Analysis of the Income Statement of Starbucks - Essay Example

Starbucks Introduction Financial ment analysis is a useful tool that is used by the investors of a company. The financial analysis can be done by the use of horizontal and vertical analysis or the use of ratio analysis. The analysis that is done on a company is usually helpful to all the stakeholders that are involved in the company. The stakeholders include the company owners who are also the shareholders of the company. The shareholders usually require value for their money and hence they mainly base their concentration on the profitability ratios of the company. The other people who are keen on the financial statements of the company are the creditors of the company who are concerned with the debt ratios of the company. The creditors of a company concentrate on the financial statement of the company so that they can determine the amount of debt that should be forwarded to the company. My paper will deal with the financial analysis of Starbucks Company. Horizontal and vertical analysis of the income statement The used of the horizontal and the vertical analysis are the 2 simplest ways of analyzing the financial statements of a company. Vertical analysis usually shows the relationship that exists between components that are found in the financial statements of the company. They are measured in the form of percentages. In the balance sheet, all the components are shown as a percentage of the total assets of the company in that particular financial period. In the income statements, the items are shown as a percentage of the net sales or the net revenue of the company. Horizontal analysis shows a way that can be used in the comparison of numbers that are found in different accounting periods. Vertical analysis of the income statement for star bucks company item 2011 percentage 2010 percentage 2009 percentage Total revenue 11700400 100% 10707400 100% 9774600 100% Cost of revenue 4949300 42.3% 4458600 41.6% 4324900 44.2% Gross profit 6751100 57.6% 6248800 58.35% 5449700 55.75% Selling expenses 4703200 40.19% 4414100 41.22% 4142500 42.38% Other expenses 523300 4.47% 510400 4.77% 534700 5.4% Net income from continuing operations 1419400 12.13% 1093700 10.21% 512700 5.245% Net income 1245700 10.6% 945600 8.8% 390800 3.99% From the vertical analysis, the company is doing goods in terms of the gross profit since most of the revenue is been converted to profits. However, there is a large of revenue that is been channeled to selling expenses. The company should work towards the reduction of the costs of the company so that the profit that is attributable to the company should increase. The percentage of net income as compared to the total revenue is a good percentage; however, with the reduction in costs and an increase in the sales, the company will earn more net profit. Vertical analysis of the balance sheet item 2011 percentage 2010 percentage 2009 percentage Total assets 7360400 100% 6385900 100% 5576800 100% Cash and its equivalents 1148100 15.56% 1164000 18.22% 599800 10.75% Net receivables 616900 8.38% 606900 9.5% 557600 9.9% Inventory 965800 13.12% 543300 8.5% 664900 11.92% Long term investments 479300 6.5% 533300 8.35% 423500 7.65 Property plant and equipment 2355000 31.99% 2416500 37.84% 2536400 45.48% Other assets 297700 4.04% 346500 5.42% 253800 4.55% Accounts payable 1626500 22.09% 1365000 21.37% 1192300 21.38% Other current liabilities 449300 7.32% 414100 6.46% 388700 5.85% Other liabilities 347800 4.96% 375100 5.67% 389600 5.92% From the vertical analysis of the balance sheet, cash and its equivalents take a large portion of the company total assets. That will imply that the company is more liquid. The liquidity levels that are high are usually appealing to creditors that are short term since that will imply that the company has the ability to cater for its short term obligations. Horizontal analysis of the income statement item 2011 2010 percentage 2009 percentage Total revenue 11700400 10707400 8.4% 9774600 8.7% Cost of revenue 4949300 4458600 5.3% 4324900 4.2% Gross profit 6751100 6248800 2.78% 5449700 7.2% Selling expenses 4703200 4414100 3.25% 4142500 3.3% Other expenses 523300 510400 2.65% 534700 -4.7% Net income from continuing operations 1419400 1093700 22.94% 512700 53.12% Net income 1245700 945600 24.09% 390800 58.67% (www.sec.gov) Horizontal analysis shows the percentage at which a company changes its items as the year’s progress. The company should nurse that it gets a positive change in percentage of its incomes and the expenses and other costs of the company should reduce so as to ensure that the profit of the company increases. Horizontal analysis of the balance sheet item 2011 2010 percentage 2009 percentage Cash and its equivalents 1148100 1164000 -1.20% 599800 43.2% Net receivables 616900 606900 2.13% 557600 3.45% Inventory 965800 543300 17.5% 664900 -4.69% Long term investments 479300 533300 -9.89% 423500 6.42% Property plant and equipment 2355000 2416500 -5.3% 2536400 -3.6% Other assets 297700 346500 -41.94% 253800 32.5% Accounts payable 1626500 1365000 28.6% 1192300 24.3% Other current liabilities 449300 414100 12.32% 388700 11.85% Other liabilities 347800 375100 -11.2% 389600 23.6% (Yahoofinance.com). The analysis of the balance sheet that is horizontal should ensure that the company makes a positive program in terms of the assets increase and the reduction in its liabilities. Liabilities are the financial obligation that a company owes to other companies who in this case can be perceived to be their creditors. Ratio analysis 2011 2010 2009 Current ratio -current assets /current liabilities 1.83 1.55 1.287 Quick acid ratio = current assets- stock)/ current liabilities 1.36 1.24 0.86 Debt to equity ratio =total liabilities/owners equity 0.67 0.73 0.83 Gross profit margin= ( gross profit/net sales)*100 57.69 58.35 55.75 Net profit margin= (net profit / net sales)*100% 10.64 8.83 3.998 Inventory turnover ratio =cost of goods/ inventory 5.12 8.21 6.50 Accounts payable ratio= (accounts payable/net sales)*100 13.9 12.75 12.19 Return on net equity= net profit/ ( total assets-total liability) 0.284 0.26 0.13 Ratio analysis can be sued to analyze the company’s performance with regard to prior year performance and the other companies that are found in the industry. The company should ensure that it makes progress in terms of the positive change that would be appealing to its investors and other company stakeholders (Cagan, 2011). Conclusion based on management’s discussion According to the management’s discussion, the financial reports of the company have been improving with time and that is a good attribute to the reputation of the company. The liquidity of the company has improved over time. The other thing that the management mentioned is the fact that the management is planning on an expansion program that will ensure that the sales revenue will increase with time and that will be a positive thing to the investors of the company who will gain form the profitability of the company. The other thing that was mentioned is the issue of cost reduction. Cost reduction is evident from the financial statements whereby the increase in costs is lower than the increase in sales volume. That is a positive change since that will ensure that the company will earn more revenue and the company will also achieve efficiency in its operations. References Cagan, M. (2011). Vertical and horizontal analysis. New York: Free press. U.S Securities and Exchange Commission. Retrieved on 6th June 2012. From http://www.sec.gov/cgi-bin/browse edgar?action=getcompany&CIK=0000829224&type=financial+report&dateb=&owner=i nclude&count=40 Yahoo Finance. Starbucks company . Retrieved on 6th June 2012. From http://finance.yahoo.com/q/bs?s=SBUX+Balance+Sheet&annual Read More