Submit the Ratio Analysis portion of the final project. For this milestone, you will be analyzing the financial performance of Starbucks using the financial ratios of liquidity, solvency, and profitability (Critical Element III). Note: To calculate the ratio amounts, you may use the file Key Financial Ratios Explained and Set Up in Excel. This Excel document may also be used for your final project. For additional details, please refer to the Milestone Two Guidelines and Rubric document and the Final Project Guidelines and Rubric document in the Assignment Guidelines and Rubrics section of the course.By submitting this paper, you agree: (1) that you are submitting your paper to be used and stored as part of the SafeAssign™ services in accordance with the Blackboard Privacy Policy; (2) that your institution may use your paper in accordance with your institution’s policies; and (3) that your use of SafeAssign will be without recourse against Blackboard Inc. and its affiliates.Institution Release StatementI understand that SafeAssign will check this assignment against several databases for original content and that it will produce an originality report which my instructor and I can view. This report will show how my paper compares to documents available on the Internet, in many print journals, a database of other papers submitted by SNHU students, as well as a Global Database of papers submitted by all users of SafeAssign at other schools.I understand that SafeAssign will add my paper to the SNHU SafeAssign database for comparison of future papers against my work. I also understand that if I select I agree to submit my paper to the Global Reference Database below, I am agreeing to have my paper stored in a Global Database of submission so that my work will be used to compare future work of myself and other students who use the SafeAssign system. I understand that submitting my paper to the Global Database is completely voluntary. I maintain ownership of the original intellectual property created, but this document must remain a part of the SafeAssign Institutional and Global Databases.KEY FINANCIAL STATEMENT RATIOS
Liquidity ratios
rev. 3-19-2010
rev. Feb 2010
Example:
Current Ratio
Current Assets
Current Liabilities
2.0 to 1
Quick Ratio
“Acid Test”
Quick Assets *
Current Liabilities
0.9 to 1
A “2.0 to 1” ratio means that there is
$2.00 of current assets for every $1
in current liabilities, which suggests
that short-term creditors can be
reasonably sure of being paid.
If current liabilities are rising faster
than the current assets from which
they must be paid, company could
become insolvent (unable to pay
its debts) and eventually bankrupt.
Indicates extent to which claims of
If Current Ratio is OK, but Quick Ratio
short-term creditors are covered by
is low or declining, the cause may
“quick” assets*.
be excessive nonliquid inventory.
* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)
Asset Management Ratios
Accts Receivable Sales (credit only )
Turnover
Accounts receivable
6.0 times
Avg Number of
Days to Collect
365 (days in yea r)
A/R turnover ratio
60.8 days
Inventory
Turnover
Cost of Goods Sold*
Inventory*
4.0 times
Number of times per year
receivables were generated
and then paid (“turned over”)
Number of days customers are
taking to pay
Number of times merchandise
items are sold and restocked
(“turned over”) per year.
* Some publications use “Sales” as the numerator, and/or average inventory as denominator
Avg Number of
Days in Inventory
365 (days in year)
Inv. turnover ratio
91.3 days
If the turnover ratio is decreasing
or avg number of days to collec t is
increasing or is substantially greater
than credit terms (e.g., “30 days, net”),
then credit and collection policies may
need to be strengthened.
If the turnover ratio is decreasing
or number of days in Inventory is
increasing , inventory may becoming
outdated and possibly overstated
Number of days inventory remains
unsold
Debt (Leverage) (Long-term Solvency) Ratios
Debt to
Assets
Total Liabilities
Total Assets
0.50
The portion of the total financing
supplied by creditors as opposed to
the owner-stockholders.
Debt to
Equity
Total Liabilities
Total Equity
1.5
The financing supplied by creditors
as compared to financing supplied
by the owner-stockholders.
Times interest
Earned
EBIT*
Interest expense
3.2
Measures the extent to which operating
income can decline before firm is
unable to meet interest payments
Debt to Assets and Debt to Equity
are alternative benchmarks that
measure long-term solvency. Higher
ratios (high leverage ) mean greater
risk that cash flows from operations
will be insufficient to cover interest
and principal payments.
Low ratio = low margin of safety,
and can make it difficult to borrow.
* EBIT means “Earnings before Interest and Taxes”
Profitability Ratios (not applicable if net loss)
Net Profit
Margin (%)
Net Income
Sales (net)
5.1%
Net income as a percentage of sales.
If trend is down, product costs and/or
operating expenses are rising faster
than sales.
Low percentage = low safety
margin: higher risk that a decline in
sales will erase profits and result
in a net loss.
Gross Profit
on Sales (%)
Gross Profit
Sales (net)
35.2%
Gross Profit as a percentage of sales.
If low or declining, product costs may
be increasing and/or selling prices
decreasing (steeper discounts).
A low or declining Gross Profit %
indicates less ability to sell goods
at intended selling price, or rising
cost of goods, or both.
Measures how well management
is managing assets to generate
profit from operations.
A low or declining rate could mean
that assets are not being utilized
effectively.
Measures rate of return on stockholders
investment. (However, “dividend yield”
for stockholders is generally much less.)
Low return could be caused by high
debt, i.e., high interest expense.
Return
on Assets (%)
aka ROI
Return
on Equity (%)
Operating Income*
15.3%
Total Operating Assets
Net Income **
Total Equity **
18.4%
* Some publications use Net income (after tax) instead of Operating income (i.e., earnings before interest and income tax, or EBIT)
** If preferred stock exists, subtract Preferred Dividends from Net Income, and also subtract Preferred Stock from Total Equity
Market Value Ratios
Earnings per
Net Income *
$1.23
Share (EPS) Common shares outstanding
EPS is the “real” measure of profitability
used by potential investors (not used
by creditors).
* If preferred stock exists, subtract Preferred Dividends from Net Income.
EPS can decline despite an
increase in total earnings and thus
drive down the market price per
share.
Price/Earnings
Ratio (P/E)
High P/E ratio means that investors
perceive good growth potential—but
they could be (and often are) wrong.
Market Price
EPS *
16.5 times
The multiple-times-earnings that
investors are willing to pay, based on
their perception of future share price.
* If EPS is negative, ratio is “not applicable”
KEY FINANCIAL STATEMENT RATIOS
THIS YEAR
Amounts
Answer
LAST YEAR
Amounts
Answer
Liquidity ratios
Current Ratio
Quick Ratio, or
“Acid Test”
Current Assets =
Current Liabilities
=
=
Quick Assets *
Current Liabilities
* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)
Asset Management Ratios
Inventory
Turnover
Cost of Goods Sold
Inventory*
Accts Receivable
Turnover
Sales
Accts Receivable*
* Textbooks generally use “average” for the year (beginning + ending ) / 2, but it’s OK to use ending only
Debt (Leverage) (Long-term Solvency) Ratios
Debt to
Assets
Total Liabilities
Total Assets
Debt to
Equity
Total Liabilities
Total Equity
Times interest
Earned
EBIT*
Interest expense
* EBIT means “Earnings before Interest and Taxes”
Profitability Ratios (not applicable if net loss)
Net Profit
Margin (%)
Net Income
Sales
Gross Profit
on Sales (%)
Gross Profit
Sales
Return
on Assets (%)
aka ROI
Net Operating Income
Total Operating Assets
Return
on Equity (%)
Net Income
Total Equity
Market Value Ratios
Earnings per
Share (EPS)
Net Income
No. shares outstanding
Price/Earnings*
Ratio (P/E)
Market Price
EPS
Industry avg.
not relevant
prior year not required
* P/E ratio changes daily with market price. If EPS is negative, ratio is “not applicable”. Use “Basic” , not “Diluted”.
Industry
Average
Industry avg.
not relevant
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