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Return On Capital Employed Overview: Starbucks

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Starbucks (NASDAQ:SBUX) posted a 157.76% decrease in earnings from Q3. Sales, however, increased by 46.92% over the previous quarter to $6.20 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Starbucks is not utilizing their capital as effectively as possible. In Q3, Starbucks brought in $4.22 billion in sales but lost $772.30 million in earnings.

Why ROCE Is Significant

Changes in earnings and sales indicate shifts in Starbucks's Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q4, Starbucks posted an ROCE of -0.06%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows Starbucks is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

In Starbucks's case, the ROCE ratio shows the amount of assets may not be helping the company achieve higher returns. Investors may take this into account before making any long-term financial decisions.

Q4 Earnings Recap

Starbucks reported Q4 earnings per share at $0.51/share, which beat analyst predictions of $0.31/share.

 

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