Financial Analyses of Two Companies: Starbucks & Dunkin’ Donuts

The financial results of two firms, Starbucks and Dunkin Donuts, will be the subject of this research report. Starbucks is a successful American coffee shop chain founded in March 1971 by Jerry Baldwin, Gordon Bowker, and Zev Siegl in Seattle, Washington. Currently, the company hires over 238,000 people and serves coffee, tea, baked goods, smoothies, and salads from almost 26,700 locations across six continents. William Rosenberg founded Dunkin Donuts, a donut, and coffeehouse chain, in June 1950. Currently headquartered in Canton, Massachusetts, the company serves its donuts, baked products, bagels, and beverages from some 11,000 plus stores spread over 36 nations and territories worldwide.

The Food & Beverage Industry

Globally, the food and beverage industry is a multi-trillion dollar operation that houses some of the biggest corporations ranging from the multinational chain stores that serve coffee and its accompanying products to the soft drink giants. With sales revenues running into trillions of dollars and profits within the hundreds of billions, the industry is a competitive one that has great barriers to entry (in terms of the high initial capital required). Freedom exists of entry and exit into the industry and the competition among many firms is in terms of packaging and branding and to a smaller extent in terms of pricing, as Belleflamme & Peitz (91) observe.

Financial Analysis

In this segment, for the two firms, three types of financial ratios will be considered, profitability ratios, liquidity ratios and solvency ratios. The relevant figures for each of the companies are outlined here-below

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Company

2014

2015

2016

Current Assets

Dunkin Donuts

393,402

557,824

606,358

Starbucks

4,168,704

4,352,710

4,760,517

Current Liabilities

Dunkin Donuts

355,519

418,792

424,201

Starbucks

3,038,714

3,653,520

4,546,900

Total Assets

Dunkin Donuts

3,124,400

3,197,119

3,227,382

Starbucks

10,752,917

12,446,118

14,329,507

Average Total Assets

Dunkin Donuts

3,055,012.5

3,160,759.5

3,212,250.5

Starbucks

11,134,811

11,586,017.5

13,387,812.5

Total Liabilities

Dunkin Donuts

2,749,450

3,417,862

3,390,640

Starbucks

5,479,214

6,626,319

8,438,844

Average Total Liabilities

Dunkin Donuts

2,822,381

3,083,656

3,404,251

Starbucks

6,256,812

6,052,766

7,532,581.5

Net Sales

Dunkin Donuts

748,709

810,933

828,889

Starbucks

16,447,800

19,162,700

21,315,900

Accounts Receivable

Dunkin Donuts

55,908

53,142

44,512

Starbucks

631,019

719,004

768,810

Net Cash from Operating Activities

Dunkin Donuts

199,323

185,566

276,205

Starbucks

607,811

3,749,134

4,575,115

EBIT

Dunkin Donuts

255,733

201,588

313,249

Starbucks

3,223,821

3,973,017

4,279,900

Net Income

Dunkin Donuts

176,357

105,227

195,576

Starbucks

2,068,149

2,757,411

2,817,700

Gross Profit

Dunkin Donuts

612,185

679,445

693,872

Starbucks

9,589,013

11,375,206

12,804,809

Cost of Sales

Dunkin Donuts

136,524

131,488

135,017

Starbucks

6,858,800

7,787,500

8,511,100

Key Indicators of the Two Companies (in $ ‘000) from 2014 to 2016

Profitability Ratios

Profit Margin

This ratio depicts the amount in net income gained from each dollar earned from the sale of products.

For the two companies, the profit margin for the three years under review would be as presented in the table below;

Year

2014

2015

2016

Dunkin Donuts

0.235

0.219

0.235

Starbucks

0.125

0.134

0.132

Asset Turnover Ratio

Measuring the efficiency with which firms generate sales from assets, this ratio, in the thinking of Goodhart (447), tells of a firm’s ability to use the assets in the generation of sales. It is derived using the formula;

For the two companies therefore, the ratio for the three years would be;

Year

2014

2015

2016

Dunkin Donuts

0.245

0.256

0.258

Starbucks

1.477

1.653

1.592

Return on Assets

Return on assets as a ratio measures the efficiency with which a company manages its assets to produce profits; the ratio basically shows how profitable the assets of a company are.

For the two companies therefore, the ratio for the three years would be;

Year

2014

2015

2016

Dunkin Donuts

0.057

0.033

0.06

Starbucks

0.185

0.237

0.21

In terms of the profitability ratios, Dunkin Donuts seems to have a higher profit margin that Starbucks though the latter generates sales more efficiently using the available assets. Starbucks is also more profitable as it returns more for each asset than does Dunkin Donuts.

Solvency Ratios

Debt to Asset Ratio

Depicting the total amount of debts relative to the assets of a given organization, this ratio, according to Ibendahl (231), is an important measure of leverage. The ratio is calculated using the formula;

For the two food and beverage industry players therefore, the ratio for the three years would be;

Year

2014

2015

2016

Dunkin Donuts

0.879

1.069

1.050

Starbucks

0.509

0.532

0.588

Cash Debt Coverage

Cash Debt coverage as a solvency ratio measures a firm’s financial flexibility and stability. It is calculated using the formula;

From the formula above, for the two food and beverage industry players therefore, the ratio for the three years would be;

Year

2014

2015

2016

Dunkin Donuts

0.070

0.060

0.081

Starbucks

0.097

0.619

0.607

Considering the solvency ratios, Dunkin Donuts can be deemed more solvent, at least in terms of the leverage. Starbucks is however more financially flexible and stable, as per the cash debt coverage ratio though such ratio seems to be fluctuate a lot for the forty six year old company.

Liquidity Ratios

Current Ratio

This ratio depicts the ability of a firm to use its current assets to honor its short term obligations (those liabilities that are due within twelve months). The ratio is derived using the formula

For Starbucks and Dunkin Donuts, the liquidity ratios for the three years under review would be;

Year

2014

2015

2016

Dunkin Donuts

1.107

1.331

1.429

Starbucks

1.371

1.191

1.046

Average Collection Period

The average collection period, as a ratio, connotes how promptly a company collects and manages its accounts receivables. The ratios is calculated using the formula depicted here below;

For the two companies under review, for the three year period, the average collection period ratios are;

Year

2014

2015

2016

Dunkin Donuts

0.00652

0.00686

0.0082

Starbucks

0.000578

0.000507

0.000474

Accounts Receivable Turnover 

Accounts receivable turnover ratio is used to measure the liquidity of a company using the formula below;

For Starbucks and Dunkin Donuts, the accounts receivable turnover ratios for the three years under review would be;

Year

2014

2015

2016

Dunkin Donuts

13.391

15.259

18.621

Starbucks

26.065

26.651

27.725

In terms of liquidity, Dunkin Donuts, going by the current ratio, can be ruled more liquid than Starbucks (at least considering the last two financial years). The average collection period and the accounts receivable turnover however seem to point to Starbucks as the more liquid of the two firms. Overall, therefore, Starbucks seems to be the better firm in terms of performance as it is generally more liquid, it is slightly more solvent and it is comparatively more profitable than Dunkin Donuts.

Lesson Learnt

In doing this assignment I have learnt that the numerical value of a given financial indicator does not count towards much in terms of ratios, as was the case with the debt to asset ratio where even though Starbucks had bigger values, Dunking Donuts ended up with a higher figure in ratios. I have also learnt that assessing the performance of a firm requires more than just a glance at simple indicators like profit or net sales.

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Works Cited

Belleflamme, Paul, and Martin Peitz. Industrial Organization: Markets and Strategies. Cambridge University Press, 2015.

Goodhart, Charles. “Ratio controls need reconsideration.” Journal of Financial Stability 9.3 (2013): 445-450.

Ibendahl, Gregory. ”Using solvency ratios to predict future profitability.” Journal of ASFMRA (2016): 223-254.