Liquidity ratios characterize the company’s ability to meet its short-term obligations. The day-to-day management of liquidity in a company consists, as a rule, of the efficient use of assets. In the medium term, liquidity management in companies in the non-financial sector is about managing the structure of liabilities (Srhoj, 2022). The required level of liquidity is specific to different industries; it depends on the level of a particular company and on the anticipated need for money at a certain point in time.
The current liquidity ratio characterizes the ability to repay all present liabilities for one year (Srhoj, 2022). For Starbucks, this indicator for 2020 was equal to 1.06; for 2021, it is equal to 1.20, i.e., it showed an increase of almost 20% (Table A1). These figures show that the company’s short-term liabilities for both years could have been paid in full when the company’s current assets were sold at market price. Moreover, the amount of these assets significantly increased during the year.
The quick liquidity ratio makes it possible to determine what part of the company’s short-term debt can be repaid by its funds within a short period of time. The value of this ratio for Starbucks as of October 2021 is 0.93 and 0.18 units higher than in 2020 (Table A1). From the given data, it can be concluded that over the year, the coefficient data approached 1, i.e., the most optimal value. Consequently, the company’s ability to cover term debts through selling highly liquid assets increased during the year. When analyzing a company’s liquidity indicators, it is essential to note that the most accurate assessment requires an analysis of its historical funding needs (Blokdyk, 2021). It is necessary to consider the current level of liquidity and its expected future funding needs and analysis of opportunities to reduce funding needs or the need to raise additional funds.
The solvency coefficient is the ratio of equity capital to the company’s total assets. It characterizes the share of funds invested by the company’s owners in its assets and determines the degree of independence from creditors. The debt-to-assets ratio assesses the proportion of total assets paid for by the company’s debt. Starbucks showed values of 1.27 (for 2020) and 1.17 (for 2021) for this ratio (Table A2). The data indicates relatively weak solvency of the company; from the dynamics of the indicators, we can conclude that the company’s financial risk has been reduced over the year. However, it is still high, demonstrating that 100% of the company’s assets are financed by debt. The debt to equity ratio assesses the leverage of a business. On this measure, Starbucks shows 1.27 and 1.17 units for 2020 and 2021, respectively. Similar to the previous criterion, based on the data, the company’s solvency is relatively weak. The values of this ratio show that the amount of debt exceeds the amount of capital stock in both 2020 and 2021.
Productivity ratios usually show the ability of a particular company to generate income. Due to these coefficients, it becomes possible to calculate balance sheet assets and share capital (Pivnyk, 2021). Most companies typically achieve a higher ratio or value because it usually means that the business is performing well, generating revenue, profit, and cash flow (Pivnyk, 2021). These ratios present quite valuable data when analyzed against the companies working in the same segment or compared to some previous periods. When developing business plans, profitability ratios are always calculated along with other metrics.
Net profit margin is a key success metric that shows how well a company is able to control its costs. A low value of the metric can indicate too much operating cost or pricing errors (Pivnyk, 2021). Besides, the lower the net margin, the more likely it is that even minor negative changes in the trade or economy could lead to losses. For Starbucks in 2020 and 2021, the net margin figures are 0, 04, and 0, 14 units, respectively (Table A3). The findings suggest that this corporation’s resistance to loss has increased by 10% over the year, and hence the likelihood of its bankruptcy has decreased significantly.
The gross profit to sales ratio from 2020 to 2021 showed an increase of 3%. It reached 70% by September 2021, which is a good indicator of the company’s readiness to withstand a crisis or to exist in a discounted sales environment (Table A3). The criterion shows the company’s high ability to use its existing assets to create profits effectively. Besides, the indicator reflects the average return received on all sources of capital.
Return on assets is a financial measure of a company that characterizes the return on the use of all of the organization’s assets. It shows the ability of an organization to generate profit without regard to the structure of its total capital, reflecting the quality of asset management in the company (Borosky, 2022). At Starbucks, in the year from 2020 to 2021, this parameter increased from 5 to 16%, more than threefold (Table A3). These dynamics suggest that the company’s ability to earn more profits with equal investment has increased. The indicator for this criterion for 2021 is relatively prosperous and characterizes the ability of the company’s management to use revenues effectively.
Return on equity shows the business’s profitability and is one of the most important indicators for deciding to buy shares or other securities of the company in question. This criterion is quite informative for investors because it allows them to assess how effectively the company uses its capital (Borosky, 2022). According to the data, Starbucks increased its return on equity by 67% in the year from 2020 to 2021 and reached the level of 79%. This data suggests that the company’s return on equity is very high and that it is largely able to recoup its investment. Nevertheless, this conclusion can be considered intermediate because the return on equity indicator is relatively unstable and should be viewed in the dynamics of several years.
Analysis of the three groups of criteria shows that, as of 2021, Starbucks shows high solvency on short-term liabilities and low ability to pay off long-term debts. Starbucks shows rather high results in terms of profitability indicators, indicating that the latter can be an attractive source of investment. Analysis of the dynamics of the indicators for the studied criteria from September 27, 2020 to October 3, 2021, suggests that the company is rapidly increasing its profitability and the solvency of its short-term liabilities. For more successful development, the corporation needs to take additional measures to improve its ability to pay long-term debts and improve the indicators of long-term solvency including debt to assets and debt to equity ratios.
Blokdyk, G. (2021). Financial Ratio A Complete Guide – 2020 Edition. 5STARCooks.
Borosky. P. (2022). Beginner’s Guide to Understanding Financial Statements and Financial Ratios. Independently published.
Pivnyk, K. E. (2021). Significant financial ratios to assess the company’s financial policy effectiveness. Financial Analytics: Science and Experience, 14(3), 347–360.
Srhoj, S. (2022). Can we predict high growth firms with financial ratios? Financial Internet Quarterly, 18(1), 66–73.
Tables with calculations
Calculations of liquidity ratios
Calculations of solvency ratios
Calculations of profitability ratios