Term paper on financial ratio analysis
Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency. Liquidity ratios Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs. Current ratio. The current. The purpose of financial statement analysis is to determine the meaning and significance of the data contained in the statements so that a forecast may be made of the prospects for future earnings, expected dividends and the ability of the business to pay interest and debt as it matures.
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Companies strive from day to day to make their business publicly strong, financially strong, and appeasing and profitable for its shareholders. These tools are better known as ratio analysis. Ratios are among the more widely used tools of financial analysis because they provide clues to and symptoms of underlying conditions. The term …show more content….
However, an accounts receivable can be too high which can occur when credit terms are so restrictive that they negatively affect sales volume. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. All three companies generate great amounts of cash on a daily basis due to the nature of the food service industry, therefore this ratio may not be as important as it would be for a retail company like Walmart that is inventory intensive, or a manufacturing company like General Motors.
Even so, as the most stringent measure of liquidity, it is rarely used. Companies will not keep excessive amounts of cash on hand because it would be an indication of poor asset utilization Investopedia, Cash Ratio Starbucks 0. Asset management is a systematic process of operating, maintaining, and upgrading assets to maximize revenue generation.
Ratios vary by industry, and higher ratios are better. Additionally, SBUX has been able to improve its performance ratios over the past five years by its continuing focus on cash flow management, closing underperforming stores Banham, and using data analytics to optimize new store siting to maximize traffic and profitability Thau, Total Debt Ratio Starbucks 0. This indicates that SBUX may be more willing to issue long term debt to support its growing asset base. This source of internally generated funds means SBUX does not need to pursue heavy debt financing Hevert, Similarly, KK, Starbucks Coffee Company, Page 11 of 25 generates enormous amounts of cash.
Equity Multiplier EM Starbucks 1. In terms of profitability, all three companies really stand out as they all outperform their competitors and far exceed industry averages. Operating Margin is one of the most important margin ratios for Starbucks. Also, operating margin is indicative of the company's effectiveness from the standpoint of creditors and equity shareholders.
As of June 28, , Starbucks' operating margin stands at Unlike the operating margin, the net margin shows Starbucks' financial effectiveness from the perspective of its common equity shareholders only. As of June 28, , Starbucks' net margin was NetMargin Starbucks Firms with strong economic moats typically have higher ROE compared to rivals.
Besides the optimistic signal being sent by a record stock price, the retailer also just received glowing praise from Moody's, the debt-rating agency. Market Capitalization Starbucks KK, on the other hand, is far less adept at The company is "in the early innings of a global expansion that may last for decades" and is poised to benefit from lower coffee costs and higher-margin food offerings, Goldman Sachs equity analysts led by Michael Kelter said in a July 26 report. Besides the optimistic signal being sent by a record stock price, the retailer also just received glowing praise from Moody's.
While upgrading its bond rating, Moody's highlighted Starbucks' "strong and consistent operating trends driven by new product offerings, greater day part diversity, well accepted loyalty program and e-commerce initiatives that have resulted in strong credit metrics and excellent liquidity.
Every aspect of this analysis should ultimately lead to a buy decision.
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In addition to the macroeconomic analysis, SWOT analysis and ratio analysis, SBUX is also a great addition to any portfolio for diversification and as a hedge against higher risk stocks with its five year beta Starbucks Coffee Company, Page 15 of 25 average of. One major consideration though is that SBUX does not pay dividends.
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So if earning dividends is important, one may not want to buy SBUX. A second major consideration is valuation. And Starbucks has grown more expensive lately -- no matter which way you look at the stock. It's valued at 33 times trailing earnings, up from 25 times at the beginning of this year. Investors are also paying nearly five times sales to own shares. That figure was as low as 0. If dividends are not paid by Starbucks and earnings come from price increase and stock repurchases, concern about the stock price being valued too high is a legitimate concern.
However, other important metrics and ratios are also at record highs. That is why Starbucks commands premium prices for its products, and why its continued growth and profitability prospects are bright. Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go.
Coffee: More than 30 blends and single-origin premium coffees. Fresh Food: Baked pastries, sandwiches, salads, salad and grain bowls, oatmeal, yogurt parfaits and fruit cups. Be the Employer of Choice — Invest in partners capable of delivering a superior customer experience. Lead in Coffee — Continue to build our leadership position around coffee agronomy, sourcing, roasting, brewing and serving handcrafted beverages.
Grow the Store Portfolio — Increase the scale of the Starbucks store footprint with disciplined expansion. Different formats, licensing opportunities and international expansion 4.
In addition to breakfast, create new food offerings for lunch, afternoon refreshment and snacks, and evenings. CPG Brand Growth — Focus on the Starbucks brand to unlock profitable growth rarely seen in consumer packaged goods internationally. Build Teavana — Create a second major business in tea. Emphasis on Tea Bars, relevant tea products and formats, Teavana in Starbucks, and Teavana in the grocery aisle 7. Extend Digital Engagement — Drive convenience and brand engagement through mobile commerce platforms. Schultz, Howard D. He embodies the values of Starbucks and its pledge to create a third place i.
He has earned the respect of his peers, his employees, his customers, etc.
Term paper on financial ratio analysis
He has had the advantage of learning the coffee shop market first hand, that his company has popularized in the United States, operates. He has had the financial information surrounding business operations for almost 3 decades, including seeing first hand which stores close, underperform or shine. He is probably the best educated coffee shop business analyst in the country.
Although the rest of the top management team are made up of newcomers, Schultz appears to run the show - exercising strategic control in all areas of Starbucks operations. Sharon L. Rothstein, Global Chief Marketing Officer Sharon Rothstein is Starbucks global chief marketing officer, and she is also a great strength. Note: This ratio does not measure profitability. Remember, over-investment may result in a lack of adequate profits.
This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also uncover potential credit or management problems, usually called "overtrading" and "undertrading. Overtrading, or excessive sales volume transacted on a thin margin of investment, presents a potential problem with creditors. Overtrading can come from considerable management skill, but outside creditors must furnish more funds to carry on daily operations.
Undertrading is usually caused by management's poor use of investment money and their general lack of ingenuity, skill or aggressiveness. By analyzing changes in this figure over several years, you can identify whether it is necessary to examine company policies relating to credit extension, markups or markdowns , purchasing, or general merchandising where applicable. Note: An increase in gross margin may result from higher sales, lower cost of goods sold, an increase in the proportionate volume of higher margin products, or any combination of these variables.
A good financial analysis should have an executive summary
Operating Income to Net Sales Ratio. This ratio reveals the profitability of sales resulting from regular business as well as buying, selling, and manufacturing operations. Note:Operating income derives from ordinary business operations and excludes other revenue losses , extraordinary items, interest on long-term obligations, and income taxes.
Obviously, a high sales volume that comes from just two or three major accounts is much riskier than the same volume coming from a large number of customers. Losing one out of three major accounts is disastrous, while losing one out of is routine. A growing firm should try to spread this risk of dependency through active sales, promotion, and credit departments.
Although the quality of customers stems from your general management policy, the quantity of newly opened accounts is a direct reflection on your sales and credit efforts. Note: This index of effectiveness does not apply to every type of business. Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment. Does your average markup on goods normally cover your expenses, and therefore result in a profit?
This ratio will tell you. If your gross profit rate is continually lower than your average margin, something is wrong!
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Be on the lookout for downward trends in your gross profit rate. This is a sign of future problems for your bottom line.
Sales, location, size of operations, and intensity of competition are all factors that can affect the gross profit rate. This ratio provides a primary appraisal of net profits related to investment. Once your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations. Note: Sales expenses may be substituted out of profits for other costs to generate even more sales and profits. This ratio acts as a complementary appraisal of net profits related to investment.