Liquidity ratios are used to assess the ability of enterprises to pay its short-term debt. Current ratio and acid test ratio will be considered within the range of liquidity ratio.
Current ratio is financial performance measure of the company liquidity. The current ratio of Starbucks decline from1.09:1 at 2015 to 1.05:1 in 2016. Even though the current ratios just a bit decrease in 2016, but its current assets and current liabilities have added a lot. It indicates that Starbucks increases the cash flow and still maintain its current ratio in normal level as no much change from last year.
Acid test ratio is similar to the current ratio with excludes inventories as it might be difficult converted to cash in the short-term. Even though the current ratio decline in 2016, but the quick ratio has increased from last year. It shows less than 1:1 may have some liquidity problem but that is common for many highly successful businesses. Starbucks is one highly successful business therefore its acid test ratio below 1:1 will not causing the liquidity problem.
Gearing Ratio 2015 2016
Gearing ratio 33.63% 39.78%
Interest cover ratio 51.08 times 51.31 times
Gearing ratio and interest cover ratio are widely used to assessing a company’s gearing.
The Gearing ratio gauges the contribution of long-term lenders to the long-term capital structure of the enterprise. It is a rapid increase from 33.6% to 39.78% in 2016. That shows Starbucks increase the fund of production and operation by the loan. Thus, the risk taking is increased, once the business into the finance dilemma, such as lack of liquidity and so on, the long-term liabilities will become a burden. However, it would not be considered very high for Starbucks which one of the successful company.
Interest cover ratio is a measure of whether the company operating profit able to cover the interest payable. Starbucks’ interest cover ratio increased slightly from 51.08 times to 51.31 times in 2016 and maintains in the high ratio. It indicates Starbucks is a much profitable company.
Investment Ratio 2015 2016
Dividend Payout Ratio 33.7% 41.8%
Dividend Cover Ratio 3 times 2.4 times
Dividend Yield Ratio 24.73% 31.67%
Earnings per share 1.84p 1.91p
P/E ratio 2.11 times 2.09 times
Investment ratios help stakeholders evaluate the return on their investment. These ratios that are widely used include dividend payout ratio, dividend cover ratio, dividend yield ratio, earning per share and P/E ratio.
Dividend payout ratio is measure the proportion of dividends that distributes to shareholders from company' earnings. It is significant increase from 33.7% to 41.8% for Starbucks' dividend payout ratio in 2016. The increase of this ratio makes Starbucks become a company more merit.
Dividend cover ratio states the number of times that an organization able paying dividends to shareholders from the after-tax profit. From the data, Starbucks’ dividend cover ratio has decreased 0.6 and into 2.4 times in 2016. It looks not much impact to Starbucks as this ratio is often expressed slightly differently from dividend payout ratio.
Dividend yield ratio is about the cash return from the share in its current market value. As one of the important tools, it helps investors assess whether a company has an investment value. This shows an increase from 24.73% in 2015 to 31.67% in 2016 of Starbucks' dividend yield ratio. It is a good change to Starbucks as the higher the dividend yield, the more attractive.
Earnings per share are the profit that a company has earned during a certain period that available to shareholders. It reflecting the after-tax profit created per share, the higher the ratio, the more profits it creates. Starbucks has increased its earnings per share to 1.91p in 2016. That means Starbucks is more profitable than last year.
P/E ratio is the ratio for valuing a company that gauges its market share price related to its earnings per share. P/E ratio of Starbucks shows a decline slightly from last year times at 2.11 times to this year at 2.09 times. The higher the P/E ratio, the higher that the investors expecting earnings growth of a company in the future. Starbucks already has been a very successful and stable company and this makes Starbucks less space in increasing its profit that is why its P/E ratio is low. - 3 references