Starbucks' Financial Statements - Essay Example

Financial Ratio

2006

2007

Current Ratio

0.7904

0.7870

Debt to Equity

0.99

1.34

Return on Equity

25.32%

29.44%

(Annual Report: Starbucks 2006: Annual Report Starbucks 2007).

The current ratio shows a company’s ability to pay for its current obligations. The formula used to calculate the current ratio is current assets divided by current liabilities. The current ratio of Starbucks for both 2006 and 2007 was 0.79. In theory, the desirable current ratio is to have 1.0 current ratio or above. The metric result shows the company is able to pay for its current liabilities. The fact that the current ratio stayed at the same level is a good sign, bad would be if the current ratio of the company decreased.

            Starbuck’s debt-to-equity ratio in 2006 was 0.99 implying that the company had as much debt as equity. In 2007 the company’s ratio rose 35% meaning Starbuck's long-term debt increased. At first glance, it is never a good sign to look at year-to-year financial statements and to see more debt in the books. More debt sometimes means trouble, but necessarily. A higher amount of debt could mean a company borrowed money in order to finance some investments that will increase its profitability. To learn more about what Starbucks has done with its new money we have to analyze the firm’s profitability ratios.  Return on equity is a profitability ratio. In 2006 Starbuck's return on equity was 25.32%, by 2007 the firm had risen this ratio to 29.44%. The total increase in return on equity at Starbucks was 4.12% which represents a percentage increase of 16.27% in comparison with the previous year. The increase in return on equity at Starbucks is a good indicator. It proves so far that the company has invested its added debt total smartly and that the company is more profitable.

            The financial ratio analyses performed on Starbucks show the company heading in a good direction. The firm added a lot of long-term debt but the money apparently spends wisely on capital projects that raised the level of income of the company. The company’s ability to pay its current obligation stayed the same from year to year. The company’s increase in return on equity was a very positive sign.