Financial analysis of company

Subject: Financial Management

Teacher: Miroslav Culik

By Elena - Daniela Adam

Financial analysis of Starbucks

Table of Contents
Table of Contents.......................................................................................................................................2 INTRODUCTION.....................................................................................................................................2 . CO!!ON "I#E ANA$%"I"..............................................................................................................& 2. FINANCIA$ RATIO ANA$%"I"........................................................................................................' &. CONC$U"ION.................................................................................................................................... ( REFERENCE"........................................................................................................................................ )

INTRODUCTION Financial analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision making. The
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financial data needed in financial analysis is drawn from many sources. The primary source is the data provided by the company itself in its annual report. The annual report comprises the income statement, the balance sheet and the statement of cash flows. Financial statement analysis is used to identify financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, funds analysis, common size percentages, and ratios analysis. n this pro!ect following tools and techniques of financial statement analysis will be described" . Common si*e analysis 2. Financial +atio analysis The aim of the pro!ect is to analyze the financial situation of the #tarbucks $ompany by applying the selected methods of financial analysis.

",o+t desc+iption of t,e analy*ed company" #tarbucks is the largest coffeehouse company in the world. The business started in %&'% in #eattle, (ashington. $urrently #tarbucks is present in more than )) countries and has more than %)*,*** employees worldwide.

. CO!!ON "I#E ANA$%"I"

$ommon size analysis is one tool to compare successive years+ statements of the same company or statements from companies of various sizes. $ommon size analysis can be" . -o+i*ontal 2. .e+tical
,

. . -o+i*ontal analysis
The horizontal analysis is the financial statements of a company of successive years presented side-by-side. The goal of horizontal analysis is to compare the figures of the current period with that of the past period. This helps the company and its shareholders analyze their performance and find out areas of improvement. .orizontal analysis is done for both income statements and balance sheets.

Comparative Balance Sheet, December 31, 2009, and 2008 (Dollars in millions)

2**&

2**/

change 2/'./ -&).1 -1*/.' -1)*.1 ))0./ -&)./

percent %1.012 -%.1/2 -2'.'&2 -2*.002 22.2'2 %.1/2

Total C/++ent Assets Total Assets Total C/++ent $iabilities Total $iabilities Total E0/ity Total $iabilities 1 ",a+e,olde+s2 E0/ity

2,*,)./ ),)'1./ %,)/%.* 2,),%.% ,,*0).' ),)'1./

%,'0/.* ),1'2.1 2,%/&.' ,,%/%.' 2,0&*.& ),1'2.1

3 #ince we are measuring the change between 2**/ and 2**&, the dollar amounts for 2**/ become the base figure for e4pressing these changes in percentage form. For e4ample, total current assets increased by figures 2/'./ between 2**/ and 2**&. This increase e4pressed in percentage form is computed as follows" 342').' 5 4 6)7' 8 (.7(9: 5ther percentage figures in this e4ample are computed by the same formula.

Comparative income statement for the ears 2009 and 2008 (dollars in millions)

2**&

2**/

change -1*/.0 ,2 )1.% &&.' ').,

percent -)./)2 %.12 %%.%2 2%.1&2 2,./12

Total Re;en/e <+oss =+ofit Ope+atin> Income Income Befo+e Ta? Income Afte+ Ta?

&,''0.1 %*,,/,.* 2,*20.1 %,&&2.1 )12.* )*,.& ))&.2 0)&.) ,&*./ ,%).)
0

Net Income

,&*./

,%).)

').,

2,./12

@ .orizontal analysis of income statement which shows the change between 2**& and 2**/. .orizontal analysis of financial statements can also be carried out by computing trend percentages. T+end pe+centa>e states several years+ financial data in terms of a base year. The base year equals %**2, with all other years stated in some percentage of this base. #tarbucks en!oyed growth each year from 2**), e4cept the last year due to the financial crisis, as evidenced by the following data" 2**& 6et revenues7million 89 6et income7million 89 &,''0.1 ,&*./ 2**/ %*,,/,.* ,%).) 2**' &,0%%.) 1'2.10 2**1 ','/1.&0 )10.21 2**) 1,,1&., 0&0.,'

The increases and decreases in revenues and in net income can be put into better perspective by stating them in terms of trend percentages, with 2**) as the base year. These percentages 7all rounded9 appear as follows" 2**& 6et revenues7million 89 6et income7million 89 %),2 '&2 2**/ %1,2 1,2 2**' %012 %,12 2**1 %222 %%02 2**) %**2 %**2

The trend analysis is particularly striking when the data are plotted as above. The net revenues increased every year compared to the base year but the net income decreased with ,'2 in 2**/ and 2%2 in 2**& compared to the base year 2**).

!rend percenta"e of net reven#e and net income d#rin" a $ ear period (fi"% 1)

180& 1(0& 1'0& 120& 100& 80& (0& '0& 20& 0& 200$ 200( 200) 2008 2009

net reven#es net incomes

3 n fig. % we can notice an increase in 2**1 and 2**' regarding both revenues and incomes, and in 2**/ and 2**& an increase in revenues considering the base year but a small decrease comparing to the previous year. The income decreases with respect to the base year in 2**/ and 2**& but also creating a big gap between income and the revenue in the above mentioned years.

. 2. .e+tical analysis
The vertical analysis techniques it is used to analyze a comparative income statement and balance sheet. :ertical analysis is the procedure of preparing and presenting common size statements. ;ach item is stated as a percentage of some total of which that item is a part. 5ne application of the vertical analysis idea is to state the separate assets of a company as percentages of total sales"
Common Si*e Comparative Balance Sheet, 2009 and 2008 (dollars in millions)

2**& Total C/++ent Assets Total Assets Total C/++ent $iabilities Total $iabilities Total E0/ity Total $iabilities 1 ",a+e,olde+s2 E0/ity 2,*,)./ ),)'1./ %,)/%.* 2,),%.% ,,*0).' ),)'1./

2**/ %,'0/.* ),1'2.1 2,%/&.' ,,%/%.' 2,0&*.& ),1'2.1

2**& ,1.)*2 %**2 2/.,02 0).,/2 )0.1%2 %**2

2**/ ,*./%2 %**2 ,/.1*2, )1.*/2 0,.&%2 %**2

3;ach asset in common size statement is e4pressed in terms of total assets, and each liability and equity account is e4pressed in terms of total liabilities and stockholders+ equity. For e4ample, the percentage figure above for cash in 2**& is computed as follows" 342A&B.' C 4BB)(.' 8 &(.B9:

Notice from the above example that placing all assets in common size form clearly shows the relative importance of the current assets as compared to the non-current assets. It also shows that the significant changes have taken place in the composition of the current assets over the last year. The main advantages of analyzing a balance sheet in this manner are that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business. Another application of the vertical analysis idea is to place all items on the income statement in percentage form in terms of sales

Common+Si*e Comparative income statement + 2009 and 2008 (dollars in millions)

2**&

2**/

2**& %**2 2*.'%2 ).'02 ).'22 ,.&&2 ,.&&2

2**/ %**2 %&.%&2 0./)2 0.022 ,.*,2 ,.*,2

Total Re;en/e <+oss =+ofit Ope+atin> Income Income Befo+e Ta? Income Afte+ Ta? Net Income

&,''0.1 %*,,/,.* 2,*20.1 %,&&2.1 )12.* )*,.& ))&.2 0)&.) ,&*./ ,%).) ,&*./ ,%).)

3The percentage figures for each year are e4pressed in terms of total revenue for the year. For e4ample, the percentage figure for gross profit in 2**& is computed as follows" 3D42A27.( C 4E))7.(F G AA 8 2A.) 9:
!y placing all items on the income statement in common size in terms of revenue" it is possible to see at a glance how each dollar of sales is distributed among the various costs" expenses" and profits. And by placing successive years# statements side by side" it is easy to spot interesting trends. $or example" as shown above" the operating income as a percentage of sales increased from %.&'( in )**& to '.+%( in )**,. -r looking at this form a different view point" the gross profit percentage increased from .,..,( in )**& to )*.+.( in )**,. /anagers and investment analysis often pay close attention to the gross profit percentage since it is considered a broad gauge of profitability.

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2. FINANCIA$ RATIO ANA$%"I"

<robably the most widely used financial analysis technique is ratio analysis. = financial +atio 7or acco/ntin> +atio9 analysis is a relative magnitude of two selected numerical values taken from an enterprise+s financial statements. 5ften used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios are usually e4pressed in percentage or times. >enerally, financial ratios are calculated for the purpose of evaluating aspects of a company+s operations and fall into the following categories"

. 2. &. 7. B.

=+ofitability +atios $i0/idity +atios "ol;ency +atios Acti;ity +atios Additional +atios D Altman *-sco+e +atio6 C/++ent liability +atioF

2. . =+ofitability +atios
<rofitability ratios analyze the company?s ability to generate profit from invested capital. The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. t is these ratios that can give insight into the all important @profit@"

<+oss p+ofit ma+>in is a measure of the gross profit earned on sales. The gross profit
margin considers the firm+s cost of goods sold, but does not include other costs. t is defined as follows"
,ross -rofit .ar"in / ,ross profit 0 1et sales (reven#es) (&)

Net p+ofit ma+>in is the ratio of net profit 7after ta4es9 to net sales and indicates how much
of each dollar of sale is left over after all e4penses"
1et -rofit .ar"in / net income 0 1et sales (reven#es) (&)

Ret/+n on assets measures the company+s ability to utilize its assets to create profits"
2et#rn on assets / net income 0 total assets (&)

Ret/+n on e0/ity measures the income earned on the shareholder+s investment in the
business"
2et#rn on e3#it / net income 0 shareholders e3#it (&)

Ope+atin> p+ofit ma+>in measure of the operating income generated by each dollar of
sales"
4peratin" -rofit .ar"in / 4peratin" income 0 1et sales (&) /

-rofitabilit ratios of Starb#c5s compan over a $ ear period (percenta"e)

2009
Gross profit margin 20.71% 4.00% 7.01% 12.83% 5.75%

2008
19.19% 3.04% 5.56% 12.67% 4.85%

2007
23.34% 7.15% 12.59% 29.45% 11.20%

2006
24.66% 7.25% 12.74% 25.32% 11.48%

2005
25.09% 7.76% 14.07% 23.65% 12.25%

Net p+ofit ma+>in Ret/+n on assets Ret/+n on e0/ity Ope+atin> p+ofit ma+>in

6vol#tion of profitabilit ratios d#rin" a $ ear period (fi"% 2)

2. 2. Li !i"it# ratios

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Aiquidity ratios measure a firm+s ability to meet its current obligations. n general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. 5n the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations. Types of measures"

C/++ent +atio provides an indication of the liquidity of the business by comparing the
amount of current assets to current liabilities. = current ratio significantly higher than the industry average could indicate the e4istence of redundant assets. $onversely, current ratios significantly lower than the industry average could indicate a lack of liquidity.
C#rrent 2atio / C#rrent 7ssets 0 C#rrent 8iabilities

H/icI +atio indicates a company?s ability to satisfy current liabilities with its most
liquid assets.
9#ic5 2atio / (C#rrent 7ssets : ;nventor ) 0 C#rrent 8iabilities

Cas, +atio is an indicator of a company+s liquidity that further refines both the current
ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities.
Cash 2atio / (Cash < ;nvestments) 0 C#rrent 8iabilities

Jo+Iin> capital compares current assets to current liabilities, and serves as the liquid
reserve available to satisfy contingencies and uncertainties. = high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.
=or5in" capital 2atio / (C#rrent assets + C#rrent liabilities) 0 1et sales

8i3#idit ratios of Starb#c5s compan over a $ ear period

2009
%*

2008

2007

2006

2005

1.29 C!rrent ratio 0.87 $!i%& ratio 0.42 Cas' ratio 0.05 (or&ing %apital

0.80 0.48 0.15 )0.04

0.79 0.47 0.20 )0.05

0.79 0.46 0.23 )0.05

0.99 0.54 0.25 0.00

6vol#tion of li3#idit ratios of Starb#c5s compan over a $ ear period (fi"%3)

1%' 1%2 1 0%8 0%( 0%' 0%2 0 +0%2 2009 2008 200) 200( 200$ C#rrent ratio 9#ic5 ratio Cash ratio =or5in" capital >

@ >enerally, the larger these liquidity ratios, the better the ability of company to satisfy its immediate obligationsB but in fact there is no magic number that defines good or bad. $onsider the current ratio. = large amount of current assets relative to current liabilities provides assurance that the company will be able to satisfy its immediate obligations.

2. &. "ol;ency +atios

#olvency ratios give a picture of a company+s ability to generate cash flow and pay it financial obligations such as interest, principal repayment, or lease payments. These ratios provide an indication of the long-term solvency of the firm. Cnlike liquidity ratios that are concerned with
%%

short-term assets and liabilities, financial solvency ratios measure the e4tent to which the firm is using long term debt. Types of measures"

Debt to assets +atio indicates the proportion of assets that are financed with debt 7both
short-term and long term debt9 "
Debt to assets / !otal debt 0 !otal assets

Debt to e0/ity +atio indicates the relative uses of debt and equity as sources of capital to
finance the company?s assets, evaluated using book values of the capital sources"
Debt to e3#it / !otal debt 0 !otal e3#it

Inte+est co;e+a>e +atio compares the earnings available to meet the interest obligation
with the interest obligationB it is used to determine how easily a company can pay interest e4penses on outstanding debt.
;nterest covera"e / 6arnin"s before interest and ta?es 0 ;nterest

Capitali*ation +atio indicates the long term debt usage"

Capitali*ation ratio / 8on" : term debt 0 8on" : term debt < Shareholders@ e3#it
Solvenc ratios of Starb#c5s compan over a $ ear period

2009 Debt to assets +atio Debt to e0/ity +atio Inte+est co;e+a>e Capitali*ation +atio
9.85% 18.04% 15.40 15.28%

2008
9.69% 22.06% 51.06 18.08%

2007
10.29% 24.08% 436.51 19.41%

2006
0.04% 0.09% 73.74 0.09%

2005
0.08% 0.14% 50.31 0.14%

2. 7. Acti;ity +atios
=ctivity ratios are measures of how well assets are used. =ctivity ratios can be used to evaluate the benefits produced by specific assets, such as inventory or accounts receivable. 5r they can be used to evaluate the benefits produced by all a company?s
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assets collectively. These measures help to gauge how effectively the company is at putting its investment to work. The most common turnover ratios are the following" In;ento+y t/+no;e+ is the ratio of cost of goods sold to inventory. This ratio indicates how many times inventory is created and sold during the period"
;nventor t#rnover / Cost of "oods sold 0 ;nventor

Total assets t/+no;e+ is the ratio of sales to total assets. This ratio indicates the e4tent that the investment in total assets results in sales.
!otal assets t#rnover / Sales 0 !otal assets

Fi?ed assets t/+no;e+ is the ratio of sales to fi4ed assets. This ratio indicates the ability of the company?s management to put the fi4ed assets to work to generate sales"
Ai?ed assets t#rnover / Sales 0 Ai?ed assets

T/+no;e+ and n/mbe+ of days

There is a relation between the measures of the operating cycle and activity ratios. This is because they use the same information and look at this information from different angles.
1#mber of da s inventor / ;nventor 0 7vera"e da @s cost of "oods ;nventor t#rnover / Cost of "oods sold 0 ;nventor

The number of days inventory is how long the inventory stays with the company, whereas the inventory turnover is the number of times that the inventory comes and leaves the complete cycle within a period. #o if the number of days inventory is ,* days, this means that the turnover within the year is ,1) D ,* E %2.%1' times. n other words, nventory turnover E ,1) D number of days inventory E F,1) 7cost of goods soldD,1)9GDinventory E cost of goods soldD inventory

7ctivit ratios of Starb#c5s compan over a $ ear period

%,

2AAE
11.66

2AA'
12.11 1.83 3.51

2AA)
10.43 1.76 3.26

2AA(
9.22 1.76 3.40

2AAB
8.73 1.81 3.46

In;ento+y t/+no;e+
1.75

Total assets t/+no;e+

3.85

Fi?ed assets t/+no;e+

6vol#tion of activit ratios of Starb#c5s compan over a $ ear period (fi"% ')

1' 12 10 8 ( ' 2 0 2009 2008 200) 200( 200$ ;nventor t#rnover !otal assets t#rnover Ai?ed assets t#rnover

@ n fig. 0 we can notice that the inventory turnover is bigger from year to year. This is a good
sign and because sales also increased it means that the demand of the product it?s higher. #tarbucks? total asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products.

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2. B. Additional +atios
T'e * ) s%ore
The H-score model is a quantitative model developed in %&1/ by ;dward =ltman to predict bankruptcy 7financial distress9 of a business, using a blend of the traditional financial ratios and a statistical method known as multiple discriminant analysis. The H-score is known to be about &*2 accurate in forecasting business failure one year into the future and about /*2 accurate in forecasting it two years into the future. H E %.2 4 7(orking $apital D Total =ssets9 I%.0 4 7Jetained ;arnings D Total =ssets9 I*.1 4 7Karket :alue of ;quity D Look :alue of Mebt9 I*.&&& 4 7#ales D Total =ssets9 I,., 4 7;L T D Total =ssets9

H - score # N %./ %./% N # N 2.&& # O ,.*

<robability of Failure :ery .igh 6ot #ure Cnlikely

B / 1%2C(203$%8 0 $$)(%8) < 1%'C(2)93%2 0 $$)(%8) < 0%(CD()'2%9C0%)) 0 (0<0%2<$'9%3)E < 0%999C(9))'%( 0 $$)(%8) < 3%3C($(2 0 $$)(%8) / 3%)9

%)

3The z-score above is calculated for the year 2**&. Lecause the score is equal ,.'& and is bigger than ,.* it is said that the probability of failure of business is very unlikely.

&. CONC$U"ION
There are various ad;anta>es of financial statements analysis. The ma!or benefit is that the investors get enough idea to decide about the investments of their funds in the specific company. #econdly, regulatory authorities like nternational =ccounting #tandards Loard can ensure whether the company is following accounting standards or not. Thirdly, financial statements analysis can help the government agencies to analyze the ta4ation due to the company. Koreover, company can analyze its own performance over the period of time through financial statements analysis. (hen a financial analysis is conducted a reference point is needed. To be meaningful, most ratios must be compared to historical values of the same firm, the firm+s forecasts, or ratios of similar firms. Kost ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm+s situation. Jatios are sub!ect to the limitations of accounting methods. Mifferent accounting choices may result in significantly different ratio values.

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REFERENCE" 'ttp+,,---.%rfonline.org,or%,%ro,%ro)16.'tml 'ttp+,,---.a%%o!ntingformanagement.%om,.erti%al/anal#sis/f!ll.'tm 'ttp+,,---.in.estope"ia.%om,!ni.ersit#,ratios, 'ttp+,,---.netmba.%om,finan%e,finan%ial,ratios, 'ttp+,,e"!%.0m!.e"!,1"ra&epp,prin%iples,mo"!le2,fin/rat.p"f 'ttp+,,---."ail#finan%e.%om,%ompan#,starb!%&s) %orporation,sb!2,nas,insi"er)tren"s

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