Starbucks Café is the industry leader in the coffeehouse industry with annual sales in 2017 of $22.38 billion. As of May 28, 2018, the price of Starbucks common stocks whose ticket symbol in the NYSE is Nasdaq was $57.92 (“Starbucks corporation”, 2018). The company has endured a long history of financial success and its common stocks are considered a blue-chip stock. Investors, managers, and other stakeholder groups often must utilize financial tools to evaluate the financial performance of a firm. Two quantitative techniques that can be used to evaluate the finances of a company based on its financial statements are vertical analysis and horizontal analyses. The purpose of this paper is to utilize both tools to assess the performance of Starbucks Café during fiscal years 2016 and 2017.
Horizontal Analysis
Horizontal analysis shows the increase or decrease of the accounts of the financial statements of a company from year to year. A horizontal analysis of Starbucks Café for 2016 and 2017 is illustrated in Appendix A and B. The revenues of the company in 2017 increased by 5.01% since the previous year. The increment in sales is a favorable sign. Starbucks obtained a net income in 2017 of $2.88 billion. Its net income increased by 2.38% in comparison with 2016. The company could have achieved a higher increase in profitability if its cost of goods sold and operating expenses had not gone up in 2017 by 15.59% and 6.76% respectively. Starbucks obtained a superb interest income increment of 154.91% as its interest income went from $108 million in 2016 to $275.3 billion in 2017. Income taxes rose by 3.83%, but a growth is taxes was expected since the company reported to the IRS higher revenues. The EBIT of the organization increased by 2.83%.
The total assets of Starbucks in 2017 went up by a moderate 0.37%. However, the total liabilities went up by 5.37% which is a negative sign since higher debt increases the interest expense of an organization and reduces the credit capacity of a corporation. In 2017 the equity of the firm reduced by 7.36%. Cash is one of the most important assets a business possess since it is its most liquid asset and it is used both to pay for operating expenses and debt obligations (Ross, 2018). In 2017 the total cash of Starbucks Café was $2,462.3. The company’s cash account rose by 15.67% in 2017 which helped the company improve its liquidity.
Vertical Analysis
Vertical analysis is an analytic technique that compares the items in the income statement and balance sheet against sales and total assets. Appendix C and D shows a vertical analysis performed on the financial statements of Starbucks Café related to 2016 and 2017. The total liabilities of the company rose by 58.84% in relation to its assets in 2017, while the equity of the firm rose by 41.16%. The net income in relation to sales which reflects the net margin went by up in 2017 by 13.22. In comparison with the industry standard the net margin of Starbucks is 8.42% higher (“Key Business Ratios”, 2018). The vertical analysis demonstrated that the cost that the company must manage the most is cost of goods sold since it represents nearly 44% of its costs. To lower cost of goods, the company must find a way to replace some of the raw materials used to build its clothes with cheaper materials. In order to decrease operating costs the organization can outsourcing manufacturing contracts to countries with expertise in apparel such as India. The future of Starbucks Café is bright if the company continues to provide its customer a superb produce and a great drinking experience.
Appendix A: Income Statement Horizontal Analysis SBUX
| Increase or decrease | ||||
| 2017 | 2016 | Amount | Percent | |
| Revenues | 22383.8 | 21315.9 | 1067.9 | 5.01% |
| Cost of sales | 9838.2 | 8511.1 | 1327.1 | 15.59% |
| Store operating expenses | 6493.3 | 6064.3 | 429 | 7.07% |
| Other operating expenses | 553.8 | 545.4 | 8.4 | 1.54% |
| Depreciation and amortization expense | 1011.4 | 980.8 | 30.6 | 3.12% |
| General and administrative expense | 1393.3 | 1360.6 | 32.7 | 2.40% |
| Restructuring and impairment | 153.5 | 0 | 153.5 | |
| Total operating expenses | 18643.5 | 17462.2 | 1181.3 | 6.76% |
| Income from equity investees | 391.4 | 318.2 | 73.2 | 23.00% |
| Operating income | 4134.7 | 4171.9 | -37.2 | -0.89% |
| Gain resulting from acquisition | 0 | 0 | 0 | |
| Loss on extinguishment | 0 | 0 | 0 | |
| Interest income | 275.3 | 108 | 167.3 | 154.91% |
| Interest expense | -92.5 | -81.3 | -11.2 | 13.78% |
| Earnings before income taxes | 4317.5 | 4198.6 | 118.9 | 2.83% |
| Income tax expense | 1432.6 | 1379.7 | 52.9 | 3.83% |
| Net earnings including noncontrolling interest | 2884.2 | 2818.9 | 65.3 | 2.32% |
| Net earnings attributed to noncontrolling interest | 0.2 | 1.2 | -1 | -83.33% |
| Net earnings attributed to Starbucks | 2884.7 | 2817.7 | 67 | 2.38% |
Appendix B: Balance Sheet Horizontal Analysis SBUX
| Assets | Increase or decrease | |||
| Current assets: | 2017 | 2016 | Amount | Percentage |
| Cash | 2462.3 | 2128.8 | 333.5 | 15.67% |
| Short-term investments | 228.6 | 134.4 | 94.2 | 70.09% |
| Account receivable | 870.4 | 768.8 | 101.6 | 13.22% |
| Inventories | 1364 | 1378.5 | -14.5 | -1.05% |
| Prepaid expenses | 358.1 | 347.4 | 10.7 | 3.08% |
| Total current assets | 5283.4 | 4757.9 | 525.5 | 11.04% |
| Long-term investment | 542.3 | 1141.7 | -599.4 | -52.50% |
| Equity and cost investments | 481.6 | 354.5 | 127.1 | 35.85% |
| Property, plant, and equipment | 4919.5 | 4533.8 | 385.7 | 8.51% |
| Deferred income taxes | 795.4 | 885.4 | -90 | -10.16% |
| Other long-term assets | 362.8 | 403.3 | -40.5 | -10.04% |
| Other intangible assets | 441.4 | 516.3 | -74.9 | -14.51% |
| Goodwill | 1539.2 | 1719.6 | -180.4 | -10.49% |
| Total assets | 14365.6 | 14312.5 | 53.1 | 0.37% |
| Liabilities and Equity | ||||
| Current liabilities: | ||||
| Account payable | 782.5 | 730.6 | 51.9 | 7.10% |
| Accrued liabilities | 1934.5 | 1999.1 | -64.6 | -3.23% |
| Insurance reserves | 215.2 | 246 | -30.8 | -12.52% |
| Stored value and liability | 1288.5 | 1171.2 | 117.3 | 10.02% |
| Current portion of long-term debt | 0 | 399.9 | -399.9 | -100.00% |
| Total current liabilities | 4220.7 | 4546.8 | -326.1 | -7.17% |
| Long-term debt | 3932.6 | 3185.3 | 747.3 | 23.46% |
| Other long-term debt | 755.3 | 689.7 | 65.6 | 9.51% |
| Total liabilities | 8908.6 | 8421.8 | 486.8 | 5.78% |
| Shareholders’ Equity: | ||||
| Common stock | 1.4 | 1.5 | -0.1 | -6.67% |
| Additional paid-in capital | 41.1 | 41.1 | 0 | 0.00% |
| Retained earnings | 5563.2 | 5949.8 | -386.6 | -6.50% |
| Accumulated other comprehensive loss | -155.6 | -108.4 | -47.2 | 43.54% |
| Total shareholders’ equity | 5450.1 | 5884 | -433.9 | -7.37% |
| Non-controlling interests | 6.9 | 6.7 | 0.2 | 2.99% |
| Total equity | 5457 | 5890.7 | -433.7 | -7.36% |
| Total Liabilities and Equity | 14365.6 | 14312.5 | 53.1 | 0.37% |
Income Statement Vertical Analysis SBUX
| 2017 | % of Sales | 2016 | % of Sales | |
| Revenues | 22383.8 | 100.00% | 21315.9 | 100.00% |
| Cost of sales | 9838.2 | 43.95% | 8511.1 | 39.93% |
| Store operating expenses | 6493.3 | 29.01% | 6064.3 | 28.45% |
| Other operating expenses | 553.8 | 2.47% | 545.4 | 2.56% |
| Depreciation and amortization expense | 1011.4 | 4.52% | 980.8 | 4.60% |
| General and administrative expense | 1393.3 | 6.22% | 1360.6 | 6.38% |
| Restructuring and impairment | 153.5 | 0.69% | 0 | 0.00% |
| Total operating expenses | 18643.5 | 83.29% | 17462.2 | 81.92% |
| Income from equity investees | 391.4 | 1.75% | 318.2 | 1.49% |
| Operating income | 4134.7 | 18.47% | 4171.9 | 19.57% |
| Gain resulting from acquisition | 0 | 0.00% | 0 | 0.00% |
| Loss on extinguishment | 0 | 0.00% | 0 | 0.00% |
| Interest income | 275.3 | 1.23% | 108 | 0.51% |
| Interest expense | -92.5 | -0.41% | -81.3 | -0.38% |
| Earnings before income taxes | 4317.5 | 19.29% | 4198.6 | 19.70% |
| Income tax expense | 1432.6 | 6.40% | 1379.7 | 6.47% |
| Net earnings including noncontrolling interest | 2884.2 | 12.89% | 2818.9 | 13.22% |
| Net earnings attributed to noncontrolling interest | 0.2 | 0.00% | 1.2 | 0.01% |
| Net earnings attributed to Starbucks | 2884.7 | 12.89% | 2817.7 | 13.22% |
Balance Sheet Vertical Analysis SBUX
| Assets | ||||
| Current assets: | 2017 | % of Assets | 2016 | % of Assets |
| Cash | 2462.3 | 17.14% | 2128.8 | 14.87% |
| Short-term investments | 228.6 | 1.59% | 134.4 | 0.94% |
| Account receivable | 870.4 | 6.06% | 768.8 | 5.37% |
| Inventories | 1364 | 9.49% | 1378.5 | 9.63% |
| Prepaid expenses | 358.1 | 2.49% | 347.4 | 2.43% |
| Total current assets | 5283.4 | 36.78% | 4757.9 | 33.24% |
| Long-term investment | 542.3 | 3.77% | 1141.7 | 7.98% |
| Equity and cost investments | 481.6 | 3.35% | 354.5 | 2.48% |
| Property, plant, and equipment | 4919.5 | 34.25% | 4533.8 | 31.68% |
| Deferred income taxes | 795.4 | 5.54% | 885.4 | 6.19% |
| Other long-term assets | 362.8 | 2.53% | 403.3 | 2.82% |
| Other intangible assets | 441.4 | 3.07% | 516.3 | 3.61% |
| Goodwill | 1539.2 | 10.71% | 1719.6 | 12.01% |
| Total assets | 14365.6 | 100.00% | 14312.5 | 100.00% |
| Liabilities and Equity | ||||
| Current liabilities: | ||||
| Account payable | 782.5 | 5.45% | 730.6 | 5.10% |
| Accrued liabilities | 1934.5 | 13.47% | 1999.1 | 13.97% |
| Insurance reserves | 215.2 | 1.50% | 246 | 1.72% |
| Stored value and liability | 1288.5 | 8.97% | 1171.2 | 8.18% |
| Current portion of long-term debt | 0 | 0.00% | 399.9 | 2.79% |
| Total current liabilities | 4220.7 | 29.38% | 4546.8 | 31.77% |
| Long-term debt | 3932.6 | 27.38% | 3185.3 | 22.26% |
| Other long-term debt | 755.3 | 5.26% | 689.7 | 4.82% |
| Total liabilities | 8908.6 | 62.01% | 8421.8 | 58.84% |
| Shareholders’ Equity: | ||||
| Common stock | 1.4 | 0.01% | 1.5 | 0.01% |
| Additional paid-in capital | 41.1 | 0.29% | 41.1 | 0.29% |
| Retained earnings | 5563.2 | 38.73% | 5949.8 | 41.57% |
| Accumulated other comprehensive loss | -155.6 | -1.08% | -108.4 | -0.76% |
| Total shareholders’ equity | 5450.1 | 37.94% | 5884 | 41.11% |
| Non-controlling interests | 6.9 | 0.05% | 6.7 | 0.05% |
| Total equity | 5457 | 37.99% | 5890.7 | 41.16% |
| Total Liabilities and Equity | 14365.6 | 100.00% | 14312.5 | 100.00% |
- Key Business Ratios (2018). Dun & Bradstreet. Retrieved from http://www.dnb.com
- Ross, S. (2018). What items in the balance sheet are most important in fundamental analysis? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/050615/what-items-balance-sheet-are-most-important-fundamental-analysis.asp
- Starbucks Café (SBUX). (2018). Yahoo. Retrieved from https://finance.yahoo.com/quote/SBUX?p=SBUX
