Between about December 2007 and June 2009, the United States was considered to b
ID: 2786343 • Letter: B
Question
Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor’s 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%.
The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent.
Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009.
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
j- What areas should Starbucks improve for the years 2010 onwards, if any?
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
Explanation / Answer
Let us look at each of the parameters for improvement for Starbucks
ROE - We see that ROE had dipped in 2008 from 29.4 % to 12.7% whcih is more than 50%. This will affect the shareholder interest and as a result starbucks must ensure to provide an ROE close to 2008 figures in 2010.
ROA- Similar to ROE, ROE another ration confirming returns on assetss deployed is an efficiency parameter. The ROA had dipped 12.6% to 5.6% again a decrease of over 50%. ROA has to improve substantially in 2010. For this Starbucks must focus on improving profitability.
ROIC - ROIC also needs improvement in 2010 as it signifies the returns to the capital holders. As ROIC had gone down more than 2 times, the capital providers will expect a much higher return and therefore higher cost of capital.
Asset Turnover- Asset Turnover has shown improvement over the years and it is expected to Starbucks to maintain the same. This is an efficiency ratio. The reason for steady figures could be attributed to lower sales and lower asset deployment in 2008 due to recession
Operating Profit Margin- OPM is showing wide variations and is not steady over the years. Starbucks need to ensure steady operating margins in the future for better valuations as the risks would inherently rise in varied operating margin figures.
Long Term Debt ratio - Long term debt ratio in the 22.1 % figures seems to be a good proposition for starbucks as it is not overtly leveraged with respect to long term debt. It must continue with same debt ratios or an optimal capital structure to reduce its overall cost of capital thereby providing better returns to investors.
Debt to Equity Ratios : Debt to Equity ratio for Starbucks is more than 1 signifying over leverage. This could pose problems to starbucks in terms of distress in times of adversities. So starbucks must ensure to bring down the D/E to an optimal level. As Long Term debt ratio is less, the large D/E may be due to short term debt. This can pose liquidity problems if not managed well but more clarity can be gauged from liquidity ratios.
Current Ratio : Current Ratio is under 1 so company seems to be fairly liquid and the worry about D/E is not warranted much.
Quick Ratio : Quick ratio is just under 0.5 and Starbucks has been maintaining this, however it can consider improving quick ratios due to higher proportion of short term debt in the capital structure
Plowback Ratio and Payout ratio : Company doesn't seem to be paying any dividends as seen from the Plowback ratio of 1 . Maybe it can consider dividend payment to convey stron message to the market that its financials are strong.
Market to Book Ratio- Market to Book ratio has gone down from more than 6 to close to 1.5 as a result of recession and Stock Price falling. If the fundamentals are strong for Starbucks, it can see a renewed interest from investors due to its cheap price that is being offered now.
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