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Question #1

Using the accompanying financial statements (Excel Workbook), assess The Home Depot concerning liquidity, solvency, profitability, and stock performance. For each area, you should calculate the ratios we discussed in class and provide a brief analysis of the ratios calculated. You do not need to perform vertical analysis for this assignment. I include historical stock price information and outstanding common share information below.

You do not need to look beyond the financial statements to complete this assignment. Use attachments as reference.

Fiscal Year Ended	1/31/2016	2/1/2015	2/2/2014	2/3/2013
Adjusted Closing Price	$125.07	$101.80	$73.34	$62.92
Common Shares Outstanding (millions)	1,252	1,307	1,380	1,486

STARBUCKS CORP 10-K Income Statement in millions of dollars, except for per share figures Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Net revenues: Company-operated stores Licensed stores CPG, foodservice and other $15,197.3 $12,977.9 $11,793.2 $10,534.5 1,861.9 1,588.6 1,360.5 1,210.3 2,103.5 1,881.3 1,713.1 1,532.0 Total net revenues $19,162.7 $16,447.8 $14,866.8 $13,276.8 Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Litigation charge (credit) 7,787.5 5,411.1 522.4 893.9 1,196.7 0.0 6,858.8 4,638.2 457.3 709.6 991.3 (20.2) 6,382.3 4,286.1 431.8 621.4 937.9 2,784.1 5,813.3 3,918.1 407.2 550.3 801.2 0.0 Total operating expenses Income from equity investees 15,811.6 249.9 13,635.0 268.3 15,443.6 251.4 11,490.1 210.7 Operating income $3,601.0 $3,081.1 ($325.4) $1,997.4 390.6 (61.1) 43.0 (70.5) 0.0 0.0 142.7 (64.1) 0.0 0.0 123.6 (28.1) 0.0 0.0 94.4 (32.7) Earnings before income taxes Income taxes (benefit) $3,903.0 1,143.7 $3,159.7 1,092.0 ($229.9) (238.7) $2,059.1 674.4 Net earnings including noncontrolling earnings Net earnings (loss) attributable to noncontrolling interests $2,759.3 1.9 $2,067.7 (0.4) $8.8 0.5 $1,384.7 0.9 Net earnings attributable to Starbucks $2,757.4 $2,068.1 $8.3 $1,383.8 $1.84 $1.82 $1.37 $1.35 $0.01 $0.01 $0.92 $0.90 Weighted average shares outstanding: Basic (adjusted for split) Diluted (adjusted for split) 1,495.9 1,513.4 1,506.3 1,526.3 1,498.5 1,524.5 1,508.8 1,546.0 Cash dividends declared per share $0.680 $0.550 $0.445 $0.360 Gain from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense Earnings per share - basic Earnings per share - diluted STARBUCKS CORP 10-K Balance Sheet in millions of dollars As of 9/27/2015 9/28/2014 9/29/2013 9/30/2012 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes, net Total current assets Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill TOTAL ASSETS $1,530.1 81.3 719.0 1,306.4 334.2 381.7 $4,352.7 $1,708.4 135.4 631.0 1,090.9 285.6 317.4 $4,168.7 $2,575.7 658.1 561.4 1,111.2 287.7 277.3 $5,471.4 $1,188.6 848.4 485.9 1,241.5 196.5 238.7 $4,199.6 312.5 352.0 4,088.3 828.9 415.9 520.4 1,575.4 318.4 514.9 3,519.0 903.3 198.9 273.5 856.2 58.3 496.5 3,200.5 967.0 185.3 274.8 862.9 116.0 459.9 2,658.9 97.3 144.7 143.7 399.1 $12,446.1 $10,752.9 $11,516.7 $8,219.2 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable Accrued litigation charge Accrued liabilities Insurance reserves Stored value card liability Total current liabilities $684.2 0.0 1,760.7 224.8 983.8 $3,653.5 $533.7 0.0 1,514.4 196.1 794.5 $3,038.7 $491.7 2,784.1 1,269.3 178.5 653.7 $5,377.3 $398.1 0.0 1,133.8 167.7 510.2 $2,209.8 Long-term debt Other long-term liabilities Total liabilities 2,347.5 625.3 $6,626.3 2,048.3 392.2 $5,479.2 1,299.4 357.7 $7,034.4 549.6 345.3 $3,104.7 Shareholders equity: Common stock ($0.001 par value) Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) 1.5 41.1 5,974.8 (199.4) 0.7 39.4 5,206.6 25.3 0.8 282.1 4,130.3 67.0 0.7 39.4 5,046.2 22.7 Total shareholders equity Noncontrolling interests 5,818.0 1.8 5,272.0 1.7 4,480.2 2.1 5,109.0 5.5 Total equity TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 5,819.8 5,273.7 4,482.3 $12,446.1 $10,752.9 $11,516.7 5,114.5 $8,219.2 STARBUCKS CORP 10-K Cash Flows in millions of dollars Fiscal Year Ended OPERATING ACTIVITIES: Net earnings including noncontrolling interests Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Litigation charge Deferred income taxes, net Income earned from equity method investees Distributions received from equity method investees Gain resulting from acquisition/sale of equity in joint ventures & certain retail operations Loss on extinguishment of debt Stock-based compensation Excess tax benefit on share-based awards Other Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable Inventories Accounts payable Accrued litigation charge Income taxes payable, net Accrued liabilities and insurance reserves Stored value card liability Prepaid expenses, other current assets, and other long-term assets Net cash provided by operating activities 9/27/2015 9/28/2014 9/29/2013 9/30/2012 $2,759.3 $2,067.7 $8.8 $1,384.7 933.8 0.0 21.2 (190.2) 148.2 (394.3) 61.1 209.8 (132.4) 53.8 748.4 0.0 10.2 (182.7) 139.2 (70.2) 0.0 183.2 (114.4) 36.2 655.6 2,784.1 (1,045.9) (171.8) 115.6 (80.1) 0.0 142.3 (258.1) 23.0 580.6 0.0 61.1 (69.3) 20.0 0.0 0.0 153.6 (169.8) 23.6 (82.8) (207.9) 137.7 0.0 87.6 124.4 170.3 49.5 $3,749.1 (79.7) 14.3 60.4 (2,763.9) 309.8 103.9 140.8 4.6 $607.8 (68.3) 152.5 88.7 0.0 298.4 47.3 139.9 76.3 $2,908.3 (90.3) (273.3) (105.2) 0.0 201.6 (8.1) 60.8 (19.7) $1,750.3 INVESTING ACTIVITIES: Purchase of investments Sales of investments Maturity and calls of investments Acquisitions, net of cash acquired Additions to property, plant and equipment Cash proceeds from sale of equity in joint ventures Other Net cash used by investing activities (567.4) 600.6 18.8 (284.3) (1,303.7) 8.9 6.8 ($1,520.3) (1,652.5) 1,454.8 456.1 0.0 (1,160.9) 103.9 (19.1) ($817.7) (785.9) 60.2 980.0 (610.4) (1,151.2) 108.0 (11.9) ($1,411.2) (1,748.6) 0.0 1,796.4 (129.1) (856.2) 0.0 (36.5) ($974.0) FINANCING ACTIVITIES: Proceeds from issuance of long-tem debt Principal payments on long-term debt Cash used for purchase of noncontrolling interest (Payments) / Proceeds from short-term borrowings Proceeds from issuance of common stock 848.5 (610.1) (360.8) 0.0 191.8 748.5 0.0 0.0 0.0 139.7 749.7 (35.2) 0.0 0.0 247.2 0.0 0.0 0.0 (30.8) 236.6 Excess tax benefit from exercise of stock options Cash dividends paid Repurchase of common stock Minimum tax withholdings on share-based awards Other Net cash used by financing activities 132.4 (928.6) (1,436.1) (75.5) (18.1) ($2,256.5) 114.4 (783.1) (758.6) (77.3) (6.9) ($623.3) 258.1 (628.9) (588.1) (121.4) 10.4 ($108.2) 169.8 (513.0) (549.1) (58.5) (0.5) ($745.5) (150.6) ($178.3) (34.1) ($867.3) (1.8) $1,387.1 9.7 $40.5 CASH AND CASH EQUIVALENTS: Beginning of period End of the period 1,708.4 $1,530.1 2,575.7 $1,708.4 1,188.6 $2,575.7 1,148.1 $1,188.6 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes, net of refunds $69.5 $1,072.2 $56.2 $766.3 $34.4 $539.1 $34.4 $416.9 Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Net revenues: Company-operated stores Licensed stores CPG, foodservice and other 79.31% 9.72% 10.98% 78.90% 9.66% 11.44% 79.33% 9.15% 11.52% 79.35% 9.12% 11.54% 100.00% 100.00% 100.00% 100.00% Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Litigation charge (credit) 40.64% 28.24% 2.73% 4.66% 6.24% 0.00% 41.70% 28.20% 2.78% 4.31% 6.03% -0.12% 42.93% 28.83% 2.90% 4.18% 6.31% 18.73% 43.79% 29.51% 3.07% 4.14% 6.03% 0.00% Total operating expenses Income from equity investees 82.51% 1.30% 82.90% 1.63% 103.88% 1.69% 86.54% 1.59% Operating income 18.79% 18.73% -2.19% 15.04% Gain from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense 2.04% -0.32% 0.22% -0.37% 0.00% 0.00% 0.87% -0.39% 0.00% 0.00% 0.83% -0.19% 0.00% 0.00% 0.71% -0.25% Earnings before income taxes Income taxes (benefit) 20.37% 5.97% 19.21% 6.64% -1.55% -1.61% 15.51% 5.08% Net earnings including noncontrolling earnings Net earnings (loss) attributable to noncontrolling interests 14.40% 0.01% 12.57% 0.00% 0.06% 0.00% 10.43% 0.01% Net earnings attributable to Starbucks 14.39% 12.57% 0.06% 10.42% Total net revenues As of 9/27/2015 9/28/2014 9/29/2013 9/30/2012 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes, net Total current assets 12.29% 0.65% 5.78% 10.50% 2.69% 3.07% 34.97% 15.89% 1.26% 5.87% 10.15% 2.66% 2.95% 38.77% 22.36% 5.71% 4.87% 9.65% 2.50% 2.41% 47.51% 14.46% 10.32% 5.91% 15.10% 2.39% 2.90% 51.09% Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill 2.51% 2.83% 32.85% 6.66% 3.34% 4.18% 12.66% 2.96% 4.79% 32.73% 8.40% 1.85% 2.54% 7.96% 0.51% 4.31% 27.79% 8.40% 1.61% 2.39% 7.49% 1.41% 5.60% 32.35% 1.18% 1.76% 1.75% 4.86% 100.00% 100.00% 100.00% 100.00% LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable Accrued litigation charge Accrued liabilities Insurance reserves Stored value card liability Total current liabilities 5.50% 0.00% 14.15% 1.81% 7.90% 29.35% 4.96% 0.00% 14.08% 1.82% 7.39% 28.26% 4.27% 24.17% 11.02% 1.55% 5.68% 46.69% 4.84% 0.00% 13.79% 2.04% 6.21% 26.89% Long-term debt Other long-term liabilities Total liabilities 18.86% 5.02% 53.24% 19.05% 3.65% 50.96% 11.28% 3.11% 61.08% 6.69% 4.20% 37.77% Shareholders equity: Common stock ($0.001 par value) Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) 0.01% 0.33% 48.01% -1.60% 0.01% 0.37% 48.42% 0.24% 0.01% 2.45% 35.86% 0.58% 0.01% 0.48% 61.40% 0.28% Total shareholders equity Noncontrolling interests 46.75% 0.01% 49.03% 0.02% 38.90% 0.02% 62.16% 0.07% 46.76% 100.00% 49.04% 100.00% 38.92% 100.00% 62.23% 100.00% TOTAL ASSETS Total equity TOTAL LIABILITIES AND SHAREHOLDERS EQUITY Liquidity Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Current ratio Working capital Acid-test ratio Inventory turnover (times) Days sales in inventory Accounts receivable turnover (times) Days sales in receivables Free cash flow 1.19 $699.2 0.64 6.50 56.18 28.39 12.86 $2,445.4 1.37 $1,130.0 0.81 6.23 58.59 27.59 13.23 -$553.1 1.02 $94.1 0.71 5.43 67.27 28.39 12.86 $1,757.1 Average inventory Average A/R $1,198.65 $1,101.05 $1,176.35 $675.00 $596.20 $523.65 1.90 $1,989.8 1.14 $894.1 Solvency Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Debt to equity Interest coverage Adjusted coverage 0.51 51.08 51.08 0.46 48.07 47.75 0.37 -11.58 87.50 0.17 61.08 61.08 Long term liabilities $2,972.8 $2,440.5 $1,657.1 $894.9 Profitability Ratios Fiscal Year Ended Asset turnover Return on sales ROS - Adjusted for litigation Gross margin % Return on assets ROA - Adjusted for litigation Return on equity ROE - Adjusted for litigation Average interest rate 9/27/2015 $1.65 14.65% 14.65% 59.36% 24.20% 24.20% 49.73% 49.73% 1.16% Average total assets $11,599.50 Income tax rate 29.30% Net of tax interest expense $49.84 Adjusted net income $2,807.24 Average equity $5,545.00 Average total liabilities $6,052.75 Income adjusted for litigation $2,807.24 Net income adjusted for litigation $2,757.40 9/28/2014 9/29/2013 9/30/2012 $1.48 $1.51 12.83% 0.18% 10.59% 12.75% 12.78% 10.59% 58.30% 57.07% 56.21% 18.95% 0.28% 18.83% 19.25% 42.41% 0.17% 42.14% 39.22% 1.02% 0.55% $11,134.80 34.56% $41.95 $2,110.05 $4,876.10 $6,256.80 $2,096.83 $2,054.88 $9,867.95 32.75% 32.75% $18.90 $21.99 $27.20 $1,405.79 $4,794.60 $5,069.55 $1,899.44 $1,405.79 $1,880.55 $1,383.80 DuPont Analysis of ROA Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 Return on assets (calculated) 24.20% 18.95% 0.28% Return on sales Asset turnover Product 14.65% $1.65 24.20% 12.83% $1.48 18.95% 0.18% $1.51 0.28% Adjusted return on assets (calculated) 24.20% 18.83% 19.25% Adjusted return on sales Asset turnover Product 14.65% $1.65 24.20% 12.75% $1.48 18.83% 12.78% $1.51 19.25% Stock Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Book value per common share $3.92 $3.55 $3.01 $3.45 Earnings per share (basic) $1.84 $1.37 $0.01 $0.92 Earnings per share (diluted) $1.82 $1.35 $0.01 $0.90 P/E Ratio 31.65 27.28 3736.00 26.84 Dividend yield 1.18% 1.49% 1.19% 1.49% Dividend payout 37.36% 40.74% 4450.00% 40.00% Adjusted Basic EPS Adjusted Diluted EPS Adjusted P/E Ratio Adjusted dividend payout $1.84 $1.82 31.62 37.32% $1.36 $1.35 27.36 40.85% $1.25 $1.23 30.29 36.07% $0.92 $0.90 26.99 40.22% Book value of equity Common shares outstanding Adjusted closing price Dividends per share $5,819.8 1,485.1 $57.61 $0.68 $5,273.7 1,487.2 $36.83 $0.55 $4,482.3 1,490.8 $37.36 $0.45 $5,114.5 1,480.4 $24.16 $0.36 ACT 5140 - Accounting for Decision Makers Chat 1 - Financial Analysis (Part 1) ACT 5140 Chat 1 Felo Chat Outline Introduction to financial analysis Sources of information Ratio analysis ACT 5140 Chat 1 Felo Financial Analysis Assessing past performance Predicting future performance Comparisons Identifying trends ACT 5140 Chat 1 Felo Sources of Information Financial statements Footnotes to financial statements Summary of accounting principles used Management's Discussion & Analysis (MD & A) Auditor's report Comparative financial data in 10-K ACT 5140 Chat 1 Felo Form 10-K - Part I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures ACT 5140 Chat 1 Felo Form 10-K - Part II Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information ACT 5140 Chat 1 Felo Form 10-K - Part III Item 10 Directors, Executive Officers and Corporate Governance Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Item 13 Certain Relationships and Related Transactions, and Director Independence Item 14 Principal Accountant Fees and Services ACT 5140 Chat 1 Felo Form 10-K - Part IV Item 15 Exhibits and Financial Statement Schedules Signatures ACT 5140 Chat 1 Felo Financial Analysis Tools Looking at statements as a whole Ratio analysis Vertical analysis / Horizontal analysis (chat 2) ACT 5140 Chat 1 Felo Ratio Analysis Over time (horizontal analysis) Other companies or industry averages Benchmarks ACT 5140 Chat 1 Felo Ratio Analysis Categories Short-term solvency (liquidity) Long-term solvency Profitability performance Stock performance ACT 5140 Chat 1 Felo Short-Term Solvency Liquidity Current ratio Working capital Acid-test ratio Inventory turnover Days sales in inventory A/R turnover Days sales in receivables Free cash flow ACT 5140 Chat 1 Felo Short-Term Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Current ratio 1.19 1.37 1.02 1.90 $699.2 $1,130.0 $94.1 $1,989.8 Acid-test ratio 0.64 0.81 0.71 1.14 Inventory turnover (times) 6.50 6.23 5.43 Days sales in inventory 56.18 58.59 67.27 Accounts receivable turnover (times) 28.39 27.59 28.39 Days sales in receivables 12.86 13.23 12.86 Free cash flow $2,445.4 -$553.1 $1,757.1 Average inventory $1,198.65 $1,101.05 $1,176.35 Working capital Average A/R $675.00 ACT 5140 Chat 1 Felo $596.20 $523.65 $894.1 Short-Term Solvency Assessment Some of these ratios are skewed by the litigation charge since it was classified as a current liability two years ago and was paid out last year. This results in the current ratio, working capital, and the acid-test ratio being relatively low two years ago. They all increased last year, but then decreased this year. The main reason is that current liabilities increased fairly significantly this year. Even though the current ratio, working capital, and acid-test ratio are fairly low this year, none indicate a problem with short-term solvency. ACT 5140 Chat 1 Felo Short-Term Assessment (2) Days to collect A/R decreased back to the level from two years ago. Since A/R is a relatively small component of total assets, the decrease is not very significant. A good sign is that days to sell decreased again. This means Starbucks on average sold inventory 11 days quicker than just 2 years ago. Free cash flow was quite large this year, even though purchases of PPE were the largest over the time period. This is because of a large amount of CFO. All in all, I classify short-term solvency as a strength of Starbucks. ACT 5140 Chat 1 Felo Long-Term Financial Condition Solvency Debt-to-equity ratio Times-interest earned ACT 5140 Chat 1 Felo Long-Term Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Debt to equity 0.51 0.46 0.37 0.17 Interest coverage 51.08 48.07 -11.58 61.08 Adjusted coverage 51.08 47.75 87.50 61.08 $2,440.5 $1,657.1 $894.9 Long term liabilities $2,972.8 ACT 5140 Chat 1 Felo Long-Term Assessment Debt to equity increased significantly the last 3 years, largely due to an increase in debt. Two years ago a decrease in equity also caused this to increase. Normally a negative interest coverage ratio (two years ago) is a very bad sign. Although I am sure Starbucks would prefer that it was positive, we can again attribute this to the litigation charge. Without that, it would have been highly positive. The firm does not appear to be in any danger of not being able to meet interest payments or their long-term obligations. ACT 5140 Chat 1 Felo Performance Analysis Profitability performance Stock performance ACT 5140 Chat 1 Felo Profitability Performance Asset turnover Return on sales Gross margin % Return on assets Return on equity Average interest rate ACT 5140 Chat 1 Felo Profitability Ratios Fiscal Year Ended Asset turnover Return on sales ROS - Adjusted for litigation Gross margin % Return on assets ROA - Adjusted for litigation Return on equity ROE - Adjusted for litigation Average interest rate 9/27/2015 9/28/2014 9/29/2013 9/30/2012 $1.65 $1.48 $1.51 14.65% 12.83% 0.18% 10.59% 14.65% 12.75% 12.78% 10.59% 59.36% 58.30% 57.07% 56.21% 24.20% 18.95% 0.28% 24.20% 18.83% 19.25% 49.73% 42.41% 0.17% 49.73% 42.14% 39.22% 1.16% 1.02% 0.55% Average total assets $11,599.50 Income tax rate 29.30% Net of tax interest expense $49.84 Adjusted net income $2,807.24 Average equity $5,545.00 Average total liabilities $6,052.75 Income adjusted for litigation $2,807.24 Net income adjusted for litigation $2,757.40 $11,134.80 34.56% $41.95 $2,110.05 $4,876.10 $6,256.80 $2,096.83 $2,054.88 ACT 5140 Chat 1 Felo $9,867.95 32.75% 32.75% $18.90 $21.99 $27.20 $1,405.79 $4,794.60 $5,069.55 $1,899.44 $1,405.79 $1,880.55 $1,383.80 Profitability Assessment This is skewed by the litigation charge two years ago. While it is certainly an issue, profitability is generally positive. The gross margin % has increased for the third year in a row. It is especially important because the days to sell decreased, meaning Starbucks sold its products faster while increasing prices faster than cost of sales increased. Another positive sign is that asset turnover increased significantly. This means that its assets generated more sales than in the past. This is especially important since it decreased the previous year. ACT 5140 Chat 1 Felo Profitability Assessment (2) Return on sales increased this year. This means that income increased faster than did sales revenue. Another way of saying it is that each dollar of sales generated more income. Either way, it is a good sign. ROA also increased, meaning each dollar of assets generated more income than in the last year. ACT 5140 Chat 1 Felo Profitability Assessment (3) Shareholders should be pleased with the high ROE. Starbucks experienced significant positive financial leverage (ROE > ROA) over this time period. About the only negative thing is the average interest rate increased again. Since it is well below ROA, it is not likely to be an issue. ACT 5140 Chat 1 Felo DuPont Analysis of ROA This allows us to analyze the two \"components\" of ROA Asset turnover x Return on Sales Helpful when assessing reasons for changes in ROA Can also be applied to ROE ACT 5140 Chat 1 Felo DuPont Calculations Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 Return on assets (calculated) 24.20% 18.95% 0.28% Return on sales 14.65% 12.83% 0.18% Asset turnover $1.65 $1.48 $1.51 Product 24.20% 18.95% 0.28% Adjusted return on assets (calculated) 24.20% 18.83% 19.25% Adjusted return on sales 14.65% 12.75% 12.78% $1.65 $1.48 $1.51 24.20% 18.83% 19.25% Asset turnover Product ACT 5140 Chat 1 Felo DuPont Analysis of ROA ROA and ROE were both negatively impacted by the litigation charge two years ago. However, both are significantly higher this year than two years ago, even after adjusting for the litigation charge. The DuPont analysis shows that asset turnover and return on sales both increased this year. This means that each dollar of assets generated more sales and each dollar of sales generated more income. ROE increased because of the increase in ROA and because of positive financial leverage. ACT 5140 Chat 1 Felo Stock Performance Is this stock appropriate for me? Growth investors vs. Income investors Book value per share Earnings per share Price earnings ratio Dividend yield Dividend payout ACT 5140 Chat 1 Felo Stock Calculations Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Book value per common share $3.92 $3.55 $3.01 $3.45 Earnings per share (basic) $1.84 $1.37 $0.01 $0.92 Earnings per share (diluted) $1.82 $1.35 $0.01 $0.90 P/E Ratio 31.65 27.28 3736.00 26.84 Dividend yield 1.18% 1.49% 1.19% 1.49% Dividend payout 37.36% 40.74% 4450.00% 40.00% Adjusted Basic EPS Adjusted Diluted EPS Adjusted P/E Ratio Adjusted dividend payout $1.84 $1.82 31.62 37.32% $1.36 $1.35 27.36 40.85% Book value of equity Common shares outstanding Adjusted closing price Dividends per share $5,819.8 $5,273.7 $4,482.3 $5,114.5 1,485.1 1,487.2 1,490.8 1,480.4 $57.61 $36.83 $37.36 $24.16 $0.68 $0.55 $0.45 $0.36 ACT 5140 Chat 1 Felo $1.25 $1.23 30.29 36.07% $0.92 $0.90 26.99 40.22% Stock Performance Assessment This past year Starbucks enacted a 2-for-1 stock split. This doubled the number of shares of stock available. All numbers have been adjusted for this. I would classify Starbucks as more of a growth stock. There is a substantial \"gap\" between book and market value. This indicates relatively high risk, meaning investors expect it to have relatively high growth. Although it has started paying dividends, they provide a relatively small yield. ACT 5140 Chat 1 Felo Stock Performance (2) The past and \"adjusted\" P/E ratios indicate that the market was expecting Starbucks to grow significantly, as they are well above the market average of 16. As we see by the adjusted closing prices, it has grown quite significantly. The fact that Starbucks has increased its dividends per share may indicate it is trying to \"shift\" into a hybrid stock (growth and income). However, the increase has not kept pace with increases in EPS and stock price. We know that because dividend payout and dividend yield decreased this year. ACT 5140 Chat 1 Felo ACT 5140 - Accounting for Decision Makers Chat 2 - Financial Analysis (Part 2) ACT 5140 Chat 2 Felo Chat Outline Review HW 1 Vertical / Horizontal analysis ACT 5140 Chat 2 Felo Vertical & Horizontal Analysis Figures in statements as a % of base Allows for comparison of firms of different sizes and of different time periods Helps us to identify trends and changes in relative size of figures I/S - base is total net sales B/S - base is total assets ACT 5140 Chat 2 Felo Vertical / Horizontal I/S - Part 1 Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Net revenues: Company-operated stores Licensed stores CPG, foodservice and other 79.31% 9.72% 10.98% Total net revenues 78.90% 9.66% 11.44% 79.33% 9.15% 11.52% 79.35% 9.12% 11.54% 100.00% 100.00% 100.00% 100.00% Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Litigation charge (credit) 40.64% 28.24% 2.73% 4.66% 6.24% 0.00% ACT 5140 Chat 2 Felo 41.70% 28.20% 2.78% 4.31% 6.03% -0.12% 42.93% 28.83% 2.90% 4.18% 6.31% 18.73% 43.79% 29.51% 3.07% 4.14% 6.03% 0.00% Vertical / Horizontal I/S - Part 2 Total operating expenses Income from equity investees 82.51% 82.90% 103.88% 86.54% 1.30% 1.63% 1.69% 1.59% Operating income 18.79% 18.73% -2.19% 15.04% Gain from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense 2.04% -0.32% 0.22% -0.37% 0.00% 0.00% 0.87% -0.39% 0.00% 0.00% 0.00% 0.00% 0.83% 0.71% -0.19% -0.25% Earnings before income taxes Income taxes (benefit) 20.37% 19.21% 5.97% 6.64% -1.55% 15.51% -1.61% 5.08% Net earnings including noncontrolling earnings 14.40% 12.57% Net earnings (loss) attributable to noncontrolling interests 0.01% 0.00% 0.06% 10.43% Net earnings attributable to Starbucks 0.06% 10.42% 14.39% 12.57% ACT 5140 Chat 2 Felo 0.00% 0.01% Income Statement Assessment Some of this is obviously skewed by the litigation charge. One item of note is the % of revenue coming from company-operated stores. Decreasing this is part of Starbuck's strategy. In the past few years this % decreased, but it increased this year. Since the litigation was related to CPG, the increase in the % of sales from company-operated sales may be the result of the litigation. ACT 5140 Chat 2 Felo I/S Assessment - 2 A second item of note is the consistent decrease in cost of sales as a % of total net revenues. This means that Starbucks was able to increase its prices faster than its cost of sales increased every year. Store operating expenses also increased more slowly than did total net revenues until this year, where they increased a little faster than did total net revenues. ACT 5140 Chat 2 Felo I/S Assessment - 3 Operating income as a % of total net revenues increased this year. This means operating income increased more than did total net sales. If we remove the impact of the litigation from the middle 2 years, we see a nice steady increase in the percentage. This is a good sign for Starbucks. Net earnings attributable to Starbucks also increased as a % of total net revenues. This is also a good sign for Starbucks. Taken all together, this analysis is quite positive for Starbucks. ACT 5140 Chat 2 Felo Vertical / Horizontal B/S - Part 1 As of 9/27/2015 9/28/2014 9/29/2013 9/30/2012 ASSETS Current assets: Cash and cash equivalents 12.29% 15.89% 22.36% 14.46% Short-term investments 0.65% 1.26% 5.71% 10.32% Accounts receivable, net 5.78% 5.87% 4.87% 5.91% Inventories Prepaid expenses and other current assets 10.50% 10.15% 9.65% 15.10% 2.69% 2.66% 2.50% 2.39% Deferred income taxes, net 3.07% 2.95% 2.41% 2.90% 34.97% 38.77% 47.51% 51.09% Total current assets ACT 5140 Chat 2 Felo Vertical / Horizontal B/S - Part 2 Long-term investments 2.51% 2.96% 0.51% 1.41% Equity and cost investments 2.83% 4.79% 4.31% 5.60% Property, plant and equipment, net 32.85% 32.73% 27.79% 32.35% Deferred income taxes, net 6.66% 8.40% 8.40% 1.18% Other long-term assets 3.34% 1.85% 1.61% 1.76% Other intangible assets 4.18% 2.54% 2.39% 1.75% Goodwill 12.66% 7.96% 7.49% 4.86% TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% ACT 5140 Chat 2 Felo Vertical / Horizontal B/S - Part 3 Current liabilities: Accounts payable 5.50% 4.96% 4.27% 4.84% Accrued litigation charge 0.00% 0.00% 24.17% 0.00% Accrued liabilities 14.15% 14.08% 11.02% 13.79% Insurance reserves 1.81% 1.82% 1.55% 2.04% Stored value card liability 7.90% 7.39% 5.68% 6.21% Total current liabilities 29.35% 28.26% 46.69% 26.89% Long-term debt 18.86% 19.05% 11.28% 6.69% Other long-term liabilities 5.02% 3.65% 3.11% 4.20% 53.24% 50.96% 61.08% 37.77% Total liabilities ACT 5140 Chat 2 Felo Vertical / Horizontal B/S - Part 4 Shareholders equity: Common stock ($0.001 par value) 0.01% 0.01% 0.01% 0.01% Additional paid-in capital 0.33% 0.37% 2.45% 0.48% Retained earnings 48.01% 48.42% 35.86% 61.40% Accumulated other comprehensive income/(loss) -1.60% 0.24% 0.58% 0.28% Total shareholders equity 46.75% 49.03% 38.90% 62.16% Noncontrolling interests 0.01% 0.02% 0.02% 0.07% Total equity 46.76% 49.04% 38.92% 62.23% TOTAL LIABILITIES & SHAREHOLDERS EQUITY 100.00% 100.00% 100.00% 100.00% ACT 5140 Chat 2 Felo Balance Sheet Assessment One thing to note is that current assets are a much lower % of total assets than in the past. While this may be more risky with respect to liquidity, it is likely to result in greater long-term growth, as long-term assets generally produce higher returns than do current assets. We see that cash and short-term investments have both decreased as a percentage of total assets. This is likely because Starbucks is investing in longterm assets (using the cash and investments to pay for them) and because the cash and investments were used to pay for at least part of the litigation charge. ACT 5140 Chat 2 Felo Balance Sheet Assessment - 2 Property and equipment increased as a % of total assets. This means these grew faster than did total assets. Goodwill also increased (fairly substantially) as a % of total assets. These are both consistent with Starbucks investing in higher growth assets (new stores and buying other companies). The one potential downside is that Starbucks may be adding new stores too quickly. This got Starbucks in trouble several years back. ACT 5140 Chat 2 Felo Balance Sheet Assessment - 3 Current liabilities as a % of total assets increased slightly this year. Increases in accounts payable (purchases of inventory on credit) and stored value cards (gift cards) explain most of this increase. Accrued liabilities as a % of total assets also increased this year. This could be a way for Starbucks to conserve cash. ACT 5140 Chat 2 Felo Balance Sheet Assessment - 4 Long-term debt as a % of total assets decreased a bit this year after a large increase the year before. This debt was probably used for the litigation payment and the p&e purchases. While adding long-term debt is risky, the solvency analysis shows Starbucks is not in any danger of missing debt payments. Borrowing now at historically low interest rates is a smart move. ACT 5140 Chat 2 Felo Balance Sheet Assessment - 5 There is nothing significant to see in the assessment of equity. ACT 5140 Chat 2 Felo Ratio Analysis Over time (horizontal analysis) Other companies or industry averages Benchmarks ACT 5140 Chat 2 Felo Ratio Analysis Categories Short-term solvency (liquidity) Long-term solvency Profitability performance Stock performance ACT 5140 Chat 2 Felo Short-Term Solvency Liquidity Current ratio Working capital Acid-test ratio Inventory turnover Days sales in inventory A/R turnover Days sales in receivables Free cash flow ACT 5140 Chat 2 Felo Short-Term Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Current ratio 1.19 1.37 1.02 1.90 $699.2 $1,130.0 $94.1 $1,989.8 Acid-test ratio 0.64 0.81 0.71 1.14 Inventory turnover (times) 6.50 6.23 5.43 Days sales in inventory 56.18 58.59 67.27 Accounts receivable turnover (times) 28.39 27.59 28.39 Days sales in receivables 12.86 13.23 12.86 Free cash flow $2,445.4 -$553.1 $1,757.1 Average inventory $1,198.65 $1,101.05 $1,176.35 Working capital Average A/R $675.00 ACT 5140 Chat 2 Felo $596.20 $523.65 $894.1 Short-Term Solvency Assessment Some of these ratios are skewed by the litigation charge since it was classified as a current liability two years ago and was paid out last year. This results in the current ratio, working capital, and the acid-test ratio being relatively low two years ago. They all increased last year, but then decreased this year. The main reason is that current liabilities increased fairly significantly this year. Even though the current ratio, working capital, and acid-test ratio are fairly low this year, none indicate a problem with short-term solvency. ACT 5140 Chat 2 Felo Short-Term Assessment (2) Days to collect A/R decreased back to the level from two years ago. Since A/R is a relatively small component of total assets, the decrease is not very significant. A good sign is that days to sell decreased again. This means Starbucks on average sold inventory 11 days quicker than just 2 years ago. Free cash flow was quite large this year, even though purchases of PPE were the largest over the time period. This is because of a large amount of CFO. All in all, I classify short-term solvency as a strength of Starbucks. ACT 5140 Chat 2 Felo Long-Term Financial Condition Solvency Debt-to-equity ratio Times-interest earned ACT 5140 Chat 2 Felo Long-Term Ratios Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Debt to equity 0.51 0.46 0.37 0.17 Interest coverage 51.08 48.07 -11.58 61.08 Adjusted coverage 51.08 47.75 87.50 61.08 $2,440.5 $1,657.1 $894.9 Long term liabilities $2,972.8 ACT 5140 Chat 2 Felo Long-Term Assessment Debt to equity increased significantly the last 3 years, largely due to an increase in debt. Two years ago a decrease in equity also caused this to increase. Normally a negative interest coverage ratio (two years ago) is a very bad sign. Although I am sure Starbucks would prefer that it was positive, we can again attribute this to the litigation charge. Without that, it would have been highly positive. The firm does not appear to be in any danger of not being able to meet interest payments or their long-term obligations. ACT 5140 Chat 2 Felo Performance Analysis Profitability performance Stock performance ACT 5140 Chat 2 Felo Profitability Performance Asset turnover Return on sales Gross margin % Return on assets Return on equity Average interest rate ACT 5140 Chat 2 Felo Profitability Ratios Fiscal Year Ended Asset turnover Return on sales ROS - Adjusted for litigation Gross margin % Return on assets ROA - Adjusted for litigation Return on equity ROE - Adjusted for litigation Average interest rate 9/27/2015 9/28/2014 9/29/2013 9/30/2012 $1.65 $1.48 $1.51 14.65% 12.83% 0.18% 10.59% 14.65% 12.75% 12.78% 10.59% 59.36% 58.30% 57.07% 56.21% 24.20% 18.95% 0.28% 24.20% 18.83% 19.25% 49.73% 42.41% 0.17% 49.73% 42.14% 39.22% 1.16% 1.02% 0.55% Average total assets $11,599.50 Income tax rate 29.30% Net of tax interest expense $49.84 Adjusted net income $2,807.24 Average equity $5,545.00 Average total liabilities $6,052.75 Income adjusted for litigation $2,807.24 Net income adjusted for litigation $2,757.40 $11,134.80 34.56% $41.95 $2,110.05 $4,876.10 $6,256.80 $2,096.83 $2,054.88 ACT 5140 Chat 2 Felo $9,867.95 32.75% 32.75% $18.90 $21.99 $27.20 $1,405.79 $4,794.60 $5,069.55 $1,899.44 $1,405.79 $1,880.55 $1,383.80 Profitability Assessment This is skewed by the litigation charge two years ago. While it is certainly an issue, profitability is generally positive. The gross margin % has increased for the third year in a row. It is especially important because the days to sell decreased, meaning Starbucks sold its products faster while increasing prices faster than cost of sales increased. Another positive sign is that asset turnover increased significantly. This means that its assets generated more sales than in the past. This is especially important since it decreased the previous year. ACT 5140 Chat 2 Felo Profitability Assessment (2) Return on sales increased this year. This means that income increased faster than did sales revenue. Another way of saying it is that each dollar of sales generated more income. Either way, it is a good sign. ROA also increased, meaning each dollar of assets generated more income than in the last year. ACT 5140 Chat 2 Felo Profitability Assessment (3) Shareholders should be pleased with the high ROE. Starbucks experienced significant positive financial leverage (ROE > ROA) over this time period. About the only negative thing is the average interest rate increased again. Since it is well below ROA, it is not likely to be an issue. ACT 5140 Chat 2 Felo DuPont Analysis of ROA This allows us to analyze the two \"components\" of ROA Asset turnover x Return on Sales Helpful when assessing reasons for changes in ROA Can also be applied to ROE ACT 5140 Chat 2 Felo DuPont Calculations Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 Return on assets (calculated) 24.20% 18.95% 0.28% Return on sales 14.65% 12.83% 0.18% Asset turnover $1.65 $1.48 $1.51 Product 24.20% 18.95% 0.28% Adjusted return on assets (calculated) 24.20% 18.83% 19.25% Adjusted return on sales 14.65% 12.75% 12.78% $1.65 $1.48 $1.51 24.20% 18.83% 19.25% Asset turnover Product ACT 5140 Chat 2 Felo DuPont Analysis of ROA ROA and ROE were both negatively impacted by the litigation charge two years ago. However, both are significantly higher this year than two years ago, even after adjusting for the litigation charge. The DuPont analysis shows that asset turnover and return on sales both increased this year. This means that each dollar of assets generated more sales and each dollar of sales generated more income. ROE increased because of the increase in ROA and because of positive financial leverage. ACT 5140 Chat 2 Felo Stock Performance Is this stock appropriate for me? Growth investors vs. Income investors Book value per share Earnings per share Price earnings ratio Dividend yield Dividend payout ACT 5140 Chat 2 Felo Stock Calculations Fiscal Year Ended 9/27/2015 9/28/2014 9/29/2013 9/30/2012 Book value per common share $3.92 $3.55 $3.01 $3.45 Earnings per share (basic) $1.84 $1.37 $0.01 $0.92 Earnings per share (diluted) $1.82 $1.35 $0.01 $0.90 P/E Ratio 31.65 27.28 3736.00 26.84 Dividend yield 1.18% 1.49% 1.19% 1.49% Dividend payout 37.36% 40.74% 4450.00% 40.00% Adjusted Basic EPS Adjusted Diluted EPS Adjusted P/E Ratio Adjusted dividend payout $1.84 $1.82 31.62 37.32% $1.36 $1.35 27.36 40.85% Book value of equity Common shares outstanding Adjusted closing price Dividends per share $5,819.8 $5,273.7 $4,482.3 $5,114.5 1,485.1 1,487.2 1,490.8 1,480.4 $57.61 $36.83 $37.36 $24.16 $0.68 $0.55 $0.45 $0.36 ACT 5140 Chat 2 Felo $1.25 $1.23 30.29 36.07% $0.92 $0.90 26.99 40.22% Stock Performance Assessment This past year Starbucks enacted a 2-for-1 stock split. This doubled the number of shares of stock available. All numbers have been adjusted for this. I would classify Starbucks as more of a growth stock. There is a substantial \"gap\" between book and market value. This indicates relatively high risk, meaning investors expect it to have relatively high growth. Although it has started paying dividends, they provide a relatively small yield. ACT 5140 Chat 2 Felo Stock Performance (2) The past and \"adjusted\" P/E ratios indicate that the market was expecting Starbucks to grow significantly, as they are well above the market average of 16. As we see by the adjusted closing prices, it has grown quite significantly. The fact that Starbucks has increased its dividends per share may indicate it is trying to \"shift\" into a hybrid stock (growth and income). However, the increase has not kept pace with increases in EPS and stock price. We know that because dividend payout and dividend yield decreased this year. ACT 5140 Chat 2 Felo