Company Background
There are many competitors in the world of coffee. These companies take the simplicity
of a coffee bean and create a complex beverage that people all over the world crave. The
leading competitor in this industry is Starbucks Coffee Company. This company thrives
on the quality of coffee it serves and its exceptional customer service. Starbucks”€™
mission statement states: “Establish Starbucks as the premier purveyor of the finest coffee
in the world while maintaining our uncompromising principles while we grow. The
following six guiding principles will help us measure the appropriateness of our decisions:
– Provide a great work environment and treat each other with respect and dignity.
– Embrace diversity as an essential component in the way we do business.
– Apply the highest standards of excellence to the purchasing, roasting and fresh delivery
of our coffee.
– Develop enthusiastically satisfied customers all of the time.
– Contribute positively to our communities and our environment.
– Recognize that profitability is essential to our future success.”€
In order to maintain this mission many steps are taken to enhance each store within the
vast company.”€ (Our Starbucks Mission)
Over the course of a decade, Starbucks has successfully made specialty coffee part of the
American experience. Beyond that, Starbucks seized growth opportunities in other
markets that now make them an intense competitor with businesses outside of the coffee
industry. Starbucks not only sells the worlds finest coffee but also manufactures and sells
other products to the public. They created a name that is internationally known due to the
heightened sales of their coffee and other products.
Research Paper Task
The purpose of this research paper is to evaluate the United States Securities and Exchange
Commissions (SEC) Annual 10-K Report for Starbucks. Utilizing the Annual Report,
major accounting ratios will be evaluated for this company and for other competitors
within its industry. This research paper will also identify the companys current corporate
issues and violations and will also seek solutions to prevent future occurrences of these
violations.
Major Accounting Ratios
The SEC Annual 10-K for Starbucks provides financial accounting data in various
financial accounting statements. To make sense of this data, major accounting ratios can
be determined to understand the relationships that exist between the data. The following
section defines fifteen major accounting ratios for Starbucks. The section will compare
the accounting ratios from 2008 to 2009, and it will also compare Starbucks”€™ ratios to
the ratios found in Starbucks”€™ major competitors. According to the SEC Annual 10-K
report, “The Companys primary competitors for coffee beverage sales are quick-service
restaurants and specialty coffee shops”€ (SEC 10-K Starbucks Corporation) McDonalds
and Diedrich Coffee were the companies selected for a comparison of the major
accounting ratios. McDonalds represents a “quick-service restaurant,”€ and Diedrich
Coffee represents a specialty coffee shop”€. The following two tables summarize the
major accounting ratios for Starbucks, McDonalds and Diedrich Coffee for 2008 and 2009.
The ratios were calculated based on data provided in each companys SEC Annual 10-K
report.
Table 1: Major Accounting Ratio Comparison for 2008
Table 2: Major Accounting Ratio Comparison for 2009
The first of the major accounting ratios is financial leverage, and it is defined as average
total assets divided by average stockholders”€™ equity. The financial leverage ratio
communicates the companys financial strength by identifying how much of the companys
funding is its own funds or if the company borrows most of its funding. Financial
leverage for 2008 and 2009 for all three companies ranges between 1.0 and 3.0. Thus,
each company generally operates more-so under its own funding, which is approximately
two times larger than borrowed funds.
The second of the major accounting ratios is total asset turnover, and it is defined as sales
revenues divided by total assets. The relationship between revenue and assets provides
insight to the companys profit margin. In 2008, Starbucks had the highest total asset
turnover at 1.83, compared with its competitors. At a 1.83 total asset turnover, Starbucks
was using $1 of assets to generate $1.83 of revenues. With the highest total asset turnover
relative to its competitors, it can be concluded that Starbucks has a lower profit margin on
its products compared to its competitors.
The third of the major accounting ratios is net profit margin, and it is defined as net
income divided by net sales. Diedrich Coffee was unsuccessful in 2008 with a net profit
margin being -34%. The company saw slowing improvements in 2009, with a net profit
margin of 3%. Starbucks was fairly successful both in 2008 and 2009 with net profit
margins of 4% and 6%, respectively. McDonalds was the most successful in both years
with net profit margins of approximately 20%. Although these three companies have
different operating activities, the net profit margin ratio expresses each companys general
profitability.
The fourth of the major accounting ratios is return on equity, and it is defined as net
income divided by stockholders”€™ equity. The rate of return on owners investment was
best realized by McDonalds. McDonalds was consistent through years 2008 and 2009,
showing a 32% return on equity. Starbucks was also consistent through years 2008 and
2009, but with only a 13% return on equity. Diedrich Coffee suffered a -150% return on
equity in 2008 and showed improvement in 2009 with a 12% return on equity.
The fifth of the major accounting ratios is gross profit percentage, and it is defined as gross
profit divided by net sales. The percentage of the companys earnings or profit after cost
