Case Study : Return On Equity ( Roe )

1905 Words Mar 30th, 2016 8 Pages
Dupont Alternative: Return on Equity (ROE) is the most useful metric to measure the overall ability of a business to generate returns for its shareholders. Starbuck’s generated an ROE of 49.71% in 2015 as compared to 42.39% in 2014. A NOPAT Margin of 12.85% and 14.66% in 2014 and 2015 indicates Starbucks’ successful operating strategy in generating sales during the period under review. In 2015, the company opened 1,677 new stores, added a variety of ready to drink beverages which further boosted its sales revenue. Operating asset turnover measures the ability of the company to efficiently use its operating assets to generate sales. We do see a decline in operating asset turnover from 4.1% in 2014 to 3.18% in 2015 primarily due to a huge decline in working capital turnover from (8.54) to (23.57) in 2015. A dramatic increase in inventory in 2015 suggests that Starbucks built up the inventory levels, which it was unable to sell. A huge amount of funds was tied up in inventory, which mainly led to a negative working capital turnover. Starbucks puts obsolete, slow-moving inventory and the estimated shrinkage between physical inventory counts under the account title “ inventory reserves” which stood at $33.8 million and $31.2 million in 2015 and 2014 (Source, Annual Report -2015). This unnecessary buildup of inventory is a red flag and may be a sign of poor planning, i.e. the stock was increased in anticipation of sales that did not occur as demand was slow. Due to a decline in…
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