Module 08 Course Project – Ratio Analysis

Module 08 Course Project – Ratio Analysis Ratio Analysis Starbucks Corporation &

Financial analysis involves measuring, interpreting financial information. Financial information is obtained from financial statements. Financial ratios should be efficient and effective in order to satisfy the user needs. Most organizations use financial ratios because they contain quantitative data. The use of such data may be qualitative as it enables one to draw long range plans. Success of entities is measured through the effectiveness performance of the institutions. Therefore, financial ratios are important management tools that help to understand the trend and financial performance.

Liquidity ratios measure the extent to which the company can pay its debts as well as maintain itself by paying employees, buying inventory for internal use, services its assets, and pays all other expenses. Liquidity is thus the ability to meet obligations and liabilities. Current ratios express the relationship between current assets and current liabilities. Starbucks Corporation has a current ratio of 1.37 compared to Dunkin Brands Group which has 1.34, indicating Starbucks is better able to meet its obligations than Dunkin. The quick ratio of Starbucks (1.13) is higher than Dunkin’s (0.14), suggesting that Starbucks has more cash and cash equivalents and minimal stock holdings.

Receivables turnover ratio refers to the period a firm takes to collect its debts from customers. Starbucks has a credit period of 5.8 days, while Dunkin’ has 41.5 days. This indicates Starbucks's credit policies are more efficient, substantial, and standard. Inventory turnover explains how many times the entity makes purchase orders in a year. Starbucks makes 6 orders annually, whereas Dunkin makes 42, reflecting a lower inventory turnover for Starbucks. Day’s sales outstanding measures the collection period and how well credit policies are managed; Starbucks’s sales remain unpaid for up to 112 days, while Dunkin’s remain for 9 days.

The fixed asset turnover ratio measures how well non-current assets generate revenue. Starbucks has a ratio of 1.8, indicating optimal utilization, while Dunkin’s ratio of 3.6 suggests less efficient use of fixed assets. The total asset turnover ratio, which reflects the use of both current and non-current assets in revenue generation, shows Dunkin at 0.04 and Starbucks at 0.59, indicating Dunkin’s assets are more effectively employed in generating revenue.

Gross profit margin ratio considers the cost of sales and examines the company's ability to sustain and pay indirect costs. Dunkin’s gross profit margin (0.94) exceeds Starbucks’s (0.74), indicating higher efficiency in managing direct costs. Operating profit margin, which reveals how much profit remains after operating expenses, indicates Starbucks retains 0.05 dollars per dollar of sales, whereas Dunkin retains 1.38. The net profit margin shows that Starbucks’s net income is 14% of sales, while Dunkin’s is 92%. These margins suggest Dunkin is more profitable in terms of net income relative to sales.

Return on assets (ROA) measures how effectively a company uses its assets to generate earnings. Starbucks’s ROA of 0.23 demonstrates better utilization than Dunkin’s 0.03. Return on equity (ROE) reflects the profitability per share of stock; Starbucks earns 0.18 per share, whereas Dunkin earns 0.27, indicating that Dunkin offers higher profitability to shareholders. Moving to capital structure ratios, Starbucks’s higher net worth than Dunkin’s implies more positive capital structure, whereas Dunkin’s negative capital indicates higher reliance on debt.

The debt ratio, reflecting the proportion of assets financed through debt, shows Starbucks at 0.51, suggesting a balanced leverage, while Dunkin’s 0.77 indicates higher reliance on debt, posing greater financial risk. Times interest earned ratio indicates the company’s ability to meet interest obligations; Starbucks at 4.40 can comfortably cover its interest expense, whereas Dunkin at 2.19 faces higher risk if earnings decline.

Based on this comprehensive financial ratio analysis, investing in Starbucks appears more favorable due to its strong liquidity, efficient asset utilization, and manageable debt levels. While Dunkin’s higher profitability margins and return on equity are attractive, its higher debt reliance and less efficient asset utilization pose potential risks. Therefore, a prudent investor might prefer Starbucks for stability and effective financial management, aligning with the goal of minimizing financial risk and ensuring steady returns.

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Financial ratio analysis provides vital insights into a company's operational efficiency, financial stability, and profitability. Comparing Starbucks Corporation and Dunkin Brands Group through key financial ratios reveals significant differences in their financial health and management effectiveness, informing investment decisions.

Liquidity ratios are fundamental for assessing a company's ability to meet short-term obligations. Starbucks’s current ratio of 1.37 surpasses Dunkin’s 1.34, indicating marginally better capacity to cover current liabilities. The quick ratio further exemplifies this difference, with Starbucks holding a ratio of 1.13 against Dunkin’s 0.14, suggesting Starbucks has a more liquid asset base capable of immediate debt settlement. High liquidity ratios generally imply low short-term financial risk, which is especially vital for companies operating in competitive markets.

Receivables turnover ratios are essential indicators of credit policies. Starbucks’s credit period of 5.8 days reflects rapid collections, whereas Dunkin’s 41.5 days suggest slower collection processes. Shorter collection periods reduce the risk of bad debts and improve cash flow, enhancing operational flexibility. Inventory turnover ratios further support Starbucks’s efficiency, with 6 turnover cycles compared to Dunkin’s 42, indicating Dunkin’s slower inventory management but higher frequency of purchase orders, which could reflect different supply chain strategies.

Days sales outstanding (DSO) measures the average collection period; Starbucks’s 112 days contrasts sharply with Dunkin’s 9 days. While shorter DSO improves cash flow, longer periods might be justified by strategic credit terms; nonetheless, this difference highlights contrasting credit management approaches. Fixed asset turnover ratios indicate asset utilization effectiveness: Starbucks’s ratio of 1.8 signifies efficient use of assets, whereas Dunkin’s 3.6 suggests they are less employed in generating revenue, potentially indicating underutilized assets or different capital expenditure strategies.

The total asset turnover ratio emphasizes overall asset efficiency. Dunkin’s ratio of 0.04 dramatically exceeds Starbucks’s 0.59, implying Dunkin’s smaller proportion of assets generates more revenue comparatively, although high ratios can sometimes indicate underinvestment or high asset turnover driven by low asset base.

Profitability ratios further elucidate operational performance. Dunkin’s gross profit margin of 0.94 surpasses Starbucks’s 0.74, reflecting better management of direct costs to generate gross profit. Similarly, its operating margin of 1.38 indicates higher operating efficiency. However, Starbucks’s net profit margin of 0.14, though lower, is reflective of its larger scale and possibly higher operational costs associated with its broader product offerings.

Return on assets (ROA) and return on equity (ROE) are critical indicators of overall efficiency and shareholder value. Starbucks’s ROA of 0.23 demonstrates effective utilization of assets to generate earnings, while its ROE of 0.18 indicates acceptable shareholder returns. Conversely, Dunkin’s lower ROA of 0.03 and higher ROE of 0.27 suggest it may be leveraging equity more aggressively to generate profits, which could entail higher risk.

The capital structure ratios depict the financial leverage employed by the companies. Starbucks’s higher net worth and debt ratio of 0.51 suggest a balanced approach to debt and equity financing. In contrast, Dunkin’s negative net worth and higher debt ratio of 0.77 point to increased financial risk, potentially jeopardizing long-term stability.

The times interest earned ratio further reinforces this risk profile. Starbucks’s ratio of 4.40 indicates a comfortable buffer for interest payments, whereas Dunkin’s ratio of 2.19 implies higher vulnerability to earnings fluctuations affecting debt servicing ability.

In sum, Starbucks demonstrates superior liquidity, more efficient utilization of assets, and a conservative leverage position, making it a safer investment. Dunkin, while profitable and attractive on certain margins, bears higher financial and operational risks due to its leverage and asset utilization inefficiencies. For risk-averse investors seeking stability, Starbucks remains the preferable option, whereas others might find Dunkin’s higher profitability margins appealing but with recognition of its higher leverage risk.

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