a good coffee, its mode of preparation and its exquisite aroma, to every person who encountered them inside and outside the premises.

In 1982, Howard Schultz, Sales Manager for an appliance company, visited them for the first time and fell in love with the passion they had for coffee. A year later he joined the company, and it was in August 1987 when he bought Starbucks with the help of other local investors.

Currently, Starbucks has become an icon of coffee, mainly for young people, with more than 20.000 stores in more than 60 countries; But what did Schultz do to make Starbucks so successful?

The formula of their success is based on different factors, such as Starbucks ‘ own concept: consisting of a place where everyone can have a great experience sipping coffee with a warm atmosphere. Its location: Since all stores are in convenient and high-traffic areas, such as campuses, airports, office buildings, high visibility places near shopping malls, among others. Its ambience: Because whenever you visit Starbucks you get comfort and each store emits its own feeling. The Service: All its workers are fast, efficient, friendly and energetic. (Ooi, 2018).

In Addition to these, Starbucks makes a good use of marketing strategies, where its main strategy has always been to generate differentiation by offering value in its different digital campaigns, achieving to fall in love and generate trends among its consumers. The Starbucks experience generates an emotional connection with your consumer thus developing a high level of fidelity. (Galindo, 2018).

The following will explain the financial coefficients of Starbucks compared to those of the Industry to which it belongs, which is «retail (Grocery)», and with its Sector that is of «Services», where a brief explanation will be given and it will be pointed out which of these three looks more Favorable in each of these coefficients.

Valuation Ratios

Valuation indexes perform a comparison of relevant data that helps users to obtain an estimate of the attractiveness of a potential or existing investment. (Investopedia, 2018)

P/E Ratio (TMD) | Price-Benefit Ratio

Starbucks has a price-benefit ratio of 17.13 while the Industry of 84.62 and the «Services» Sector of 17.27, this shows us that the expectations of the value of the Industry are favorable and expected a growth of the future profits, but also It means that your share price is overrated and it may be unlikely that your quote will continue to go up, so the value Starbucks is better in this regard.

Beta

The Beta coefficient of Starbucks is 0.57 while that of the retail Industry (Grocery) is 0.54, indicating that the expected performance of an asset based on its beta and expected yields of the market is high, are faster than the market , while the beta coefficient of the Sector is 1.40.

Price to Sales (TMD)

The Wreck-Sales relationship indicates the value allocated to each dollar of the sales or revenue of a company, thus the value of Starbucks of 3.16 while the Industry is 3.32 and the Sector is 9.92, this tells us that the action price of the Sector » Services «has more value.

Price to Book (MRQ)

This relationship compares the market value of an action with its book value, we can see that this at Starbucks is 19.36 while the Industry is 8.78 and the Sector is 2.74, this means that the shareholders pay 19 times more the value of the action of Starbucks.

Price to Cash Flow (TMD)

This takes into account the operational cash flow of an action, which adds non-monetary gains such as depreciation and amortization to net income, so, we can see that the value of this in Starbucks is 12.85 while the Industry is 29.41 and E L of the «Services» Sector is 10.40, this tells us that it is better to invest in the Industry and this value is more effective since cash flows cannot be easily manipulated, compared to revenues, which are affected by depreciation and other items in Cash.

Dividends

A dividend is a distribution of a portion of the earnings of a company, decided by the board of directors, paid to a class of its shareholders. These can be issued as cash payments, stocks, or other properties. (Investopedia, 2018)

Dividend Yield

This Index shows us how much a company pays in dividends each year in relation to the price of its shares, in this case, Starbucks has a value of 2.55%, while Industry and Sector have a value of 1.07% and 2.60% respectively.

Payout Ratio (TMD)

This index is the proportion of earnings paid as dividends to shareholders, Starbucks has a value of 37.27%, while the value of this in the Industry is 43.28% and the Sector is 2.60%.

Profitability Ratios

Profitability rates are used to evaluate a company’s ability to generate profits in comparison to its costs and other costs incurred over a specific period of time.

Gross Margin (TMD)

Starbucks shows us a value of 58.83% while the Industry «retail (Grocery)» of 46.62%, and the Sector of 23.85%, this shows us that Starbucks has a higher percentage of the total sales revenue that preserves after incurring direct costs Associated with the production of goods and services it sells.

EBITDA Margin (TMD)
This is a measure of the operating profitability of a company as a percentage of its total income. In This case this percentage in Starbucks is 20.98%, while Industry the Sector has no value in this. By excluding interest, depreciation, amortization and taxes, this indicates to an investor, owner of a business or financial professional a clear view of the operating profitability and cash flow of a company.

Operating Margin (TMD)
This percentage refers to the earnings that a company retains after eliminating operating expenses such as the cost of goods sold and wages, and depreciation, so, we can see that the percentage of Starbucks is 24.14% while that of the Industry is 9.68% and the «Services» Sector is 9.46%, showing that Starbucks has higher earnings.

Net Profit Margin (TMD)
This net profit margin is the relationship enters the net profit and revenue of a company, then we can see that the percentage of Starbucks is 19.50% while the Industry is 7.61% and the Sector «Services» is 9.43% , this means that Starbucks has a greater benefit.

Effective Tax Rate
The Effective tax rate is the average rate at which a person or corporation is taxed. The percentage of this at Starbucks is 21.63% while the Industry is 25.24% and the «Services» Sector is 18.39%, this shows us that Starbucks has a lot of taxes because it pays more than its sector.

Liquidity Ratio

Liquidity indices measure a company’s ability to meet its short-term-expiring obligations. It tells Us whether a company can quickly convert its assets to cash without any loss in value if necessary to meet its short-term obligations. (Investopedia, 2018)

Current Ratio (MRQ)
In The case of Starbucks we can see that its current reason is 1.01 indicating that, if they have the ability to pay with their short-and long-term obligations, although compared to the Industry of 1.21 and the Sector we can see that yours is 1.53 , thus having more success in this area.

Quick Ratio (MRQ)
The acid test of Starbucks is 0.76, indicating that its ability to fulfil its short-term obligations such as accounts receivable, cash, etc. is favorable, while the Industry is 1.09 and the «Services» Sector is 1.25, suggesting that it has a large Ability to meet these same short-term obligations.

Efficiency Ratios

Efficiency indices are generally used to analyze how well a company uses its assets and liabilities internally. It can calculate the turnover of accounts receivable, the reimbursement of liabilities, the amount and use of capital, and finally the general use of inventory and machinery. (Investopedia, 2018)

Revenue/Employee (TMD)
The earnings per employee at Starbucks are $87,055.00 dollars while the Industry is $44,356,566.00 and the «Services» Sector is $972,422,233.00, this means that the Sector has a higher productivity and effective use of the resources of the Company.

Receivable Turnover (TMD)
This measure is used to quantify the effectiveness of a company in the extension of credit and debt collection in that credit, the retail Industry (Grocery) proves to be more effective at having a value of 83.96 while Starbucks has a value of 29.30 and the Sector of 13.54.

Inventory Turnover (TMD)
Inventory rotation measures How fast a company is selling its inventory and is usually compared to the industry averages. Starbucks has a value of 7.23 and the Industry «retail (Grocery)» of 66.59 while the Sector of 9.98, this tells us that the Industry has strong sales and/or big discounts, so it causes a constant change of its inventories.

Asset Turnover (TMD)
The turnover rate of the assets at Starbucks is 1.52 while in the Industry is 1.40 and in the Sector is 0.74, this indicates that Starbucks has a higher efficiency by deploying its assets to generate revenue.

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