PLEASE HELP WITH MY MODULE 11 COURSE PROJECT

Module 08 Course Project – Ratio Analysis

Ratio Analysis

Starbucks Corporation & Dunkin Brands Group

Christopher Robert Carter

Rasmussen N.P.R. Campus

Author Note

Submitted 06-11-15 to Mr. Paul Borosky for Principles of Finance B230/FIN1000

Financial Ratio Analysis Report

Financial analysis involves measuring, interpreting financial information. Financial information is obtained from financial statements. Financial ratios should be efficient and effective in order to satisfy the user needs. Most organizations use financial ratios because they contain quantitative data. The use of such data may be qualitative as it enables one to draw long range plans, Success of entities is measured through the effectiveness performance of the institutions. Therefore, financial ratios are important management tools that help to understand the trend and financial performance.

Liquidity ratios measure the extent to which the company can pay its debts as well as maintain itself by paying employees, buying inventory for internal use, services it assets and pays all other expenses. Liquidity is thus the ability to meet obligations and liabilities. Current ratios express the relationship between current assets and current liabilities. Starbucks Corporation has a current ratio of 1.37 as compared to Dunkin Brands Group which has 1.34 and this means Starbucks is able to meet obligations better than Dunkin. The quick ratio of Starbucks (1.13) is higher that of Dunkin (0.14) and this means its cash and cash equivalent are better and the stock held is minimal.

Receivables turnover ratio refers to the time or period a firm takes to collect its debts from its customers. Starbucks have a credit period of 5.8 while Dunkin’ has 41.5. Thus, Starbucks has a better ratio and its credit policies can be taken to be quality, substantial and standard. Inventory turnover is an asset turnover ratio that is of substantial advantage. It explains how many times the entity makes purchase orders in a year. For, Starbucks it makes 6 orders while Dunkin makes 42 orders in a year.

Day’s sales outstanding is the collection period of creditors. The ratio helps an investor to be able to understand whether the credit policies are of quality, substantial and standard to avoid drain on the company and make it meet its needs. For instance Starbucks has its sales remaining unpaid for up to 112 days while Dunkin has its sales remain outstanding for up to 9 days.

Fixed asset turnover ratio is the ratio of fixed assets to net sales. It indicates the extent to which the firm utilized its non-current assets to generate its revenue. The smaller the ratio means the entity has fully utilized its assets in generating revenue while the larger ratio means the firm has not fully utilized the assets to generate revenues. Since Starbucks has a smaller ratio of 1.8 (as compared to Dunkin that has 3.6) then it has well utilized its fixed assets better than Dunkin.

Total asset turnover explains the extent to which the entity has utilized its current and non-current assets to generate revenue. For instance Dunkin has a better total asset turnover ratio of 0.04 than Starbucks which is 0.59. The gross profit margin ratio considers the cost of sales and ignores other indirect cost. This shows the ability of the firm to sustain it and pay the indirect costs associated. For example, gross profit of Dunkin which is 0.94 is better than that of Starbucks which is 0.74. Operating profit margin is the ratio of EBIT to sales. It explains how much of each dollar remains after deducting operating expenses. For Starbucks 0.05 of a dollar remains after deducting operating expenses while for Dunkin, 1.38 remains after deducting operating expenses while for Dunkin, 1.38 remains after deducting the operating expenses of the entity.

Net profit margin is the ratio of net income i.e. net profit to sales. It indicates the ratio of the dollar that remains after deducting all the firm’s expenses. For Starbucks, 0.14 of a dollar remains while for Dunkin, 0.92 of a dollar remains. Return on asset is also another ratio used to express to what extent has effectively used its total assets to generate revenues. The return on assets for Starbucks is better than that of Dunkin. The reason is that for Starbucks the return is 0.23 for every dollar invested while Dunkin is 0.03 for every dollar invested.

Return on equity is the amount of income earned in a given financial period per share of common stock. For Starbucks, the net income attributed to each share held is 0.18 while for Dunkin it is 0.27. Thus, investing in Dunkin’s stock is profitable compared to Starbucks. Debt/Net worth of the entity is the capital of an entity. Starbucks has a higher net worth as compared to Dunkin. Starbucks has a positive net worth while Dunkin has negative capital. This implies that much of the investments are financed by debt in Dunkin.

Debt ratio relates a firm’s total liabilities to total assets. This indicates the percentage controlled by owners and the creditors. For instance, Starbucks is controlled by non-owners by 0.51 while Dunkin is controlled by non-owners by 0.77. This makes Starbucks a better investment portfolio.

Times interest earned relates the interest income generated to interest expense incurred. Starbucks has generated more interest than the expense it has incurred to service borrowed funds as compared to Dunkin. The times interest earned ratio for Starbucks is 4.40 while that for Dunkin is 2.19.

After reviewing all this information if I was going to invest in one of these stocks I would chose Starbucks Corporation over Dunkin Brands Group.

References

Merton, R.C. (1974). On the pricing of corporate debt. The risk structure of interest rates. The Journal Finance, 29(2), 449-470.

Sharpe, W.F., Alexander, G. J., & Bailey, J.V. (1999). Investments (vol. 6) Englewood Cliffs, NJ: Prentice-Hall.

http://finance.yahoo.com/q?s=SBUX