Company Profile – Second Cup
Second Cup was incepted in 1975 from a small kiosk and has become the largest Canadian coffee café franchisor. The company offers not only whole coffee beans products but has also specialized coffee blends available to its customers. The company owns 360 coffee stores in Canada and a chain of 50 franchised stores internationally (Second Cup, 2009). The company has established a unique open-end fund known Second Cup Income Fund that is listed on the Toronto Stock Exchange which owns the whole of the company’s shares and investors have the opportunity to invest in these stocks through the company’s fully owned subsidiary (Second Cup, 2009).
Ratio Analysis.
Figures for calculating ratios taken from Second Cup Annual Report (Second Cup, 2008).
Company Profile – Starbucks
Starbucks Coffee Company is one of the leading coffee houses, which offers a large variety of coffee blends, shakes, confectionaries, and other coffee-related accessories to millions of customers every year. The company started its journey in the year 1971 with its first store opening in Seattle (Starbucks, 2008). At present, it operates in 50 states of the US with 7,087 company-operated stores and also a chain of franchises in 43 other countries (Starbucks, 2008). It also has a fully owned subsidiary Tazo Tea Company which specializes in different kinds of teas from around the world (Starbucks, 2009). The company is facing tough financial conditions and has been forced to shut down many of its stores in the US as a result of the current financial crisis.
Ratio Analysis.
Figures for calculating ratios taken from Starbucks Annual Report (Starbucks, 2008).
Comparative Analysis
Both companies are in a similar industry that is involved in offering the best-brewed coffees to millions of customers every day. In recent years both companies have faced difficulties of prevailing weak economic conditions in their respective markets. The effects of economic recession have forced consumers to spend less and save more. Where companies like Starbucks and Second Cup which have enjoyed long periods of profitability and expanding businesses are now faced with the issues of sustainability and inability to generate profits from their operations. In regards to the weakening economic conditions, Starbucks is forced to shut more than one thousand stores in the US that could generate huge unemployment and investment cutbacks.
However, it is deemed necessary for companies to restructure their organizations to manage their ailing financial positions. In this analysis paper, the ratio analysis of both companies is carried out using ten important financial ratios. These ratios could be easily categorized for discussion purposes into liquidity, solvency, and profitability ratios. Under the following headings results for both companies are analyzed:
Liquidity Ratios
These ratios include current ratio, inventory turnover, days in inventory, receivables turnover, and average collection period. The current ratio of both companies remained under 1 which suggests that the companies may have problems when paying off their current obligations from their current assets. Second Cup has much better inventory management as it has been to complete almost 98 times in 2008 (137 times in 2007) its inventory cycle into sales compared to only 6.71 times of Starbucks.
Similarly, days in the inventory of Second Cup indicates great efficiency compared to Starbucks which has high days in inventory that are 54 days in 2008 and 64 in 2007 as compared to only 2.66 and 3.70 respectively of Second Cup. Receivables Turnover of Starbucks is poor at almost 15 in 2008 which has deteriorated from 32.69 in 2007 which has caused the collection period to increase to 24.35 days. On the other hand, the collection period of the Second Cup has improved and is only 8 days in 2008.
Solvency Ratio
The ratio included in the analysis is debt to total assets. Both companies have high debts. However, Second Cup has debt exceeding 109% of total assets in 2008 while on the other hand Starbucks debts as 56% of total assets in 2008. This raises major concerns regarding both companies when they are faced with declining sales. The free Cash Flow of both companies is negative and has worsened over the period of 2008-08. This suggests that the companies may be making large investments that may yield better returns in the future. However, in the case of Starbucks, its profits have been depleting and Second Cup has incurred losses.
Profitability Ratios
These ratios include profit margin, return on assets, and returns on common shareholders’ equity. Second Cup has made a loss in 2007 and 2008 which has resulted in negative values for all these three ratios. It could be observed that values of these ratios have worsened for both companies as they are facing depleting sales and difficult economic conditions which are threatening their business sustainability and even their existence.
Reference List
Second Cup. (2009). Our Story. Web.
Second Cup. (2008). Second Cup Annual Report 2008. Toronto: Second Cup.
Second Cup. (2009). Second Cup Royalty Income Fund. Web.
Starbucks. (2008). Annual Report. New York: Starbucks Coffee Company.
Starbucks. (2008). Company Fact Sheet. Web.
Starbucks. (2008). Company Timeline. Web.
Starbucks. (2009). The Company. Web.