Question

Choose a company and look at their financial statements. Using the information on the Financial Statements compute a minimum of four ratios of your choice. For each of the ratios you've calculated explain what these ratios tell about the company? Include a link to these financial statements.

Answer 1

The company that I have selected is Starbucks and I have looked at their latest annual report i.e. 2019 annual report.

The four ratios of my choice are: current ratio, interest coverage ratio, net profit margin and return on total assets.

(1): Current ratio = current assets/current liabilities = 5653.9/6168.7 = 0.92

(2): Interest coverage ratio = EBIT/interest expense = 4077.9/331 = 12.32

(3): Net profit margin = Net profit/Revenues = 3599.2/26508.6 = 13.58%

(4): Return on total assets = net profit/average assets = 3599.2/(19219.6+24156.4)/2 = 16.60%

The current ratio for Starbucks is 0.92. This is a liquidity ratio and as it is less than 1 it means that the company is having short term liquidity issues as its current liabilities exceeds its current assets. As such Starbucks is not very capable of meeting its current liabilities and it should ensure that its current assets get converted to cash faster so that funds are available to pay off its current liabilities.

Interest coverage ratio for the company is 12.32. This is a good figure and indicates that Starbucks can easily meet its interest burden. Thus Starbucks debt capacity is at a comfortable position.

The company’s net profit margin stands at 13.58% and this means that 13.58% of the company’s total earnings is left for the shareholders as a percentage of net sales. The margin of 13.58% is fairly good and indicates good efficiency levels for the company’s operations.

The company’s return on total assets is 16.60% and this indicates that Starbucks is using its capital and assets in an efficient manner.

Source: Starbucks 2019 annual report