Question

Compute and Interpret Liquidity, Solvency and Coverage Ratios Selected balance sheet and income statement information for Starbucks for 2018 and 2017 follows. ($ millions) Cash 2018 2017 $ 8,756.3 $2,462.3 181.5 228.6 Short-term investments Accounts receivable 693.1 870.4 Current assets 12,494.2 5,283.4 5,684.2 4,220.7 349.9 Current liabilities Short-term debt Long-term debt Total liabilities Interest expense Capital expenditures Equity Cash from operations Earnings before interest and taxes 9,090.2 3,932.6 22,980.6 8,908.6 170.3 92.5 1,976.4 1,519.4 1,175.8 5,457.0 11,937.8 4,251.8 3,883.3 4,134.7 (a) Compute the following liquidity, solvency and coverage ratios for both years. Round all your answers to two decimal places. 2018 current ratio = 2017 current ratio = 2018 quick ratio = 2017 quick ratio = 2018 liabilities-to-equity = 2017 liabilities-to-equity =

Answer 1

Part - a

Particulars Current ratio => Formula Current Assets Current Liabilities 2018 12494.2 5684.2 2017 5283.4 4220.7 2.20 Times 1.25 Times Cash + Short term investment + Accounts receivable Current Liabilities Quick ratio => 3561.3 9630.9 5684.2 4220.7 1.69 Times 0.84 Times Liabilities to Equity=> Total Liabilties Equity 22980.6 1175.8 8908.6 5457.0 19.54 Times 1.63 Times Total debt to Equity=> Short term debt + Long term debt Equity 9440.1 1175.8 3932.6 5457 8.03 Times 0.72 Times

2018 2017 Particulars Formula Earning before Times interest earned=> Interest and Taxes Interets expense 3883.3 170.3 4134.7 92.5 22.80 Times 44.70 Times Cash from Opertaion to Total debt-> 11937.8 4251.8 Cash from Operation Short term debt + Long term debt 9440.1 3932.6 1.26 Times 1.08 Times Cash from Free operating cash flow Operations - Capital to Total debt expenditure Short term debt + Long term debt 9961.4 2732.4 9440.1 3932.6 1.06 Times 0.69 Times

Part - b

option - b) Both the quick and current ratio for 2018 has increased in the past year and are higher than 1.0 implying Starbucks is relatively liquid Starbucks interest coverage ratio decreased but remains high indicating it has ability to cover interest payment on its debt

From the Debt to Equity ratio it could be seen that the company is more reliant on Debt form of Financing rather than the Equity form, This has lead to increased interest expense and reduced interest coverage ratio (based of Times interest earned ratio)

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