Question

What would the calculations look like for Starbucks 2018 annual report on the listed ratio?

ROE =Net income - preferred dividends/Average common stockholders' equity

My number feels incorrect and i'm trying to see where I went wrong. I used 4518.3(Net income), couldn't find preferred dividends and (1175.8(2018)+5457(2017))/2= 1394.6 (Average common stockholders' equity).

I am questioning if I pulled the correct numbers from the annual report. My ratio was 136%, if that is correct what does it mean being such a high number?

Answer 1

With the provided facts in your problem,

1st : Your calculation for average common stockholder will come to 3316.4

2nd: Generally Preference Shareholders dividend can be calculated by paid up value of Preference Stockholders' value with the specified percentage of their dividend rights.

like if you are provided with 10000, 10% preference shareholders of $100 each then you get paid up preference value to be $1,000,000. Now to calculate preference dividend simply find the 10% of paid up value coming to be $100,000.

3rd: If there is everything correct and you still get ROE as higher as 136% then it means:

(i) Company is doing exceptionally well, or

(ii) The company is highly levered, as it has employed more borrowed fund instead of paid up capital.

(iii) The company has huge retained earnings in its reserves. The company is following growth model instead of dividend model.

To understand this point see this comparative analysis:

Growth Model	Dividend Model
Paid Up Capital $10000	Paid Up Capital $100000
Retained Earning $90000	Retained Earning Nil(Payout Ratio 100%)
Total Capital & Reserve $100000	Total Capital & Reserve $100000
Profit after Tax and Pref Dividend $120000	Profit after Tax and Pref Dividend $120000
ROE= $120000/$10000 = 1200%	ROE= $120000/$100000= 120%

I hope this will bring you some clarity.