A ratio analysis is crucial in determining if a company is doing well and if they have made any progress. Financial ratio analysis is the processes of configuring financial ratios; they are mathematically indicated when financial information are compared to previous financial statements (Jan, 2013).

Javier A Rogero

MBA 503: Financial Reporting and Analysis

Milestone Two

Professor Casey McNellis

Southern New Hampshire University

October 1, 2017

A ratio analysis is crucial in determining if a company is doing well and if they have made any progress. Financial ratio analysis is the processes of configuring financial ratios; they are mathematically indicated when financial information are compared to previous financial statements (Jan, 2013). What is being compared is the company’s financial statements and the different analysis that assist in conceptualizing a company’s performance, financial position, and what their future expectations might be. There are 3 major categories of financial ratios that are typically compared: liquidity, solvency, and profitability.  Each of these categories of financial ratios play a crucial role in determining a company’s success.

With Starbuck Corporation’s 2016 financial statements, a proper financial analysis ratio for liquidity, solvency, and profitability can be completed. Starbucks happens to be a global coffee giant, which was founded on March, 31, 1971 in Seattle, Washington (Starbucks, 2016). The company is the world’s leading coffeehouse chain with almost 21,000 locations in over 60 countries and with much room for growth.

Liquidity is the measurement of how rapid an item/product can be made into cash without delay or loss of value (Harrison, Horngren, & Thomas, 2015). It can be measured through current ratio and quick ratio. A current ratio can be produced by dividing its total current assets by the total current liabilities. Using Starbucks’ financial statement, it is found that from 2015 to 2016, their current ratio slightly dropped from a 1.09 to 1.05. It is important that a company is capable of using its current assets to insure it can protect its own current liability (Loth, 2017). In contrast, their quick ratio slightly rose from .64 in 2015 to .67 in 2016. This ratio helps assist whether a company can pay its current liabilities in full if needed (Harrison et al, 2015). With these ratios, it can be determined that the lower its liquidity ratio is, the more likely Starbucks will struggle paying off their debts. It is clear to investors and loan officers that liquidity is not everything; even though Starbucks’ current ratio is slightly lower from its previous year, Starbucks can still be recognized as a company with stability.

Solvency ratio concentrates primarily on whether a business has the capability to repay long-term debts and other accounts payable to loaners (Jan, 2013). This ratio deals with long-term financial viability. There are two types of solvency ratios: there are Debt to Asset and Debt to Equity. The debt to asset can determine the amount of debt taken on to finance asset; it can distinguish debt that was from a lender over debt from shareholders. From 2015 to 2016, Starbucks’ debt to asset ratio grew from .53 to .59. Ultimately, if the ratio is high, the financial risk rises because of the growth in debt. During the 2016 year, Starbucks’ financial statement did have an increase in their debt but the company was able to raise their total asset from $1,2416.3 in 2015 to $1,4329.5 in 2016. The debt to equity ratio also signify the amount of debt a company like Starbucks, is using to finance their assets compared to the amount of value represent in shareholders’ equity (Jan, 2013). The debt to equity ratio for the company was .47 in 2015 and it rose to .48 in 2016. This concludes that the higher the ratio is, the more debts the company used to achieve their growth.

Lastly, a profitability ratio is typically use to measure a company’s, like starbucks, ability to produce earnings compared to their expenses/cost (Harrison et al, 2015). Profitability focuses on a company’s return on assets and return on equity ratio. A business’s profitability and the ability to promptly sell their inventory is considered as their return on assets. Starbucks’ return on assets from 91% in 2015 to 88% in 2016. Next, the measurement of how much a shareholder earns from a company they have invested in is known as the return on equity ratio. Return on equity ratio is produced by using the net income and dividing it the company’s equity. Starbucks’ return on equity increased from .47 in 2015 to .48 in 2016. When this ratio percentage increases, it proves that its management team is effectively using their equity; Investors begin to earn a greater return, which might lead to future investments (Loth, 2017). To determine an appropriate price for their product and gain profit for the company, a business may use their profitability ratio.

Using liquidity ratio, solvency ratio, and profitability ratio, Starbucks’ has acquire  more debt since its previous year. Starbucks corporation is still a successful company  through these ratios and they still have the capablitiy to attract other investors and continues growing their business.

References

Harrison, W. T., Horngren, C. T., & Thomas, C. W. (2015). Financial accounting (10th ed.). Upper Saddle River, NJ: Pearson.

Jan, Obaidullah ACA, CFA. ND Financial Ratio Analysis. Retrieved on October 7, 2017

Loth, R. (2007). Liquidity Measurement Ratios: Current Ratio | Investopedia. Retrieved

September 18, 2016, from http://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp

Loth, R. (2007). Profitability Indicator Ratios: Return On Equity | Investopedia. Retrieved

September 18, 2016, from http://www.investopedia.com/university/ratios/profitability-indicator/ratio4.asp

Starbucks Corporation. (2016). Form 10-K 2016. Retrieved from Hoovers Online database.

from http://accountingexplained.com/financial/ratios/

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