appears to reflect the changing revenue mix: as revenue from company-store sales declines as a percentage of revenue, store operating costs as a percentage of revenue decline as well margins mirror the pattern for operating margins from 2010 to 2011. In 2012, net margin fell slightly as tax expense rose. More research is needed to uncover the cause of the increase in tax in 2012, but since tax expense is largely out of company control, the decline in net margin does not indicate a deficiency in the ability of Starbucks’ operating strategy to generate profit. 5 Starbucks 2012 Annual Report. Purchased by: Janet Le [email protected] on February 05, 2014
BAB036N J ULY 2013 Starbucks Corporation: Financial Analysis of a Business Strategy 6 Table 1 Profitability: Accounting Margins Ratio Formula 2012 2011 2010 Gross margin Gross profit Sales % 3 . 56 = 5 . 299 , 13 3 . 813 . 5 - 5 . 299 , 13 58.0% 58.8% Operating margin Operating profit Sales % 0 . 15 = 5 . 299 , 13 4 . 997 , 1 14.8% 13.3% Net margin Net income Sales % 4 . 10 = 5 . 299 , 13 7 . 384 , 1 10.7% 8.9% Asset Management Ratios While profitability is indeed important, it does not tell a complete story about the ability of an operating strategy to generate shareholder returns. Another critical element is the efficie with which a firm utilizes its assets. Why? Every dollar of assets is funded by a dollar liabilities or equity; every dollar of equity and almost every dollar of liabilities is costly. The cost of a liability (e.g., a bank loan) is interest on that liability, while the cost of equity is the return required by shareholders. Therefore, in addition to profitability, generation of shareholder returns requires efficient use of corporate assets. The objective here is to generate maximum revenue on minimum assets, without compromising long-term strategy. The most generic overall asset management metric is total asset turnover, calculated as assets Total Sales turnover asset Total . It measures the dollars of sales generated by each dollar invested in assets. Analysts m different methodological choices in selecting the denominator for turnover measures: sales can be measured against beginning assets, ending assets, or average assets. That is, asset turnover for fiscal 2012 can be measured by dividing 2012 sales by 2011 assets (beginning), 2012 assets (ending), or an average of 2011 and 2012 assets (average). The argument in favor of u average assets is that average assets best reflects the asset investment on which sales generated during a reporting period. In the interest of simplicity, the convention used throughout this note for all turnover measures is a denominator defined as ending assets. Purchased by: Janet Le [email protected] on February 05, 2014
BAB036N J ULY 2013 Starbucks Corporation: Financial Analysis of a Business Strategy 7 An additional asset management measure, return on assets (ROA), integrates profitability and asset utilization. It is measured as assets Total Sales x Sales income Net = assets Total income Net = assets on Return .
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