Starbucks Corporation (NASDAQ:SBUX), a large-cap worth US$79.32B, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Starbucks’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SBUX here. Check out our latest analysis for Starbucks
How much cash does SBUX generate through its operations?
Over the past year, SBUX has ramped up its debt from US$3.59B to US$3.99B , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$2.69B for investing into the business. Moreover, SBUX has generated cash from operations of US$4.17B in the last twelve months, resulting in an operating cash to total debt ratio of 104.68%, indicating that SBUX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SBUX’s case, it is able to generate 1.05x cash from its debt capital.
Can SBUX meet its short-term obligations with the cash in hand?
With current liabilities at US$4.22B, the company has been able to meet these obligations given the level of current assets of US$5.28B, with a current ratio of 1.25x. Usually, for Hospitality companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SBUX service its debt comfortably?
Since equity is smaller than total debt levels, Starbucks is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies.
Next Steps:
SBUX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SBUX’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SBUX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Starbucks to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SBUX’s future growth? Take a look at our free research report of analyst consensus for SBUX’s outlook.
- Valuation: What is SBUX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SBUX is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.