# 2.4 Ratio Analysis - Solutions

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## 2.4 Ratio Analysis - Solutions

- Pages:
- 7
- School:
- University of Texas at Austin
- Course:
- Fin 320f - Foundations of Finance

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FIN 320F Foundations of Finance 2.4 Ratio Analysis - Solutions 1. How liquid is Starbucks? a) What were the company’s Current and Quick Ratios for 2011? Explain the results. In 2010, the Current Ratio was 1.5 times and the Quick Ratio was 1.2 times. As measured by the Current and Quick Ratios, did liquidity improve or erode year-over-year? Current ratio = CA CL Current ratio = $3,794.9 $2,075.8 = 1.8 times In 2011, Starbucks had 1.8 times more current assets than current liabilities. If Starbucks were to liquidate all of its current assets, it could pay each of its current liabilities 1.8 times. This is an improvement over 2010, at which time they had enough current assets to pay for each of their current liabilities only 1.5 times. Quick ratio = (CA – Inventory) CL Quick ratio = ($3,794.9 – $965.8) $2,075.8 = 1.4 times. If we eliminate Starbucks’ inventory of coffee beans and paper cups (and whatever else was in their inventory), the company still had enough current assets to pay for each of its current liabilities 1.4 times. This is much better than in 2010, when the company had enough current assets to pay for their current liabilities only 1.2 times. Overall, liquidity improved from 2010 to 2011. b) What was Starbucks’ Cash Conversion Cycle in 2011? Explain each of components. In 2010, DSI was 43.9 days, DSO was 10.2 days, and DPO was 22.8 days. As measured by the Cash Conversion Cycle, did liquidity improve or erode year-over-year? Which components of the Cash Conversion Cycle improved? Which components worsened? DSI = Inv (COGS 360) $965.8 ($4,915.5 360) = 70.7 days DSO = A/R (Sales 360) $386.5 ($11,700.4 360) = 11.9 days DPO = A/P (COGS 360) $540.0 ($4,915.5 360) = 39.5 days CCC2011 = DSI + DSO – DPO = 70.7 + 11.9 – 39.5 = 43.1 days CCC2010 = DSI + DSO – DPO = 43.9 + 10.2 – 22.8 = 31.2 days In 2011, Starbucks’ had 71 days worth of inventory on hand. Once Starbucks made a sale, it took an average of 12 days for Starbucks to collect payment from the customer. On average, Starbucks paid its suppliers 39.5 days after receiving inventory. In total, it took Starbucks 43 days from the time it received inventory until it sold the inventory to the customer, paid its suppliers for the inventory, and received the customer’s payment. Starbucks’ Cash Conversion Cycle was 12 days slower in 2011 than it was in 2010. Thus, Starbucks had to finance 12 more days of net working capital in 2011. The main problem was related to inventory management: Starbucks held 26.8 more days of inventory in 2011 than in 2010. Payables management improved by 16.7 days in 2011, but receivables management worsened by 2 days. In total, Starbucks converted its operating activities into cash less rapidly than in 2010. SourceDocument.docx Page 1 of 7 ...

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