Tim Hortons vs Starbucks Financial Situations - Case Study Example

+ Tim Hortons verses Starbucks financial case study to Basic Information about the Companies These are companies operating in the fast food restaurant industry particularly in coffee and doughnuts. Tim Horton Inc. was established in Hamilton, Ontario in the year 1964 by a Canadian professional hockey player Jim Charade and Tim Horton and later merged with Wendy’s international in 1995. In 2013, statistics showed that it was the leading Canadian fast food service with 3,588 outlets in Canada. In the United States, they were 859 and 38 in the Persian Gulf region. Tim hortons has expanded by using franchising whereby it offers a selling license to property owners to establish their own Tim Hortons stores. With 99 percent of its restaurants, more revenue is collected from royalties, rent and advertising fees which relates to 20 percent of the corporation’s total earnings. As the company has grown since being founded, it has expanded its main menu and has become a chain store offering a variety of baked goods and specialty drinks. Its command for the Canadian coffee and bakery market has risen to 80 percent and so has its contribution to all fast foods revenue in Canada to 40 percent by the end of 2013. Starbucks on the other hand is based in Seattle, Washington and was established in 1971. At that time, it dealt only with roasting and retailing ground coffee and whole bean. It is the largest coffee house in the globe with over 20,891 stores in 64 countries. 13279 stores are located in the United States. In Canada, there are 1,324 outlets, 851 in China, 989 in Japan and 806 in the United Kingdom. Starbucks in 2013 accounted for 33 percent of the United States’ market share and 16 percent in the Canadian market. Starbucks sells more than 30 blends and single origin premium Arabica coffee, and focuses on handcrafted beverages as fresh brewed coffee, hot and spiced espresso beverages. Its products are highly diversified to include fresh foods as sandwiches and salads. It also offers a diversity of baked goods. Both Tim Hortons and Starbuck offer merchandising by selling coffee makers and whole bean coffee. (Rodgers, 2008) Main Competitors The QSR industry’s (Quick Service Industry) competition is based on several factors among them being; product quality, value for money, convenience to customers, location, atmosphere, personnel service, new product development and effective franchising. The main competitors for this industry include McDonald’s corporation, Nestle and Dunkin’ Brands group. McDonald’s has offered attractive services as free newspapers, free coffee refills and superior coffee technology with new double lined coffee pots that will keep the coffee fresher and hotter for longer. In 2010, McDonald’s and Dunkin’ Brand group had a total system wide sales of 33 and 6 trillion dollars respectively while Starbucks and Tim Hortons total sales were 7.5 and 8.3 trillion dollars. This competition in the QSR industry has brought about the need to improve services and quality of products to stay ahead of the other companies. Analysis and Comparison Using Annual Report and 10-K It is a companies’ requirement to fill both the annual and 10-k reports to the SEC (Securities and Exchange Commission). The 10-k document is mandatory for all public companies and is the best for investment analysis since it gives detailed information on the company (Rodgers, 2008). The 10-k in both companies includes; the business description, risk factors, legal proceedings, selected financial data and management discussion and analysis of the current or future financial condition. The functional currency in the financial statements of Tim Hortons Inc. is Canadian dollars while that of Starbucks is the United States dollars. However, both companies prepare their financial statements with the generally accepted accounting principles (GAAPs) The amount of sales and net operating income is higher in Tim Hortons Company’s Annual report compared to that of Starbucks. This amount also will determine the amount of earnings after interest and tax deductions which are relatively higher in Tim Hortons. In the 10-k annual filing, Starbuck is diversified in computations given the large number of companies that are subsidiaries and will be consolidated in the annual reports (Rodgers, 2008). Tim Hortons however has a simplified and less structured given that revenue and expenses is accounted separately in the franchises then later included in the financial statements. Calculations Working Capital- is the amount of money that remains after all debts have been settled. These amounts will be used to settle other future expenses and also invested in available opportunities (Rodgers, 2008). Creditors will prefer a higher amount because they will be sure of timely payments while investors prefer a smaller amount to avoid opportunity cost of having idle cash. Year 2009 2010 2011 2012 2013 Starbucks 230.8m 132.4m (248.1m) (404m) 476.7m Tim Hortons (27.77m) 98.43m (132.07m) 514m 27.65m Liquidity ratios Current ratio The ratio measures if the company to settle short-term debts and obligations. It is calculated by dividing current liabilities to current assets. Optimal ratio is 2:1. High ratios indicate misuse of funds. Current ratio= current assets Current liabilities Year 2010 2011 2012 2013 Starbucks 1.15 1.92 2.05 1.43 Tim Hortons 1.39 1.58 1.27 1.24 Quick ratio Quick ratio is a determinant of the ability of the company to utilize its available and most current assets to meet current liabilities. The optimal ratio is to be 1:1 (Rodgers, 2008). A higher ratio is an indicator of funds misuse in that company. It enables an investor to determine if the company is able to handle liabilities created during operation. Quick ratio is sometimes referred to as Acid test ratio and is calculated as: Quick (acid test) ratio= cash and cash equivalents + marketable securities + Accounts receivable Current liabilities Year 2010 2011 2012 2013 Starbucks 1.24 1.36 1.34 1.43 Tim Hortons 1.34 1.57 1.27 1.24 Inventory or Merchandize Turnover Merchandize turnover states how many times the inventory held by a company has been sold. Higher ratios are considered best because they indicate how more times a company has sold its merchandize. An investor will be able to determine how adequate it will be to invest in a company that has a higher drive for sales. Year 2010 2011 2012 2013 Starbucks 8.21 5.13 4.68 5.75 Tim Hortons 22.82 19.4 21.3 26.6 Number of Days in Collecting Debts This will show if the company is having a large number of unpaid debts and if there are any bad debts. The time in days the company is willing to set aside for collection of debts will determine if it will get cash quicker to put back into the business. Therefore, shorter collection periods are preferable. Year 2010 2011 2012 2013 Starbucks 60 71 78 68 Tim Hortons 44 56 35 24 Debt to Equity Ratio Equity ratio measures the relative amount of equity used in financing a project. The amount of money invested will be indicated in relation to the assets that exist in the company. This ratio is calculated as: Equity ratio=Total shareholder’s equity Total assets Year 2010 2011 2012 2013 Starbucks 0.74 0.68 0.61 0.71 Tim Hortons 0.72 0.91 0.92 1.9 Rate of Return on Equity The rate of return on equity is defined as the amount of net income that will be generated as a result of use of shareholders’ equity. The company profitability is accessed to determine if it is capable of generating more revenue from the investments offered by shareholders. This rate is expressed as a percentage portion of income derived specifically from equity. The calculation is done as follows: Return on equity= net income Shareholder’s equity (Rodgers, 2008 The net income used in computation of this rate is the figure after deducting interest and taxation but before deducting dividends. Investors can improve ROE calculation to better their investment decisions by deducting preference dividends from the net income to get the return on common equity ROCE. Year: 2010 2011 2012 2013 Starbuck 25.73% 28.41% 27.06% 34.90% Tim Hortons 53.29% 26.54% 35.36% 34.7% Return on Assets Return on assets is used as an indicator of how a company will generate revenue from use of its assets. This ratio will test the ability of the company in managing its assets in order to develop maximum amounts of earnings (Rodgers, 2008). The rate is stated as a percentage and is referred also as return on investment. The rate is calculated as: Return on assets= net income Total assets This rate will vary frequently especially in public companies therefore the companies previous rates should be compared to the following year rates to determine the trend of returns. In this formula, the total assets include both the equity and debt because all are part of financing the company. The rate of ROA, will give investors an idea of how efficient the company is in investing the available amounts of money to generate income. Higher rates of return are better because it means the company will be earning revenue from lesser investments. Year 2010 2011 2012 2013 Starbuck 14.81% 16.92% 16.84% 18.14% Tim Hortons 31.24% 15.43% 18.52% 19.14% Analyzing Calculations Working capital if more is important for a company to be in a secure status financially and avoid losing assets when it cannot meet short-term liabilities. However, a company may invest in ventures that have high returns thus having minimal working capital. Tim Hortons has minimal working capital because it has spent on investments (Rodgers, 2008). This is good for investors because they will get higher returns if the company gets more income. The current ratio has similar applications to the working capital because it will determine the ratio of meeting current liabilities. A ratio of 2:1 is optimal so that the company will not use fixed assets in payment of simple expenses (Rodgers, 2008). Over the years indicated in the study Starbucks has a preferable ratio however, Tim Hortons has not reduced its level to extreme levels and will still be able to meet current liabilities when they become due. Quick ratio will show the liquidity of the companies’ assets. The ratio is set to remain at 1:1 because more liquidity may encourage misuse of funds. Both the companies have a similar ratio of liquidity therefore they all have easily convertible assets. Looking at the Inventory turnover, investors will determine how a companies’ product is demanded in the consumer market. Tim Hortons has a higher inventory turnover given that its products are highly demanded in the United States market. Higher sales of products are beneficial to investors who desire maximum returns. In the days used to collecting debts, Tim Hortons has had smaller figure meaning that debts are paid in time and fewer debts will be declared bad in the financial statements. Equity ratio in the computations is also important to the investors since it will indicate the ratio of their investment being used to acquire fixed assets or capital expenditure (Rodgers, 2008). Tim Hortons has a higher ratio which is a sign that the company is carrying out continuous expenditure on acquiring assets. An investor should consider investing in a company that is capable of expanding its operations and venturing to more attractive opportunities in the market. While still focusing on returns, the returns on equity will give a clear view to an investor on how a company will use the equity to maximize their profits. The amounts held in equity are to be invested in operations that will generate more income. Therefore a higher percentage of return will attract investors. In this case study, Tim Hortons has a higher rate of return on equity than Starbuck and hence more attractive to the investor. Finally, the rate of return on sales is a good way of realizing if a company commands a sizeable market share. A larger market share is important to boost the sales revenue that the company will generate and since the amount of revenue determines the dividends to be paid, an investor will prefer a venture with a higher rate of return on sales (Rodgers, 2008). Tim hortons has the highest rate of return on sales making it more desirable in terms of investment. The statement of comprehensive income states the current net operating profit that will be generated in the current financial year. This is a basis for an investor to estimate the company’s earnings per share. Higher profits in Tim Horton are desirable to an investor than Starbucks Company. Another financial statement that a company prepares is the statement of financial position which estimates the amount of assets to offset long-term and short term liabilities. Investors should invest in a company with more assets and equity than liabilities. Tim Horton Company has more assets compared to its assets unlike Starbucks that has more assets that are minimized by higher liabilities. Better Company to Invest Tim Hortons Company is the preferable company for an investor. This is because the company will offer higher returns to the investor’s share of equity. This is supported by the continuous flow of revenue and increased capital investments. The company is also growing steadily over the years from 2010 to 2013 by franchising and extending operations to neighboring countries. This is a better way to let the shares grow and acquire a higher market value then it can later be sold. This is a capital investment to the investor because it is long-term in nature. In conclusion, an investor will choose a venture based on their ability to accept risk and their speculation for the future growth (Rodgers, 2008). Work cited Rodgers, Paul, Financial analysis, Oxford: CIMA 2008, print (Rodgers, 2008) Read More