2. Choose and calculate three ratios for Starbucks for the last two years. Make sure to select ratios that you think that expanding into a new market will effect, and explain your reasoning. Identify a competitor of Starbucks and contrast these three ratios for the two companies. Explain why you selected this competitor. Describe how the decisions made by management, marketing and operations functions of the company can impact, and hopefully improve, the components of firm operations that these financial ratios measure.

Explanation:

Starbucks noted a gross margin of 29.6% in 2018 and 28.2% in 2019. Therefore, just like we had discussed above the gross margins might be impacted in the medium term due to competitive pricing strategies to win market share in China and competition from McDonald's. McDonald's noted a gross margin of 46.5% and 51.3% in the last two fiscal years. Starbucks deals with premium coffee and other food products and therefore has a lower gross margin compared to McDonald's whose volumes are driven by its friendly pricing.

The debt to capital ratio rose from 86.8% in 2018 to 216.4% in 2019. Expansion in a new market comes with higher capital which leads to an increase in the costs in the form of interest expenses. McDonald's debt to capital ratio for the last two fiscals were 107.8% and 119.4% respectively. The increase in debt was driven by the ongoing efforts towards bringing innovations to the company's menu, restaurants and other related matters to drive the revenue and profits.

The return on equity stood at 136.2% in 2018 and turned into a negative 142.2% in 2019 due to the stockholder deficit. The higher capital issue associated with the expansion might worsen the returns further. McDonald's noted a negative return on equity of 189.8% and 124.4% in the last two fiscals.

Starbucks and McDonald's have noted a spike in their capital expenditure to increase their market share. Both the companies are focused on their respective strategies of geographical expansion and store and menu renovation. The gross margin expansion of Starbucks will be intially driven by higher volumes from friendly pricing and loyalty programs. Once it has gained market share it will take the help of pricing power to drive revenue in the 1.4 billion Chinese economy. McDonald's has already won market share through its friendly pricing policies leading to higher volumes. The store and menu renovation and loyalty programs will further add value to the margins.

The growth in revenue and profits will help the companies to gradually repay and lower their debt levels. All of which will drive their net incomes and convert their stockholder deficit into a positive stockholder equity.

Once the companies start expanding their profits and margins then the return on equity will also turn positive and will witness growth.