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Starbucks has been operating with negative equity. What does this indicate about the company's financial structure?

A. Starbucks is not profitable and is likely to go bankrupt.
B. Starbucks has a high level of cash reserves that offset its liabilities.
C. Starbucks shows in the financial statements that the company has more liabilities than assets, which may indicate high leverage but also the potential for high risk.
D. Starbucks has no debt and relies solely on equity for funding.

Answer :

Final answer:

Negative equity in Starbucks indicates that its liabilities exceed its assets, suggesting financial risk associated with high leverage. This situation can arise from growth strategies that prioritize expansion over immediate profitability. While it points to potential challenges, negative equity alone does not imply imminent bankruptcy.


Explanation:

Understanding Negative Equity in Starbucks

When a company like Starbucks has a negative equity, it indicates that its liabilities exceed its assets. This situation is often reflected in the company's financial statements, where the balance sheet reveals a negative net worth. Specifically, if Starbucks has been carrying more debt than it has in resources, this suggests a scenario of high leverage, which can pose significant risks for the company during financial downturns.

However, it is important to note that negative equity does not automatically mean a company is on the verge of bankruptcy or that it is not profitable. In fact, some businesses may deliberately operate with negative equity as part of a strategy for growth, where investment in expansion (such as opening new locations or acquiring companies) is prioritized over immediate profitability. Nonetheless, this strategy can lead to increased financial risk, such as during economic downturns when cash flow may be constrained.

In conclusion, while negative equity can indicate potential challenges, it could also reflect strategic growth decisions that may yield high returns in the long term, if managed carefully. Therefore, stakeholders should look beyond the surface numbers to evaluate the broader context of the company's financial health.


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