Question

Evaluating Starbucks debt utilization ratios. This category of ratios are especially important to creditors and investors. Please answer in paragraph form.

Answer 1

The debt utilization ratios that I will use for Starbucks are debt ratio, debt to equity ratio and times interest earned (or interest coverage ratio). All numbers have been taken from Starbucks 2017 Annual Report.

Debt ratio = total debt/total assets. Total debt = current liabilities+long term liabilities. Total debt of Starbucks = $8,908.6 million and total assets = $14,365.6 million. Thus Starbucks debt ratio = 8908.6/14365.6 = 0.62. This ratio shows the degree of leverage being used by Starbucks and the number means that around 62% of the company’s assets are debt financed.

Debt to equity ratio = Long term debt/Equity. Total long term debt of Starbucks = $3,932.6 million and total equity of Starbucks = $5,457 million. Thus Starbucks debt to equity ratio = 3932.6/5457 = 0.72. This ratio indicates that the high figure of 0.72 will mean that degree of protection enjoyed by Starbucks creditors is low.

Times interest earned ratio = EBIT/Interest. Thus the ratio for Starbucks = 4134.7/92.5 = 44.70. Starbucks has a good interest coverage ratio and so the debt capacity of the company is strong, despite the presence of high amounts of debt in its books. High interest coverage ratio also augurs well for the bond ratings of Starbucks.