Starbucks has higher return on equity (ROE) than that Wells Fargo. Starbucks got 29. 45% and 25. 32% for the years 2007 and 2006 respectively as against Well Fargo’s 16. 92% and 18. 38% for the same years respectively. The same could be observed in terms of return on assets (ROA) where Starbucks has 12. 59% and 12. 74% for the years 2007 and 2006 as against Wells Fargo’s 1. 40% and 1. 75% for the same years respectively.
See Appendix A. It could be observed also the difference in ROA is higher than the difference in ROE since while the difference in ROE is only almost doubled, in the ROA, the difference range from 7 to 9 times. This could be explained by the fact the two companies belong to two different industries. Starbucks Coffee is from the retail industry while Wells Fargo is from banking industry.
The former sells coffee, hot and cold drinks and snack items and items as mugs all over the world through their stores while the former provide personal banking services, commercial banking, small business and investing services with operations also around the world. (Wells Fargo, 2008; Starbucks, 2008). Since ROE measures how much income is generated in terms of stockholder’s investments it is understandable the two retail industry is more profitable than the banking industry because of the stronger competition in the banking industry than in the retail industry.
This proved by the fact of many mergers that have happened in the industry. The bigger difference in ROA in favor of Starbucks could also explained by the fact that banks have higher turnover of assets since its business transactions is mostly in lending and investing as against selling the longer process of buying and selling goods and in some cases partly manufacturing because of roasting coffee. This means the higher turnover of assets in banking is justified by smaller return because of the bigger volume of transactions.
Both global companies however have total revenues, total net income, total assets, total liabilities and total equity, which are indications of complete financial statements. But they differ again in the presence of current assets and current liabilities in the Starbucks but not found in Wells Fargo. Thus the extracted ratios confirm the same by the absence of current ratio, which is a measure of liquidity, in Wells Fargo. See Appendix A. Again the difference of two companies could be explained by the nature of their business.
In Starbucks, current ratio is important to know the company liquidity position at certain points in time, which could monthly or quarterly or yearly but in a bank the measure of liquidity is more technical as everyday cash position is important for the bank since withdrawals could be unpredictable. Hence, more than the normal liquidity measured in terms of current ratio, the bank is required to have its assets allocated more rationally between its short terms and long terms investments.
Hence banks have stricter regulations by monetary authorities than a retail business. In other, words it is easier to put up a retail store than a bank. The effect of the difference of the companies because of the nature of their business is still apparent in terms of their debt to equity ratio.
Starbucks has debt to equity ratios of 1. 34 and 0. 99 for the years 2007 and 2006 as against Wells Fargo’s 11. 08 and 9.52 for the same years respectively. See Appendix A. The higher ratios for the banking industry over that in the retail industry is normal because of the business of banking which lives on credit lines, loans and obligations and wider circulation of currency. The banks have many depositors which are considered as creditors whereas Starbucks has fewer creditors, which primarily include its suppliers and some banks.