Financial accounting

Final Individual Assignment

Name: Tran Vu Hanh Class: GMBA2023 Grade:

Analyzing Starbucks Corporation's financial statements provides a comprehensive insight into

the company's fiscal health, operational efficiency, and overall financial performance. With its
global recognition as a leading coffeehouse chain, Starbucks has successfully established itself as
a prominent player in the retail industry. As of the most recent financial reporting period, the
examination of its income statements, balance sheets, and cash flow statements can unveil crucial
information for investors, stakeholders, and industry analysts. (Data, n.d.)
Analyzing the balance sheet of Starbucks, it provides insights into the company's financial
health and quality. Below are some key points to consider:
1. Asset structure:
The company has a total asset value of $27,978.4 million in 2022, which is a decrease from the
previous year's total asset value of $31,392.6 million. This decrease is primarily due to a decrease
in cash and cash equivalents, accounts receivable, and other current assets. However, the company
still has a significant amount of current assets, with a value of $7,018.7 million, which could be
used to fund their short-term operations. Additionally, the company has a significant amount of
long-term investments ($279.1 million), equity investments ($311.2 million), property, plant, and
equipment ($6,560.5 million), and right-of-use assets ($6,560.5 million), which could help
generate revenue in the future.
2. Structure of liabilities:
The company has a total liability value of $27,557.1 million in 2022, which is an increase from
the previous year's total liability value of $26,767.3 million. This increase is primarily due to an
increase in long-term debt and deferred revenue. The company also has a significant amount of
operating lease liabilities ($7,515.2 million), which could increase the company's future expenses.
However, the company has a reasonable amount of current liabilities ($9,151.8 million), which
could be paid off using the current assets.
3. Liquidity of assets:
Despite the decrease in cash and cash equivalents, the company still has a reasonable amount of
current assets ($7,018.7 million), including cash and cash equivalents, short-term investments,
accounts receivable, inventories, and prepaid expenses. The current ratio of the company is 0.77 in
2022 and 1.20 in 2021, which indicates that the company may face difficulty in paying off its
current liabilities in the short term. However, the company has a strong brand and generates
significant cash flows from its operations, which can help support its liquidity position.
4. Leverage:
The company has a significant amount of long-term debt, which stands at $13,119.9 million in
2022. However, the company's debt to equity ratio is 1.71, which indicates that the company is
using more debt than equity to finance its operations. This could increase the company's financial
risk, as it may face difficulty in paying off its debts in the future. Nonetheless, the company has
been able to generate healthy operating income, which can help support its debt obligations.
Overall, Starbucks Corporation has a solid asset base and generates significant operating income.
However, the company's increasing liabilities and debt may increase its financial risk in the long
run. The company may need to focus on maintaining liquidity and reducing leverage to improve
its financial quality.
Analysis Starbucks Corporation's income statement and statement of cash flows to assess
the company's profitability and earnings quality.

Income Statement Analysis:

1. Net Earnings:
Net earnings for 2022 were $3,283.4 million, which is a decrease from $4,200.3 million in 2021.
A significant drop in net earnings could be a concern, and it's essential to investigate the reasons
behind this decline.
2. Other Comprehensive Income/(Loss):
There's a notable negative impact on comprehensive income in 2022 due to unrealized losses on
available-for-sale securities, cash flow hedging instruments, and net investment hedging
instruments. Translation adjustment and other factors also contributed to the overall decrease in
comprehensive income.
3. Comprehensive Income:
Comprehensive income, including noncontrolling interests, decreased from $4,712.1 million in
2021 to $2,673.0 million in 2022. The decline in comprehensive income suggests potential
challenges or adverse external factors affecting the company's overall financial performance.

Statement of Cash Flows Analysis:

1. Operating Activities:
Net cash provided by operating activities decreased from $5,989.1 million in 2021 to $4,397.3
million in 2022. Operating cash flow is a crucial metric, and a decrease may indicate challenges in
generating cash from core business operations.
2. Investing Activities:
Net cash used in investing activities increased significantly from -$319.5 million in 2021 to -
$2,146.3 million in 2022. This increase is primarily due to reduced proceeds from the divestiture
of certain operations and higher capital expenditures.
3. Financing Activities:
Net cash used in financing activities increased substantially from -$3,651.0 million in 2021 to -
$5,638.0 million in 2022. This change is driven by increased repurchase of common stock and
higher debt repayments.
Overall Comments:
1. Profitability:
The decrease in net earnings and comprehensive income raises concerns about the company's
profitability in 2022. Factors impacting profitability include unrealized losses on investments and
increased expenses.
2. Earnings Quality:
The decline in comprehensive income is partly due to non-operating factors such as unrealized
losses, which may not reflect the core business performance. Monitoring cash flow from operating
activities is crucial for assessing the sustainability and quality of earnings. The decrease in
operating cash flow is a point of concern.

Compare the net cash flow from operating in the recent years and see whether there is
significant change or great variation of the company’s net operating cash flow. If there is,
please find the possible reasons that cause this change.
• 2022: Net cash provided by operating activities = $4,397.3 million
• 2021: Net cash provided by operating activities = $5,989.1 million
• 2020: Net cash provided by operating activities = $1,597.8 million
Analysis:
1. 2021 to 2022:
• There's a decrease in net cash provided by operating activities from $5,989.1 million in
2021 to $4,397.3 million in 2022.
• Possible Reasons:
Decrease in Net Earnings: Given the decline in net earnings from $4,199.3 million to $3,281.6
million, reduced profitability could be a primary factor.
Changes in Working Capital: Variations in accounts receivable, inventories, and other operating
assets and liabilities might have contributed to the change.
2. 2020 to 2021:
• There was a substantial increase in net cash provided by operating activities from $1,597.8
million in 2020 to $5,989.1 million in 2021.
• Possible Reasons:
Recovery from Pandemic: The year 2020 was heavily impacted by the global pandemic, and
2021 might have seen a recovery in sales and operational activities.
Cost Management: Starbucks might have implemented cost-cutting measures or operational
efficiencies.
Additional Considerations:
• Investing and Financing Activities: Changes in investing and financing activities could
also influence the overall cash flow. For instance, increased capital expenditures or debt
repayments could impact the cash flow from operating activities.
• Industry and Economic Factors: External factors such as changes in consumer behavior,
economic conditions, and industry trends could play a role in the variations.
• Management Commentary: Reviewing Starbucks' management commentary, annual
reports, and conference call transcripts could provide insights into specific factors
influencing cash flow changes.
• Future Outlook: Forward-looking statements and guidance from Starbucks about their
expectations for the future may shed light on the company's anticipated financial
performance.
Calculate key financial ratios and comment on the fundamentals of the company.
Profitability Ratios

1. Net Profit Margin:

Formula: (Net Income / Total Revenue) * 100
3,281.6
2022: 32,250.3 × 100 = 10.16%
4,199.3
2021: 29,060.6 × 100= 14.45%
928.3
2020: 23,518.0 × 100 = 3.94%

The net profit margin has decreased from 14.45% in 2021 to 10.16% in 2022. This indicates that
Starbucks' profitability has declined, which could be due to factors such as increased expenses or
decreased revenue.
2. Return on Assets (ROA):
Formula: (Net Income / Average Total Assets) * 100
2022: Average Total Assets = (Total Assets in 2022 + Total Assets in 2021) / 2
27,978.4 + 31,392.6
Average Total Assets = = 29,685.5
2
𝟑,𝟐𝟖𝟏.𝟔
ROA= 𝟐𝟗,𝟔𝟖𝟓.𝟓 × 𝟏𝟎𝟎 = 11.05%

A Return on Assets (ROA) of 11.05% for Starbucks in 2022 indicates that the company generated
a positive return on its assets during that period. This suggests that Starbucks was able to
effectively utilize its assets to generate profits.
3. Return on Equity (ROE):
Formula: (Net Income / Average Shareholders' Equity) * 100
Average Shareholders' Equity = (Shareholders' Equity in 2022 + Shareholders' Equity in 2021) / 2
(8,698.7) + (5,314.5)
2022: Average Shareholders' Equity = = (7,006.6)
2
𝟑,𝟐𝟖𝟏.𝟔
ROE = (𝟕𝟎𝟎𝟔.𝟔) × 𝟏𝟎𝟎 = (46.84)%
(5,314.5) +(7,799.4)
2021: Average Shareholders’ Equity = = (6556.95)
2
𝟒,𝟏𝟗𝟗.𝟑
ROE = (𝟔𝟓𝟓𝟔.𝟗𝟓) × 𝟏𝟎𝟎 = (64.04)%

Starbucks has a positive net income, it means that its revenues exceed its expenses, resulting in a
profit. However, the shareholders' equity is negative, it suggests that the company's liabilities
exceed its assets, resulting in a negative book value for shareholders' equity.
A negative Return on Equity (ROE) indicates that Starbucks is generating losses relative to
shareholders' equity. An increase in negative ROE from -64.04% to -46.84% suggests that the
company's performance has improved slightly, but it is still generating substantial losses. It was
due to factors such as declining incomes (from $4,199.3 million in 2021 to $3,281.6 million in
2022), increased expenses (from $24,573.8 million in 2021 to $27,866.6 in 2022), or poor
management of assets and liabilities. When a company consistently reports negative ROE, it raises
concerns about its financial health and sustainability.

Liquidity Ratios
1. Current Ratio:
Formula: Current Assets / Current Liabilities
7,018.7
2022: 9,151.8 = 0.77
9,756.4
2021: = 1.20
8,151.4
The current ratio has decreased from 1.20 in 2021 to 0.77 in 2022, indicating that Starbucks may
be facing liquidity issues and may have difficulty in meeting its short-term obligations.

Solvency Ratios:
1. Interest Coverage Ratio:
Formula: Operating Income / Interest Expense
4,617.8
2022: = 9.56
482.9
4,872.1
2021: = 10.37
469.8
1,561.7
2020: = 3.57
437

The interest coverage ratio has remained relatively stable over 2021 and 2022, indicating that
Starbucks has a relatively strong ability to cover its interest expenses with its operating income. In
2020, the interest coverage ratio was 3.57, which was significantly lower than the subsequent
years. This suggests that the company had a lower ability to cover its interest expenses in that year
which is explainable because 2020 was the first year of the global pandemic leading to lower
operating income.
2. Debt to Equity Ratio:
Formula: Total Debt / Shareholders' Equity
13,119.9+ 1,749.0
2022: Debt to Equity Ratio = = 1.71
8,698.7
13,616.9+998.9
2021: Debt to Equity Ratio = = 2.75
5,314.5

Debt to Equity Ratio has decreased from 2.75 in 2021 to 1.71 in 2022. This indicates a reduction
in the company's reliance on debt financing and a relatively stronger equity position.
Based on the information you got from the financial report, and combine with the
development of the macroeconomy and the industry, if you are CEO of the company, what
would you do to create value to your shareholders in the future 3 to 5 years? Why?

• Continue efforts to optimize costs and enhance operational

Cost Management efficiency, especially in store operating expenses and other
and Operational operating expenses
Efficiency • Monitor and manage product and distribution costs to ensure
profitability

• Evaluate the capital structure, considering the significant long-

Capital Structure term debt
Optimization • Explore opportunities to refinance debt to reduce interest
expenses, given the negative interest coverage ratio

Investment in • Allocate resources to innovative initiatives that enhance the

Innovation and customer experience, driving increased store revenues
Customer • Leverage technology to improve efficiency and convenience in
Experience customer interactions

• Explore opportunities for international market expansion,

Global Expansion particularly in regions with potential growth in coffee
and Market consumption
Penetration • Assess and adapt to changing consumer preferences and trends
in the food and beverage industry
Environmental,
• Implement and communicate ESG initiatives to address
Social, and
sustainability concerns, which can positively impact brand
Governance (ESG)
image and attract socially responsible investors
Initiatives
• Evaluate the capital structure, considering the significant long-
Debt Reduction term debt
and Shareholder • Consider returning value to shareholders through dividends and
Returns share buybacks, provided it aligns with the overall financial
strategy

Strategic • Explore partnerships and alliances with other companies to

Partnerships and enhance capabilities, expand market reach, or improve supply
Alliances chain efficiency.
Calculate the most recent P/E ratio of the company (when calculating the P/E ratio, please
use the closing price of 9 Jan. 2024). Do you think the company’s stock is undervalued or
overvalued by the market? Why?
The stock's closing price of Starbucks on January 9, 2024 is 93.09 ((SBUX), n.d.)
Starbucks EPS in 2023 (TTM): $3.58 (EPS, n.d.)
P/E Ratio = 25.99
The most recent P/E ratio of Starbucks is approximately 25.99
Comparing Starbucks P/E Ratio in the recent 5 years (Ratio, n.d.)

Starbucks PE Ratio Historical Data

Date Stock Price PE Ratio
2024-01-09 93.09 25.99
2023-03-31 102.50 33.28
2022-03-31 87.48 23.45
2021-03-31 103.27 122.94
2020-03-31 60.91 21.68

Considering the historical trend and the current P/E ratio, some investors may view Starbucks as
potentially undervalued.

References
(SBUX), S. C. (n.d.). Retrieved from Finance Yahoo:
https://finance.yahoo.com/quote/sbux/history/
Data, F. (n.d.). Retrieved from invester.starbucks: https://investor.starbucks.com/financial-
data/annual-reports/default.aspx
EPS, S. (n.d.). Retrieved from macrotrends:
https://www.macrotrends.net/stocks/charts/SBUX/starbucks/eps-earnings-per-share-diluted
Ratio, S. P. (n.d.). Retrieved from macrotrends:
https://www.macrotrends.net/stocks/charts/SBUX/starbucks/pe-ratio