Hanna Stokes, Molly Kimbro, and Nicole Majewski

Finance Final Paper

April 30th, 2017

 The economy can be very unstable and very unpredictable. With that being said,

companies across the world find it to be a constant struggle to keep their businesses running

smoothly. Just as it takes a whole company to be successful, there are certain criteria that can

help determine how financially healthy a company is at the time. For example, the coffee

company, Starbucks, seems like a goldmine within the coffee industry. However, the company

has certain strengths and weaknesses among its competitors that include Dunkin’ Donuts and

McDonalds. Therefore, it is crucial to understand various aspects within a company such as

Starbucks to determine its overall financial standing. To conclude the financial health of the

company, Starbucks, our group focused on analyzing the company’s stock prices, knowing their

financial standings in relation to their competitors, knowing their investment risks and

identifying the company’s strengths.

Stock price growth is a good determinant of a company’s financial health. However, not

only is a company worried about their own stock prices, but also in relation to their competitors

and in relation to the overall stock market prices. Starbucks’ stock prices over the last five years

have nearly doubled. In 2013 is was priced at $39.20 and grew to $57.43 by 2017. However, in

relation to Dunkin’ Donuts and McDonald’s, their stock prices are much lower. Both of its

competitor’s stock prices have increased tremendously over the last five years. Dunkin’ Donuts

started at $48.20 in 2013 and stands at $64.47 in the year 2017. McDonald’s is even more

impressive as it grew from $97.03 in 2013 to $172.12 in 2017. So although Starbucks’ stock

prices are increasing, it is much lower than that of its competitors. McDonald’s stock prices sit

well above companies like Dunkin’ Donuts and Starbucks as it can be seen by these numbers

above. However, all three of these competitors’ stock prices are increasing just as the overall

stock market has over the last five years. The market in 2013 was sitting at $142.79 and rose to
$225.71 by 2017. These companies’ stock prices are increasing along with the overall market.

However, the companies’ prices are not more than half of the overall market. Starbucks falls

below its competitors and the market when analyzing their stock prices. The company’s financial

health may look startling because of its gap of stock prices in relation to Dunkin’ Donuts,

Starbucks and the overall stock market.

Dunkin' Overall
Year Starbucks Donuts McDonald's Market

$ $ $
48. 97.0 142
2013 $ 39.20 20 3 .79

$ $ $
42. 93.7 183
2014 $ 41.03 65 0 .85

$ $ $
42. 118. 208
2015 $ 60.03 59 14 .44

$ $ $
52. 121. 200
2016 $ 55.52 44 72 .02

$ $ $
64. 172. 225
2017 $ 57.43 47 12 .71
 Although a company can control most of their strengths and weaknesses, there are

various risks that a company like Starbucks might have a hard time controlling. For example,

Starbucks faces the risk of the United States and international markets economic conditions.

This risk could evolve due to the performance of the overall market and can depend on consumer

behavior at the time. The overall economy can directly affect the financial health of Starbucks.

When focusing on the company itself, Starbucks health depends on their own success such as the

value of their brand and failure to preserve their value through their actions or that of business

partners can harm their financial standings. Another risk can involve incidents involving food or

beverage-borne illnesses, tampering or contamination or products can harm the health of

Starbucks’ consumers. Starbucks also relies on technology. Therefore, the wrong use,

inadequacy or interruption of technology could harm their ability to effectively operate. In order

to be financially successful, Starbucks has to be successful in implementing important strategic

initiatives or effectively managing growth. Therefore, the risk of not doing so means the

financial results of Starbucks will be harmed. Starbucks also faces the risk of intense
competition within its industry along with relying on the financial performance of their target

market. With that being said, Starbucks success also depends on the cost of its raw materials

such as Arabica coffee beans and the availability of Arabica coffee beans. The supply chain

could also alter Starbucks ability to produce or deliver their product which would alter their

financial position. The company also faces the risk of being able to meet the markets

expectations and be able to compete with the stock market fluctuations. Starbucks must also be

able to provide a qualified staff to keep their performance. Lastly, Starbucks’ financial results

depend on its ability to comply with applicable laws.

Despite all the risks mentioned above, there are a select few that might be more likely to

impact Starbucks over the next few years than the others. For example, the overall market is

extremely hard to control. Therefore, the market conditions overall the next few years seems to

be a large risk for the company. The market is hard to control and predict which is why it raises

such a concern for the company’s financial position over the next year or two. Another risk that

is most likely to affect the company, is competition and its ability to fulfill its target markets’

needs. The coffee industry it very competitive, therefore if Starbucks fails to supply customers

with their needs or falls behind the competition, their health will be affected. Lastly, technology

is most likely to be a risk within the company. If Starbucks fails to adapt to technology or use it

in the wrong way, their finances will be affected. The digital age in on the rise, therefore

technology proves to be a great threat over the next few years. So although Starbucks faces

various risks within their financial position, some risks are more likely to occur in the next few

years than others.

Although Starbucks does a great job using their strengths and minimizing their weakness,

managing certain risks can be difficult. The risks mentioned above may be hard to control all at
once, especially since some of the risks are out of the company’s control. However, managing

these risks are crucial in order for Starbucks to remain financially healthy.

When analyzing Starbucks strengths and weaknesses, our group focused on Porter’s Five

Forces. It is important for a company such as Starbuck’s to try and be as successful as they can

within all five of the forces. Starbuck’s does a fairly good job competing against new

competitors that may enter the coffee business, they also fulfill their job within supplying and

buying and do well within differentiating their products to fight off substitutes. However, out of

Porter’s Five Forces, Starbucks succeeds the most within “Jockeying for Position.” This force

focuses on rivalry amongst existing competitors. To compete against companies such as

Dunkin’ Donuts and McDonald's, Starbucks uses price and the quality of their products. It is

hard for the company to differentiate itself since both competitors are equal in size and equal in

power. The coffee industry is also very simple, therefore it is hard for these companies to

differentiate themselves when selling such a basic product, like coffee. However, Starbucks is

starting to sell more than coffee. The company has started to introduce new products like new

drinks such as teas or unique lattes. The company also introduced new breakfast food in order to

fight off McDonald’s and Dunkin’ Donuts. The company itself also focuses on differentiating

their customer service and how they treat their employees from the competition. Starbucks is

choosing to have informal chats with consumers to get a better idea on how to position their

brand. They also make their own employees partners and give them stock options. Therefore,

Starbucks works hard to increase their customer service and they treat their employees with

respect. So although the coffee industry may seem to be hard to differentiate from company to

company, Starbucks does a great job “Jockeying for Position.” The last of Porter’s Five Forces is
where Starbucks beats their competition. This helps Starbucks financially and increases their

overall financial health and position within the market.

In addition to finding strengths and weaknesses for a company’s financial health, it is

important to provide an analysis of ratios as evidence in order to determine the company’s

financial position. Our group managed to analyze a numerous amount of ratios to accurately

assess the financial position of Starbucks. In order to get a more accurate and complete

understanding of our company’s position, we also analyzed the financial ratios of Dunkin Donuts

and McDonalds. It is important to compare our company’s ratios to our competitors in order to

see where our company is excelling, where it could improve, and where our company stands

overall.

In order to determine the growth of our company, we calculated many different ratios for

our company Starbucks and its competitors, Dunkin and McDonalds. Our first ratio that we

calculated is change in net working capital. The change in net working capital is calculated by

taking our company’s current assets minus its current liabilities. This calculation is important to

companies because it shows the firm’s short-term liquidity while also letting management of the

company the ability to use their assets efficiently.

Starbucks

❖ Change Net Working Capital

➢ Year 1: 4168700-3038700=1130000
➢ Year 2: 3971000-3648100=322900
➢ Year 3: 4757900-4546800=211100
➢ Year 4: 5283400-4220700=1062700
➢ Year 5: 6883500-6841100=42400
Dunkin

❖ Change Net Working Capital

➢ Year 1: 461.76M-344.3M=117.46M
➢ Year 2: 442.62M-355.52M= 87.1M
➢ Year 3: 557.82M-418.79M=139.03M
➢ Year 4: 606.36M-424.2M=182.16M
➢ Year 5: 1.32B-471.98M=848110000

McDonald’s

❖ Change Net Working Capital

➢ Year 1: 4185500-2747900=1437600
➢ Year 2: 9643000-2950400=6692600
➢ Year 3: 4848600-3468300=1380300
➢ Year 4: 5327200-2890600=2436600
➢ Year 5: 5892500-2743300=3149200

The current ratio is very important when measuring a company’s financial health and

their financial position because it measures a company's ability to pay short-term and long-term

obligations. The Current ratio is a comparison of current assets to current liabilities and is

calculated by dividing the company’s current assets by their current liabilities. We analyzed the

last five years of all three companies; Starbucks, Dunkin Donuts and McDonalds. In each year

for Starbucks, their current ratio was at least one which is what is usually expected. They align

well in relation to their competitors, but they are not the dominant company. Dunkin Donuts

numbers were all above one and their ratio seemed to increase steadily over the five years.

McDonald’s numbers seemed to vary each year, but overall there ratios were above one.

Starbucks

❖ Current Ratio
➢ Year 1: (5,471,400/5,377,300) = 1.02
➢ Year 2: (4,168,700/3,038,700) = 1.37
➢ Year 3: (4,352,700/3,653,500) = 1.19
 ➢ Year 4: (4,760,500/4,546,900) = 1.05
➢ Year 5: (5,283,400/4,220,700) = 1.25

Dunkin
❖ Current Ratio
➢ Year 1: (461.76M/344.30M) = 1.34
➢ Year 2: (442.62M/355.52M) = 1.24
➢ Year 3: (557.82M/418.79M) = 1.33
➢ Year 4: (606.36M/424.20M) = 1.43
➢ Year 5: (1.32B/471.89M) = 2.79
McDonalds
❖ Current Ratio
➢ Year 1: (5,050,100/3,170,000) = 1.59
➢ Year 2: (4,185,500/2,747,900) = 1.52
➢ Year 3: (9,643,000/2,950,400) = 3.27
➢ Year 4: (4,848,600/3,468,300) = 1.40
➢ Year 5: (4,790,300/3,740,200) = 1.28

Similarly to the current ratio, the quick ratio is also a good determinant in assessing a

company’s financial position. The quick ratio is a measure of how well a company can meet its

short-term financial liabilities. It is calculated similarly to the current ratio but subtracting

inventory from the current assets. Over the last five years, we found ratios for each of the three

companies, Starbucks and its competitors. We found that Starbucks numbers increased over

time yet they are not the most dominant in relation to their competitors. McDonalds had much

bigger ratios than Starbucks. Dunkin did not provide information about their inventory so their

quick ratio is the same as their current ratio. Therefore, this ratio was hard to compare the

companies.

Starbucks:
❖ Quick Ratio
➢ Year 1: (3,795,200/5,377,300) = .71
➢ Year 2: (2,474,800/3,038,700) = .81
➢ Year 3: (2,330,400/3,653,500) = .64
➢ Year 4: (3,032,000/4,546,900) = .67
➢ Year 5: (3,561,300/4,220,700) = .84
Dunkin:
❖ Quick Ratio
➢ Year 1: (461.76M/344.30M) = 1.34
➢ Year 2: (442.62M/355.52M) = 1.24
➢ Year 3: (557.82M/418.79M) = 1.33
➢ Year 4: (606.36M/424.20M) = 1.43
➢ Year 5: (1.32B/471.89M) = 2.79
McDonald’s:
❖ Quick Ratio
➢ Year 1: (4,118,500/3,170,000) = 1.30
➢ Year 2: (3,292,300/2,747,900) = 1.20
➢ Year 3: (8,984,200/2,950,400) = 3.05
➢ Year 4: (2,697,500/3,468,300) = .78
➢ Year 5: ( 4,240,200/3,740,200)= 1.13

Not only did we measure how well a company can meet its short term financial liabilities,

but we also measured the extent of the company’s financial leverage. We measured Starbucks,

Dunkin Donuts, and McDonald's’ total debt ratios. This ratio can be interpreted as the proportion

of a company's assets that are financed by debt. We calculated the ratio by dividing total

liabilities by total assets. Both of which we found on the companies balance sheets. Their

numbers aligned well with their competitors. We did find though, that Dunkin Donuts had the

highest percentages, and Starbucks had the lowest which is a good thing. A higher debt ratio can

sometimes make it more difficult to borrow money, although larger and more established

companies are able to push the liabilities side of their ledgers further than newer or smaller

companies. Larger companies usually have more solidified cash flows and are also more likely to

have negotiable relationships with their lenders.

Starbucks
❖ Total debt ratio
➢ Year 1- 61.11%
(11.52B-4.48B)/11.52B
➢ Year 2- 50.98%
(10.75B-5.2B)/10.75B
➢ Year 3- 53.14%
(12.42B-5.82B)/12.42B
➢ Year 4- 58.83%
(14.31B-5.89B)/14.37B
➢ Year 5- 62%
(14.37B-5.46B)/14.37B

Dunkin’
❖ Total debt ratio
➢ Year 1- 88.61%
(3.62B-4.12.29M)/(3.62B)
➢ Year 2- 88.21%
(3.18B-374.95M)/3.18B
➢ Year 3- 1.07
((3.2B-(220.74M))/3.2B
➢ Year 4- 1.05
((3.23B-(163.26M))/3.23B
➢ Year 5- 99.79%
(3.94B-8.45M)/3.94B
McDonald’s
❖ Total debt ratio
➢ Year 1- 56.29%
(36.63B-16.01B)/36.63B
➢ Year 2- 62.51%
(34.28B-12.58B)/34.28B
➢ Year 3- 81.31%
(37.94B-7.09B)/37.94B
➢ Year 4- 1.07
((31.02B-(2.2B))/31.02B
➢ Year 5- 75.31%
(33.01B-8.15B)/33.01B
 After measuring the extent of a company’s financial leverage, we also needed to measure

the company’s ability to honor its debt payments. We used the times interest earned ratio for all

three companies to determine this. We measured the different company’s ability to pay their debt

over the last five years. The ratio is calculated by taking a company's earnings before interest and

taxes and dividing it by the total interest payable on bonds and other contractual debt. In 2013,

Starbucks ended the year with a negative number which was not good for them. Though, over the

next four years, Starbucks brought this number up tremendously and remained constant. In

relation to their competitors, their numbers were scattered.

Starbucks
❖ Times interest earned ratio
➢ Year 1: ((201,800)/28,100) = $-7.18
➢ Year 2: (3,223,800/64,100) = $50.29
➢ Year 3: (3,973,500/70,500) = $56.36
➢ Year 4: (4,279,900/ 81,300) = $52.64
➢ Year 5: (4,410,000/92,500) = $47.68
Dunkin
❖ Times interest earned ratio
➢ Year 1: (262.43M/76.85M) = $34.14
➢ Year 2: (302.44M/63.99M) = $47.26
➢ Year 3: (285.03M/98.91) = $28.82
➢ Year 4: (390.78M/103.03) = $37.93
➢ Year 5: (424.18M/104.42) = $40.62
McDonald’s
❖ Times interest earned ratio
➢ Year 1: (8.48B/521.5M) = $16.26
➢ Year 2: (7.99B/570M) = $14.02
➢ Year 3: (7.2B/637.8M) = $11.28
➢ Year 4: (7.51B/884.3M) = $8.49
➢ Year 5: (7.4B/921.3M) = $8.03

After calculating cash coverage ratio, we needed to measure our company’s performance.

This ratio is calculated by taking 365 divided by our receivables turnover ratio. The average

days sales inventory ratio gives investors in our company an idea of how long it takes our

company to turn its inventory into sales. When looking at this ratio, a company generally wants a

lower or shorter average days sales inventory. However, this ratio varies from different

companies.

Starbucks
❖ Avg. Days Sales Inventory
➢ Year 1: (365/26.49)=13.78
➢ Year 2: (365/26.05)=14.01
➢ Year 3: (365/26.63)=13.71
➢ Year 4: (365/27.72)=13.17
➢ Year 5: (365/25.71)=14.20
Dunkin
❖ Avg. Days Sales Inventory
➢ Year 1: (365/8.95)=40.78
➢ Year 2: (365/7.13)=51.20
➢ Year 3: (365/6.32)=57.75
➢ Year 4: (365/9.73)=37.51
➢ Year 5: (365/8.39)=43.50

McDonald’s
❖ Avg. Days Sales Inventory
➢ Year 1: (365/21.30)=17.14
➢ Year 2: (365/22.68)=16.09
➢ Year 3: (365/19.55)=18.67
➢ Year 4: (365/16.75)=21.80
➢ Year 5: (365/13.91)=26.24

In order for a company to be financially healthy, they must also be able to use their assets

efficiently. We measured this on all three companies using the receivables turnover. After

analyzing Starbucks and comparing them to their competitors, we found that Starbucks had high

numbers in relation to their receivables and compared to their competitors. This is a huge
strength of their company. Because they have higher ratios, we know that Starbucks is able to

retrieve their money owed to them quickly.

Starbucks
❖ Receivables Turnover Ratio
➢ Year 1-14.87B/561.4M)=26.49
➢ Year 2-(16.44B/631M)=26.05
➢ Year 3-(19.15B/719M)=26.63
➢ Year 4-(21.31B/768.8M)=27.72
➢ Year 5-(22.38B/870.4M)=25.71

Dunkin’
❖ Receivables Turnover Ratio
❖ Year 1-(713.84M/79.77M)=8.95
❖ Year 2-(748.71M/105.06M)=7.13
❖ Year 3-(810.93M/128.36M)=6.32
❖ Year 4-(828.89M/85.18M)=9.73
❖ Year 5-(860.5M/102.52)=8.39

McDonald’s
❖ Receivables Turnover Ratio
❖ Year 1-(28.11B/1.32B)=21.30
❖ Year 2-(27.44B/1.21B)=22.68
❖ Year 3-(25.41B/1.3B)=19.55
❖ Year 4-(24.62B/1.47B)=16.75
❖ Year 5-(22.82B/1.64B)=13.91

Not only does a company need to use their assets efficiently, but they also need to be able to

generate sales from those assets. The total asset turnover ratio helps determine whether or not a

company is financially healthy and can generate sales in their company from their assets. This

can be calculated by dividing sales or revenue by the total assets of the company. We analyzed

this ratio for all three companies over the last five years. Starbucks did well in their asset

turnover ratio. The three companies had similar numbers when compared to one another. We

noticed that McDonald’s has had the higher numbers in most of the ratios we analyzed, yet their
turnover ratios were quite low. Both Dunkin and Starbucks are quite equal in their asset turnover

numbers.

Starbucks
❖ Total Asset Turnover Ratio
➢ Year 1- 1.29
(14.87B/11.52B)
➢ Year 2- 1.53
(16.44B/10.75B)
➢ Year 3- 1.53
(19.15B/14.31B)
➢ Year 4- 1.49
(21.31B/14.31B)
➢ Year 5- 1.56
(22.38B/14.37B)

Dunkin’
❖ Total Asset Turnover Ratio
➢ Year 1- 1.55
(713.84M/461.76M)
➢ Year 2- 1.69
(748.71M/442.62M)
➢ Year 3- 1.45
(810.93M/606.36M)
➢ Year 4- 1.37
(828.89M/606.36M)
➢ Year 5- 0.65
(860.5M/1.32B)
McDonald’s
❖ Total Asset Turnover Ratio
➢ Year 1- 0.77
(28.11B/36.63B)
➢ Year 2- 0.80
(27.44B/34.28B)
➢ Year 3- 0.67
(25.41B/37.94B)
➢ Year 4- 0.79
(24.62B/31.02B)
➢ Year 5- 0.69
(22.82B/33.01B)
Equity and Debt Analysis

Starbucks market share is currently at 58.36 in the year of 2017. Recently that is lower

than what Starbucks is usually at. We chose to value our company based on our capital structure

and calculating the weighted average cost of capital. This method tells us how our firm raises

funds for our investments, also known as capital structure. Our beta coefficient is 0.52. Beta is a

measure of a non-diversifiable risk or a market risk in comparison to the market. Beta is a

measure that attempts to measure risk and return to determine the value. Beta for the overall

market is 1.00. Beta for Starbucks is 0.52 so in terms of comparing that to the market Starbucks

is a lower than average. This is an appropriate number because the risk is one half as responsive

as the market. Our competitors are Dunkin Donuts and McDonalds. Dunkin Donuts beta is 0.24

which is lower when compared to Starbucks beta. This means that Dunkin’s beta is even lower

than average when comparing it to the market. McDonald’s beta is 0.74, which is higher than

both Starbucks and Dunkin’s beta. This means that McDonald’s beta is closer to the average 1.00

beta which is the average for the overall market. If a business is highly dependent on a market
cycle then their beta is going to be higher than those without that dependency. In addition to the

three company’s beta, their risk free rate and risk premium are included in order to find the cost

of equity capital for each company. Our group used the CAPM (capital asset pricing model) to

determine this. The CAPM measures the relationship between risk tolerance and risk

compensation. We found that Starbucks’ costs of equity in 2017 was 6.18%, Dunkin Donuts was

4.44%, and McDonald’s was 7.44%.

Cost of Equity Capital

*R = RF + β (RM – RF)*

Starbucks

.03 + .52 (.06) = 6.18%

Dunkin Donuts

.03 + 0.24 (.06 ) = 4.44%

McDonald’s

.03+ 0.74 (.06) = 7.44%

The weighted average cost of capital (WACC) is the rate that a company is expected to

pay on average to all its security holders to finance its assets. The WACC is commonly referred

to as the firm's cost of capital. It is determined by the external market and not by management.

As of today in 2017, Starbucks’ weighted average cost of capital is 5.98%. Starbucks generates

higher returns on investment than it costs the company to actually raise the capital needed for

that investment. It is earning excess returns. A firm that expects to continue generating positive

excess returns on new investments in the future will see its value increase as growth increases.

Dunkin Donuts’ weighted average cost of capital is 3.98%. Dunkin Donuts also generates higher
returns on investment than it costs the company to raise the capital needed for that investment

and is earning excess returns. McDonald's weighted average cost of capital is 6.47%. They, too,

are generating higher returns on investment than it costs the company to raise the capital needed

for that investment and are earning excess returns.

Starbucks

*WACC=E/(E + D)*Cost of Equity+D/(E + D)*Cost of Debt*(1 - Tax Rate)*

= 0.9562 * 6.18% + 0.0438 * 2.4608% * (1 - 33.02%)

= 5.98%

Dunkin Donuts

= 0.6453 * 4.44% + 0.3547 * 3.7901% * (1 - 17.07%)

= 3.98%

McDonalds

= 0.8177 * 7.44% + 0.1823 * 3.3205% * (1 - 35.59%)

= 6.47%
 It is evident that Starbucks is a very successful and well-known company within the

coffee industry. However, our group was able to go beneath the company’s surface and do

research about their financial health. When determining Starbucks overall financial standing it

was crucial to look at their strengths and weaknesses, their investment risks, stocks prices and

the overall stock market prices, and to calculate various ratios to determine their finances all

based against their main competitors, Dunkin’ Donuts and McDonald’s. There are various

components that make a company financially healthy which can make it hard to determine how

stable a company is when there are various variables. However, it can be concluded that among

its competitors, Starbucks sits in between Dunkin’ Donuts and McDonald’s. Starbucks is very

financially stable and competes well against its competitors and within the market. However,

several risks and ratios can alter its financial position. But overall, Starbucks proves to be a very

financially healthy and stable company.