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Current Ratio
2. Capital Structure and Solvency 1.2 a. Total Debt to Equity 1 2011 0.68 0.8 2010 0.73 LT Debt/Equity 0.6 2009 0.83 0.4 Total D/E b. Long term Debt to Equity 0.2 2011 0.2 0 2010 0.25 2009 2010 2011 2009 0.31 The debt to equity ratio decreased from 2009-2011. This increase in 2011 is due to the increase in retained earnings. The debt service margin increased from 2009-2011. This increase is probably because of an increase in operating cash flows. 3. Return on Investment a. Return on Asset
Return on Assets measure has steadily improved over the last three years. It has grown from 15.81% in 2009 to 17.35% at the end of fiscal 2011. The companys assets are returning nearly $0.15 on $1.00 invested by the company. This gives Starbucks, as well as the investment community confidence that future investments will provide a nice return for the company. Return on Equity shows the return stockholders are earning on their investment in the enterprise. Starbucks shareholders return has skyrocketed in recent years, fueled by steady bottom-line growth. 4. Operating Performance a. Gross Profit Margin 2011 57.67% 2010 58.36% 2009 55.75% b. Operating Profit Margin 2011 14.77% 2010 13.26% 2009 5.75% c. Net Profit Margin 2011 10.67% 2010 8.85% 2009 4%
100% 80% 60% 40% 20% 0% 2009 2010 2011 NI margin OP margin GP margin
Gross Profit Margin indicates how efficiently a company manages its largest assets and biggest costs. From a gross profit standpoint, we like what is going on at Starbucks. The companys gross profit margin has held steady around 50% in the last three years. This indicates that no matter how the economy is performing, Starbucks has been able to efficiently manage its costs structure. Net Profit Margin shows how much profit a company makes for every $1 it generates in revenues. Starbucks net profit margin was nearly 11% in 2011. Although down a bit from 4% in 2009, the product of the aforementioned costs, it still surpassed the rate achieved in 2010. This is an encouraging sign for the company. We anticipate that the NPM will increase moving forward, as commodity costs moderate to more normal levels.
5. Asset Utilization 20.00 a. Cash Turnover 2011 10.19 15.00 2010 9.2 Asset Turnover 10.00 2009 16.29 Cash Turnover b. Total Asset Turnover 5.00 2011 1.7 2010 1.79 2009 2010 2011 2009 1.73 This ratio calculates the total revenues for every dollar of assets a company owns. Starbucks ratio stands at less than 2.0. More importantly, this ratio has decreased every year since the beginning of this decade. It shows that Starbucks has done a poor job of integrating new assets into the companys mix. Starbucks has done a worse job of utilizing its assets than all of its competitors.
2. Total debt to equity ratio: Ratio Total debt to equity [Total debt = (S-T debt + L-T debt)] / Equity
b. Investment Choice and Justification Based on Part A Based on Westfields investment criteria for investing in the company with the lowest price-to-book ratio (P/B) and considering solvency and asset utilization ratios, JDS is the better purchase candidate. The analysis justification follows: Ratio JDS MLS Company Favored i. Price-to-book ratio (P/B) 2.15 2.64 JDS: lower P/B ii. Total debt to equity 45% 47% JDS: lower debt or ratios are very similar JDS: higher turnover
iii. c.
Asset turnover
3.73
3.36
Investment Choice and Justification Based on Note Information Note: Details underlying the Balance Sheet Adjustments ($ millions): JDS: i. Leases recognition of MDSs present value lease payments will add $1,000 to JDSs property, plant, and equipment (PP&E) and is offset by a $1,000 addition to JDSs longterm debt. ii. Receivables recognition of JDSs sale of receivables with recourse will increase assets (accounts receivable) by $800 and short-term debt used to finance accounts receivable by $800. MLS: iii. Inventory recognition of LIFO inventory reserve will add $700 to assets (inventory) and
iv.
Adjusted Calculations Made ($ millions): JDS: Needed adjustments: Assets Liabilities (PP&E) (Long-term debt [LTD]) +$1,000 +$1,000 (Accounts receivable) (Short-term debt [STD]) +$800 +$800 i. Book value per common share: No net adjustment to JDS owners equity of $6,000; thus, $6,000 / 250 million shares = $24.00 book value per share ii. Adjusted total debt-to-equity ratio: $2,700 Historical LTD +1,000 LTD + 800 STD $4,500 Adjusted total debt Adjusted debt-to-equity ration = $4,500 / $6,000 = 75% iii. Fixed-asset utilization (turnover) = $5,700 Historical fixed assets +1,000 PP&E (JDS leases) $6,700 JDS adjusted fixed assets Adjusted fixed-asset utilization (sales/adjusted fixed assets): $21,250 / $6,700 = 3.17 MLS: Needed adjustments: Assets Owners Equity (Inventory) +$700 +$700 (Pension) +$1,600 +$1,600 i. Book value per common share: $7,500 historical equity + $700 + $1,600 = $9,800 Adjusted equity; thus, $9,800 / 400 million shares = $24.50 adjusted book value per share Adjusted total debt-to-equity ratio: Adjusted debt (no adjustments) / Adjusted equity = Adjusted debt / equity $3,500 / $9,800 = 36% Fixed-asset utilization (turnover): Sales / Fixed assets (no adjustments) $18,500 / $5,500 = 3.36
ii.
iii.
JDS
MLS
Final Results of Analysis: Based on Westfields investment criteria of investing in the company with the lowest adjusted Priceto-Book and considering the adjusted solvency and asset utilization ratios, MLS is the better purchase candidate. The analysis justification follows: Ratio JDS MLS Company favored i. Price to adjusted book 2.15a 2.02b MLS lower adjusted P/B ii. iii.
a b
36% 3.17
MLS lower adjusted debt to equity 3.36 MLS higher asset utilization