Starbucks Financial Statement Analysis

Net income represents the difference between the money a firm earns from its sales and the total expenses that it incurs in generating revenues over a given period. In the year 2017, Starbucks recorded a net income of $ 2,884,700 compared to $2,817,700 which the corporation reported in 2016. Therefore, there was a 2.38% increase or $67,000 from 2016 fiscal year to 2017. The net income is one of the measures of the profitability of a firm. Therefore, it is an important financial metric for investors. Investors will examine the historical profitability of a firm while assessing the risks of committing their funds in it. Thus, they will consider the net income as some essential criteria while acquiring shares of a company. The return on investment gives investors valuable information on whether a firm is generating sufficient returns on their investment thus decide whether or not it is wise to invest in the business. The number of years it takes to recoup the initial investment in a firm is calculated based on previous net income records. Subsequently, investors want to commit their investments in profitable companies and a change in the net incomes will have an impact on the investment decisions they make.Starbucks had an ending balance in shareholder's equity of $5,450,100 for the year ended October 1, 2017. Labor unions protect the rights related to labor laws and also fight for their members to obtain favorable benefits from employers. The financial statements of a company are thus crucial to labor unions since they give vital information which they use while negotiating contracts with top management. Therefore, information regarding the shareholder's equity would be of importance to labor unions as it reflects the firm's economic standing. Corporations with substantial stockholder's equity are considered as healthy hence to a labor union it would signify that the firm will continuously provide jobs to its employees. Also, a firm has the obligation of paying pension for its employees, only a company that has sufficient equity will afford these payments. Decreasing stockholder equity may mean that pension fund will subsequently fall.

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For the year ended October 2017, Starbucks reported $14,365,600 as the total value of its assets. Potential creditors would include banks and suppliers of Starbucks. Creditors have an interest in the total assets value since they need to assess the financial risk they are taking by lending money or supplies to a company. Moreover, the creditors would want to have some assurance that total assets would be sufficient to cover the lending so that in case of default the assets can be utilized to offset the debts. Therefore, the total asset value of Starbucks would act as collateral to its creditors hence assuring that their debts will be paid eventually after selling these assets in case of bankruptcy of insolvency.

Starbucks Corporation's return on assets was 19.66% in 2016 but slightly improved to 20.08% in 2017 (see appendix 1). The increase suggests that the firm's profitability improved marginally over the two years as indicated by the slight increase in the net income from $2,817,700 in 2016 to $2,884,700 in 2017. The working capital of Starbucks increased from $213,600 in 2016 to 1,062,700 in 2017. Similarly, the corporation's current ratio increased from 1.05 to 1.25 over the two years which suggest that the firm had sufficient current assets to pay off its near-term obligations. Both the working capital and current ratios indicate that the liquidity of the firm had improved over the two years. The debt to asset ratio shows the portion of a corporation's assets funded through borrowed money. Engle (2011) suggests that if the ratio is more than one, it implies that a considerable portion of the assets is funded through debt. Starbucks' debt to asset ratio increased from 0.25 in 2016 to 0.27 in 2017 which means that despite the increase, the firm is not highly leveraged. Consequently, Starbucks has more assets than its liabilities and if need be, the firm can dispose its assets and pay off its debts thus it is not risky. The corporation generated positive free cash flows of $3,134,800 in 2016, but in 2017 the cash flows decreased to $2,654,900 (see appendix 1). Despite the decrease, Starbucks generated positive cash flows over the two years more than what it needed to run its operations and finance new capital investments. Starbucks can either reinvest the excess cash flows into the business or pay dividends to investors. The two ratios suggest that Starbucks is solvent thus financially healthy since it is not highly leveraged and has been generating positive free cash flows.

In my current role as a manager financial statements are used to formulate the company's policies and plans for the future. Also, the reports give a clear picture of the company's operational activities over a period. The financial statements indicate the capital structure of a firm, sources and uses of cash and the net income. All the three financial statements are crucial for managers since they drive many business decisions. The balance sheet gives a picture of a firm's strength and its working capital, therefore, highlights possibilities of growth and efficiencies for a manager. For instance, if a manager notices high receivables on the balance sheet, he can change the credit policies and streamline collections hence improve the firm's liquidity. The cash flow statement informs a manager if a firm has the cash to meet obligations over the short-term thus presents a firm's ability to maintain operations. The information from the statement of comprehensive income gives a manager the guide on decisions that involve controls on operating expenses and the cost of sales to maintain the gross profit. Therefore, from the up to date financial statements, managers can make appropriate decisions to increase sales, reduce costs, improve liquidity, purchase new capital assets and identify suitable sources of financing. However, managers should not base their decision on one financial statement since it will not provide complete information that would facilitate making the best possible decision.

Conclusion

In conclusion, Starbucks slightly improved its overall profitability over the two years under consideration. The change in net income is crucial to investors since they would not want to invest in a firm which is generating losses year over year. The ratio analysis of Starbucks reveals a favorable performance over the two years. The profitability and liquidity of the corporation slightly improved over the two years. The firm is financially stable as shown by the low debt to asset ratio, therefore, less risky.

References

Engle, C. R. (2011). Aquaculture economics and financing. Hoboken, NJ: John Wiley and Sons.

Appendix 1. Starbucks ratios