Running head: HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS Jaclyn Hurley Southern New Hampshire University 1 HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS 2 The fixed assets at Starbucks are carried at their purchase cost less the accumulated depreciation. Cost, in this case, is a sum of all the expenses incurred in the acquisition of the fixed assets and preparation for its use. The company uses the straight-line method for computing depreciation of its fixed assets. They estimate that the useful life of equipment ranges from 2-25 years while that of buildings ranges from 30-40 years. The company amortizes its leasehold improvements for a period extending to about ten years. In the determination of the useful life of renewable leases, the business uses the initial lease term. The table below shows horizontal and vertical changes in Starbucks’ accounts receivable, fixed assets, and debt financing balances over time. The techniques the company uses to acquire fixed and intangible assets and apportion depreciation has the following impacts on its income statement and statement of cash flow. Accumulated depreciation amounts to 8% of the company’s net income. This amount id directly deducted from the total cash flow from the business’ operations. The cost incurred as a result of HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS 3 depreciation is directly included in the cost of sales that reflects in the income statement. The repair and maintenance expenses of the equipment are classified as direct costs in the income statement. The firm disposes of its assets through two methods, retirement and sale. The gain or loss realized from this disposal is included in the computation of net income in the company. From the above table a reduction in other property plant and equipment from 164% in 2015 to 160% in 2015 results in a decline in gross accounts receivables from 102% to 101% between 2015 and 2016. Starbucks makes comparisons between current values of an asset to its estimated prospective undiscounted cash flows. It uses these comparisons to determine whether or not it has impairment losses. A long-term debt refers to a debt whose repayment period extends to more than a year. Short-term debt is a debt whose repayment period is less than a year (He, & Xiong, 2012). Starbucks has plenty of cash on hand as evident in its favorable statement of cash flow. The organization uses both equity financing and debt funding in credit acquisition. It, however, prefers debt financing to equity financing. From the table, debt financing accounts for 36% of the company’s total funding. This percentage is significant. Its board of management has a perception that shares are undervalued. The management works towards gaining leverage by repurchasing all the company’s traded shares. They believe that the company will attain its optimal capital structure when it can solely depend on free cash flows to facilitate sales growth which will eventually translate to business growth. The coffee giant recently submitted a regulatory filing that seeks to borrow from investors to expand its operations. The company intends to sell debt securities to raise capital. These debt securities will be treated as long-term debts the company owes. The company wishes HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS 4 to use the money it raises to re-purchase its traded shares in a move that is seen to shift the company’s financial structure toward debt financing and away from equity financing. The continuous increase in the business’ debt put the company at a high leverage risk. Starbucks recently announced the splitting of its stock. This split resulted in a decline in the market value of the company’s shares. Declining stocks indicate that a business’ assets are overvalued. As a consequence of this fall, it is unlikely that many investors would want to buy its shares. This financial decision was aimed at encouraging debt financing in the company. The high leverage risk affords the company to enjoy tax liberation because taxes are not levied on interests. Starbucks is yet to achieve an optimal capital structure because of the increasing cost of debt. An optimal capital structure is one in which a balance is established between equity financing and debt financing to minimize the cost of credit (Martin, & Baker, 2013). HORIZONTAL AND VERTICAL ANALYSIS OF STARBUCKS 5 References Martin, G., & Baker, H. (2013). Capital structure and corporate financing decisions (1st ed.). Hoboken, N.J.: Wiley. He, Z., & Xiong, W. (2012). Debt financing in asset markets (1st ed.). Cambridge, MA: National Bureau of Economic Research. Vertical Vertial Analysis Analysis (2015) (2016) Horizontal Analysis Total Accounts Receivable Accounts Receivable (Net) 6 100 Horizontal vs. Vertical An 100 250 6 100 100 200 150 Accounts Receivable (Gross) Bad Debts Net Property Plant/Eqipment Gross Property Plant/Eqipment Buildings Land and Improvement Other Propety Plant and Equipment Total Long-Term Debt 100 6 -15 102 2 101 1 50 0 -50 10 100 100 9 10 236 10 233 10 Horizontal Analysis 0 1 1 8 164 160 36 100 100 Intangible Assests 6 100 100 Accumulated and Depreciation Amortization 8 8 100 100 100 100 Vertial Analysis (2015) zontal vs. Vertical Analysis Vertial Analysis (2015) Vertical Analysis (2016)
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