Operating Leverage ROI, EVA, and EPS for Starbucks

1099 Words4 Pages
Operating Leverage, ROI, EVA and EPS for Starbucks There are a number of ways an investor can assess the performance of a firm. When looking at a firm such as Starbucks an investor may choose to use measures such as the operating leverage, the return on investment and EVA as well as others. These can give an investor insight into the performance of the firm, but the measures may also be seen as limited. The operating leverage gives an indication of the degree to which the firms' net operating income is sensitive to the changes in sales. Where a firm has a high operating leverage small changes ion sales can have a disproportionately large impact on the net operating income, where there is a low leverage the firm will not be as sensitive to changes in the sales. Operating leverage tends to be high near a break even point and will decrease as the level of profit in a firm increases (Elliott and Elliott, 2010). The most common method of calculating the leverage is to divide the fixed costs by the total costs, the total costs being the fixed costs and the variable costs. The annual accounts of Starbucks do not give a clear breakdown of fixed and variable costs. The variable costs are those costs which vary on every unit produced, for example, a paper cup and the coffee used for each cup of coffee sold. Fixed costs are those which are incurred regardless of the level of production, such as head office costs. In this case we will assume that the cost of goods sold is the

More about Operating Leverage ROI, EVA, and EPS for Starbucks

Open Document