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

By using the financial statements provided, calculate the ratios presented in the table for the year 2009 and answer the following questions:

e-      In what ratio can you see the change in the mix of debt and equity reflected?

g-       Did the quick ratio increase or decrease between the years 2007 and 2009?

h-      Explain why you expect the quick ratio to increase or decrease during a recession?

j-        What areas should Starbucks improve for the years 2010 onwards, if any?

Annual report:

http://media.corporate-ir.net/media_files/irol/99/99518/SBUX_AR.pdf

Expert Answer

Answer 1

Year	2006	2007	2008	2009
ROE	0.253	0.294	0.127	Net earnings/Total equity	390.8/3045.7=	0.128
ROA	0.106	0.126	0.056	Net Earnings/Total assets	390.8/5576.8=	0.070
ROIC	0.207	0.25	0.121	EBIT/Total assets-Current liabilities	559.2/(5576.8-1581)=	0.140
Asset Turnover	1.758	1.761	1.83	Sales/Total assets	9774.6/5576.8=	1.75
Op. Profit Margin	0.115	0.746	0.048	EBIT/Total Sales	559.2/9774.6=	0.057
Long Term Debt Ratio	0.0009	0.241	0.221	LT Debt/Total assets	(549.3+400.8)/5576.8=	0.170
D/E Ratio	0.987	1.34	1.277	Total liabilities/Equity	2531.1/3045.7=	0.831
Current Ratio	0.97	0.787	0.798	Current assets/Current Liabilities	2035.8/1581=	1.288
Quick Ratio	0.462	0.466	0.482	(Current assets-Inventories)/current laibilities	(2035.8-664.9)/1581=	0.867
Payout Ratio	0	0	0	Dividends/Net earnings	0	0
Plowback Ratio	1	1	1	1-Payout ratio	1	1
Market to Book Ratio	6.088	3.099	1.374	Market price/Book Value
Stock Price Used for Mark/Book	17.71	9.45	4.68			10.9

e. Debt /equity ratio reflects the change in the mix of debt & equity --- the ratio has decreased by 1.277-0.831=0.446--ie.outside debt has decreased as well as equity(Retained earnings) has increased

g.Quick ratio has steadily increased between 2007 & 2009 --almost doubled in 2009--meaning more liquid assets to meet the current obligations.

h. The quick ratio increases during recession because firms tend to pay off its current liabilities,by encashing all the available liquid current assets ( as it is almost a-nil-growth-period) -- thus mathematically, the numerator increases while the current liabilities in the denominator ,decreases.Naturally the ratio increases.

f. The only point can be ROE has decreased in the last two years--due to increase in the equity base. A slight improvement in asset utilisation ,ie. $ sales generated can be helpful.

As in recession, liquidity seems to have improved because of cashing of current assets.