Summary of Findings
Based on my findings and the financial reports provided by both Starbucks
Corporation and Tim Horton’s Inc., I have found that investment in Starbucks Corporation
would ultimately prove to be the better investment. Reasons for this include: (1) Starbucks’s
venture into emerging markets abroad, (2) comparably lower debt-to-equity and debt-to-asset
ratios to Tim Horton’s, and (3) the company’s recent activities involving new product
development in its Channel Development segment of its operations. The following will provide
a more comprehensive explanation of the reasons mentioned above:
Global Activity
According to management’s discussion and analysis, Starbucks has vested interests in markets
abroad which include Europe, the Middle East, Africa, China, and the Asia Pacific region.
Compared to Tim Horton’s, Starbucks shows greater potential for long-term gains due to its
status as a global company. Moreover, Starbucks operates in many of Asia’s and Africa’s
emerging markets with rising middle classes which shows additional promise for future growth
of the company.
Financial Standing
Having conducted ratio analyses for both companies, it is clear that Starbucks is in greater
financial shape than Tim Horton’s and this can be observed by comparing both companies’
debt-to-equity and debt-to-assets ratio. Comparatively, Starbucks debt-to-assets are nearly
25% less than Tim Horton’s, and Tim Horton’s debt-to-equity is 50% higher than that of
Starbucks which is worrisome when considering the companies’ ability to cover its debts.
Proportionately, Starbucks exhibits a greater ability to manage its debts both in terms of
covering them and in incurring them for any necessary financing.
New Product Development
With respect to Starbucks, Management’s Discussion and Analysis for fiscal year 2012 included
that the company’s increased revenues were enhanced mostly through its Channel
Development segment which introduced a series of new product lines. With this in mind, we
can see that Starbucks is a more forward-thinking company compared to Tim Horton’s and
shows greater promises for future gains. As Starbucks ventures into new markets I believe it will
begin to explore new revenue channels at every corner.
Based on the information presented herein, if faced with the choice to invest in
either Starbucks Corporation or Tim Horton’s Inc., my choice would undoubtedly have to be
Starbucks. The company has greater financial health and overall, it exhibits more potential for
long-term gains through its global activities and its forward-thinking attitude.
Financial Ratios
Debt-to-Assets
Debt-to-Equity
Return on Equity
Profit Margin
Return on Assets
Current Ratio
Current Assets
Current Liabilities
Working Capital
STARBUCKS
37.70%
60.70%
29.10%
10.40%
16.80%
190%
TIM HORTONS
47.80%
91.90%
34.70%
13.06%
17.80%
131.40%
(in millions)
(in thousands)
$4199.6
2209.8
$1989.8
$609,328
463,372
$145,956
Starbucks Working Capital (as a proportion)
Current
Liabilities
34%
Current
Assets
66%
Tim Horton's Working Capital (as a proportion)
Current
Liabilities
43%
Current
Assets
57%
Explanation of Financial Ratios
Debt-to-Assets
Debt-to-assets is a proportion which measures a company’s debt with respect to its assets at a
given point in time and is used most often to assess the company’s ability to cover its debts.
Comparatively, the debt-to-assets ratios of Starbucks Corporation and Tim Horton’s Inc. are
reflective of the leasing operations that they both partake in. According to management’s
discussion and analysis, as of Dec.30, 2012, 99.5% of all Tim Horton’s restaurants were
franchised which offers a brief insight as to why Horton’s percent of debt to assets is larger
than Starbucks.
Debt-to-Equity
The debt-to-equity ratio is used by companies to assess the portion of debt that they want to
carry as a means of financing. Due to certain obligations in the past year both Tim Horton’s
long-term obligations and its equity activities have led to a slightly larger proportion of debt to
total equity. This was largely the result of a vast increase in capital leases and debts incurred
due to advertising activities. Starbucks liabilities and equity maintained a steady increase over
the past year and increased only gradually from the prior year. It is likely the result of regular
operations or plans for global expansion discussed in management’s discussion and analysis.
Return on Equity
The return on equity ratio is a tool used to measure the rate of return with respect to average
equity at a specified time. In terms of Starbucks Corporation, nearly every aspect of its revenue
generating activities (general operating, investments, interest) were attributable to its generous
return on equity of 29.1%. According to management’s discussion and analysis, net revenues
increased 14% in fiscal year 2012. Comparatively, Tim Horton’s return on equity was
proportionately larger than that of Starbucks - one reason being the increase in all revenue
generating operations. Moreover, the companies increased operations (with respect to equity
contributions) were attributable to an increase in their retained earnings from the prior year.
Profit Margin
Profit margin is used to determine what portion of net sales are directly attributed to net
earnings after all expenses. The differences exhibited between Starbucks and Tim Horton’s
profit margins were mostly the result of a larger percent increase in operating expenses for
Starbucks. According to management’s discussion and analysis, Starbucks incurred greater
expenses due to increases in commodity costs (namely, coffee).
Return on Assets
The return on assets ratio is used to demonstrate how efficiently assets were used in terms of
generating revenues. Tim Horton’s and Starbucks had proportionately similar return on assets
for fiscal 2012. Differing by only 1%, the companies don’t exhibit any significant differences
with respect to return on assets. This is typically the case when assessing the return on assets of
two companies in the same industry.
Working Capital
The working capital ratio is used to measure a company’s operational liquidity. Comparatively,
the working capital of Starbucks is significantly larger both proportionately and in terms of
dollar amount. This can be explained mostly by the relative size of Starbucks to Tim Horton’s.
Due to this, Starbucks influence within in the quick service restaurant industry is much larger
than that of Tim Horton’s. This difference can be observed further by examining both
companies’ balance sheets.
Current Ratio
The current ratio is used to assess a company’s ability to satisfy its short-term obligations by
comparing them to its current (and therefore its most liquid) assets. Both companies’ current
assets exceed their current liabilities indicating healthy management of debts throughout the
organization in the short-term. Further, Starbucks current ratio far exceeds that of Tim Horton’s
proportionately and shows that its current assets are nearly double its current liabilities.
Summary of Management’s Discussion & Analysis for Starbucks Corp.
Management’s Discussion and Analysis for Starbucks covered general operating
revenues and operating expenses throughout all four segments of their operations (as defined
in the report) and noted any significant changes that demanded attention. In terms of the most
significant contributors to increased operating revenues for fiscal 2012, the report indicated
that channel development played the most significant role with an increase of 50% in revenues
attributable to the development of new product lines which were launched at the beginning of
the fiscal year. The company also suffered through increased commodity costs and as a result
exhibited a decrease of $214 million in operating revenues across all segments through these
increases.
On a brighter note, Starbucks global activities in the eastern hemisphere are
gaining ground as the company fights through the challenging economic atmosphere in both
the middle east/Africa and China/Asia Pacific. Additionally, the company can expect gradual,
but steady increases in operating margin and shows promise for long-term gains by having
begun operations abroad and in emerging markets. In terms of the company’s future, new store
growth in emerging markets and channel development will most likely be the largest
contributors toward developing their global business model and long-term increases in
operating revenues.