Comparing capital expenditure
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Certain companies are considered as the front runners in their respective industries judging from their spending and the annual profits they get in their operations. For example, in the search engines industry, Google is well thought –out to be the trailblazer having billions of users. However, there are small companies which try to thrive in the same industries. The small companies possess some unique features which help them to survive in those industries. They distinguish themselves by differentiating their products brand and surroundings to meet their target market needs. Capital expenditure has been used to determine a company’s worth. It focusses on the properties, buildings and the equipment that a company considers as assets. The funds needed to buy, maintain and refurbish these assets are the ones referred to as capital expenditure.
Centred on the profit margins of a company, the capital expenditure is conjectured as a percentage of the gross profit during equivalent distribution. This paper will contrast the capital expenditure of Starbuck Corporation and Dunkin Brands in the coffee industry of the United States. Starbuck being the frontrunner in the industry and Dunkin as its leading competitor. The paper will focus on the capital expenditure of the two companies for the past three years.
Dunkin’ Brands Corporation has for years thrived as a competing franchise in the coffee industry. It is the sole owner of two restaurants in the United States, that is, Baskin- Robbins and Dunkin’ donuts. Since it acts as the franchise for these two restaurants, the capital requirements has been lower making it easy to open up the restaurants. Dunkin’ Donuts derives its income from the franchises through royalties and fees. A fraction of the total capital expenditure is incurred by Dunkin’ Brands from these franchisees. It owns a global market share of roughly 23 percent while Starbucks owns around 32.6 percent, leading in the list as far as coffee market is concerned.
In 2011, the capital expenditure for Dunkin’ Brands mounted to $19 million due to the addition of other outlets in the states. In the same year, the company had incurred huge expenses due to some few factors. These factors include, costs from giving out new stock for public sale from a firm which has already made its preliminary public offering. , loss on debt when the creditor accepts a higher security, and written off goodwill charges from a corporation with South Korea. In the year 2012, the company had incurred capital expenditures of $23.4 million which is considered as restrained bearing in mind the number of site launches.
In 2013, the capital expenditure for Dunkin’ Brands elevated to $31.1 million. This shows that the value of the expenditure was consistent throughout the three years. The company’s price- earnings ratio had been so low but due to the establishment of new stores the P/E ratio is expected to rise over the next fiscal year. The initial public offering that the company issued, raised funds to settle the long term debt creating a progressive cash flow. In the calculation of capital expenditure of Dunkin’ Brands, the net amount of fixed assets recorded in the financial statements for the previous year is subtracted from the net amount of fixed assets recorded for the year just ended. The amount of depreciation is also done the same and the result is added to the net change of the fixed assets. The final answer is the amount of capital expenditure of the company.
Starbuck Corporation as the juggernaut in the coffee industry has continued to show growth especially towards the Asian countries ( Byrd,2013). Sales have increased steadily due to their market strategy enabling an equal increase in capital expenditure. The expansion to these Asian countries which include, Chinese/Asian/Pacific division, has been considered as one of the factors that has contributed to the faster growth of the corporation.
Starbuck Corporation continues to be successful due to the low interest rate that persuade the management to enlarge its capital expenditure. However this may upsurge the total quantity of liabilities on the balance sheet of the corporation. China/ Asian/ Pacific Division has an extraordinary economic growth with interest rates at its lowest making it an enormous and worthwhile investment opportunity caused by the increase in the company’s liabilities.
The need to increase these liabilities of the company is to capitalize on the returns in that new market environment. Starbuck has incurred some debt which has been getting lower considerably throughout the years. Its financial debt to total debt ratio in 2010 was 11% to 31% in 2013. Initially the decision for Starbuck Corporation to increase its capital expenditure, did not lower the profit margin which was the expectation of many. However, since 2010 to 2013, the profit margins heightened significantly. The company is expected to improve the income GDP per capita worldwide from 2010 which was at $7329 ( Byrd, 2013). This will in turn increase the visits the consumer makes to the stores resulting in growth with foreign revenue by additional 45% in the next 10 years.
In the company’s annual financial statements, the capital expenditures in the investing activities column shows that in the year 2011 was at $531.9 million. In the year 2012 the amount rose to $856.2 million and $1.15 billion in 2013. The capital expenditure has been consistent over the three years like the Dunkin’ Corporation. This was due to the opening of new stores across the country. Depreciation has grown in the years as a result of increased capital spending and procurements. 2012 has been Starbucks development phase since it increased the new stores to up to 1300. Most of the stores were located in China. The capital expenditure value has been derived from getting the net fixed assets of the preceding year and subtracted it from the net fixed assets of the year just ended. The value is then added to the depreciation amount gotten from the difference between the depreciation value from the year just ended and the preceding year.
The focus on the company’s capital expenditure has been used to acquire the desired information to determine and predict its future earnings according to financial and accounting models. Managers counter information from the private operation about the future costs and demands over and done with their investment judgements.
In the quick food service industry, Starbuck Corporation and Dunkin’ Brands are the key participants. They try to counter the rising consumer demands for fast food products. However they are somewhat different since Starbuck Corporation principal concentration is on the expensive coffee, but has trailed on other product lines such as teas and juices. Conversely, Dunkin’ Brands has focussed primarily on marketing their products to everyone by combining coffee and donuts. The rate of growth for Dunkin’ has been considered to be moderately strong by financial analysts, but Starbucks has been a stronger growth with very minimum amount of debt.
Capital expenditure is the most commonly used determiner for how well a company operates since the funds are used to upgrade an existing business asset or purchasing a new asset for example a new building. The cost or the value of the business assets is always adjusted for tax purposes. Capital expenditure is measured to be deductible for tax determinations, because it signifies an improvement to the industry. The following table represents the capital expenditure comparisons between Starbuck Corporation and Dunkin’ Brands a franchise to the Dunkin’ donuts and Baskin Robbins.(2013).
Qtrly Rev Growth (yoy): 0.11 0.06
Gross Margin (ttm): 0.57 0.79
Operating Margin (ttm): 0.14 0.39
Net Income (ttm): 1.51B 106.11M
P/E (ttm): 33.59 44.29
P/S (ttm): 3.47 6.61
Employees: 160,000 1,104
Revenue (ttm): 14.02B 667.67M
EBITDA (ttm): 2.59B 313.12M
EPS (ttm): 1.97 0.94
PEG (5 yr expected): 1.61 1.72
Market Cap: 49.50B 4.42B
Starbucks updates on annual meeting of shareholders. (2013). Entertainment Close – Up, Retrieved from http://search.proquest.com/docview/940899804?accountid=32521
Mergent database in the Ashford University Library. Mergent Online Quick Tips <http://vizedhtmlcontent.next.ecollege.com/pub/content/78d50337-7e75-4658-9262-972e9b7422ea/Mergent_Quick_Tips.pdf> [accessed Nov 14th, 2014]
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint Education Inc.