Starbucks Company Financial Analysis

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Starbucks is an American coffee shop chain; the analysis of the company’s financial activity is presented in this paper. Starbucks has had some pretty impressive financial performance over the past three years. In 2020, the company broke a long streak of revenue growth, dropping nearly 10% (Starbucks, 2022). However, at the same time, according to revenue, the company maintains the growth of gross profit, which indicates an optimized approach to the use of production resources. In 2021, its operating profit significantly exceeded its pre-pandemic 2019 figures, signaling Starbucks’ resilience in a complex crisis. The company generally demonstrates relatively stable growth in many balance sheet indicators.

The cash flow of financial activity by 2019 reached low levels, crossing negative values. The reason for this is the increased total liabilities; apparently, the company received a large long-term loan to add cash to the turnover (Starbucks, 2022). The crisis in the global economy explains significant jumps due to the pandemic: closed borders, problems with coffee transportation, closed coffee shops, and lockdowns. On the other hand, massive financial injections have been beneficial in keeping the company afloat on meager revenue in 2020 (Starbucks, 2022). Judging by the negative cash flow from investments, Starbucks buys long-term assets annually in approximately equal amounts. The company’s assets peaked in 2018, as did net income and revenue.

The increase, however, was accompanied by a change in long-term debt, which almost tripled. After 2018, Starbucks’ current ratio went negative, reflecting on its ability to repay its short-term liabilities. Although the company managed to correct this situation by 2020, further development should already be qualitative due to several reasons. First, the company realized almost its full geographic potential, in connection with which Starbucks diversified its products into retail coffee packs (Starbucks, 2022). Opening up a new market for itself, the company has attracted many significant investments, also due in large part to the focus on the environmental agenda (Starbucks, n.d.). Secondly, the significantly increased long-term debt in 2018 quite noticeably disrupted its relationship with existing capital, increasing it by several whole units. In this regard, Starbucks must have a long-term development strategy, including product diversification expansion of the range of services in the new post-pandemic world, where it is necessary to place particular emphasis on delivery services and online sales.

As it turns out, Starbucks made an important decision to take long-term, large loans to launch various projects within the company and achieve various goals. The debt to equity ratio shows that the company is in a difficult situation in terms of long-term liabilities: a relatively high indicator of this ratio in 2018 fell into negative values ​​by the next three years (Starbucks, 2022). The current ratio is gradually corrected after 2019, gradually reaching a value greater than one, which improves the company’s position in the short term. However, the quick ratio has not yet grown to the value of one at the same time due to low accounts receivable rates. However, the company’s cash and cash equivalents increased more than 50% compared to the previous year, 2020 (Starbucks, 2022). While this is partly due to the pandemic, the company had never had such a performance, except in 2018, when the loan was allegedly received. This indicator is more than five times higher than the average value from a ten-year perspective. In addition, if we fully evaluate all the company’s liabilities, they finally took a positive trend and began to decrease in 2021 (Macrotrends, 2022). In fact, despite a tough 2020, Starbucks has been able to streamline its financial and operational performance and not only bounce back but significantly outperform it.

Return on equity exceeded 300 points in 2018 but then fell to negative values. Strong earnings performance in 2018 caused a similar spike in ROE statistics; however, the stable value previously fluctuated around 40 and now does not rise above -50 (Macrotrends, 2022). Although the company’s net income is growing, so is the need to pay dividends to the company’s shareholders, which may indicate inefficient use of capital. However, in this situation, the inefficiency is primarily caused by the consequences of the pandemic, when most of the company’s resources and assets were not involved in operations due to restrictions.

Finally, the stable growth of the net profit margin signals the correct pricing policy and optimizes Starbucks’ operations. At the same time, it is now difficult to predict what dynamics this indicator will have in the coming years since now it has just returned to the pre-pandemic level. Starbucks needs to better control its costs, especially given its significantly increased long-term debt. Greater control over costs and their optimization with growing revenues can make it possible to achieve the most critical development of the gross profit ratio, which makes it possible to maintain or reduce production costs with positive sales dynamics. Given that Starbucks is doing quite well in its operations, the company needs to improve at this point. In other indicators that affect net profit, the company’s potential has already been mainly realized.

References

Macrotrends. (2022). Starbucks financial ratios for analysis 2009-2022. Web.

Starbucks. (2022). FY21 annual report. Web.

Starbucks. (n.d.). Starbucks announces coffee-specific environmental goals. Web.

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BusinessEssay. (2023) 'Starbucks Company Financial Analysis'. 12 January.

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BusinessEssay. 2023. "Starbucks Company Financial Analysis." January 12, 2023. https://business-essay.com/starbucks-company-financial-analysis/.

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BusinessEssay. "Starbucks Company Financial Analysis." January 12, 2023. https://business-essay.com/starbucks-company-financial-analysis/.