How's The Balance Sheet Of Green Mountain Coffee Roasters Looking?

| About: Keurig Green (GMCR)
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Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.

Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheet of Green Mountain Coffee Roasters (NASDAQ:GMCR) in order to get some clues as to how well this company is doing.

I will go through the balance sheet, reviewing the most important items, in order to assess the financial condition of Green Mountain Coffee Roasters. The information that I am using for this article comes from the company's most recent annual report, which can be found here. Note that this article is not a comprehensive review as to whether Green Mountain Coffee Roasters should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.

This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it.


Green Mountain Coffee Roasters is a leader in specialty coffee and coffeemaker businesses in the United States and Canada. The company sells Keurig Single Cup brewers and roasts high-quality Arabica coffee beans. They sell coffee that comes in K-Cup and Vue single-serve portion packs for use in the Keurig Single Cup brewers. In addition to the portion packs, the company also offers whole bean and ground coffee in bags, fractional packages, and cans. GMCR offers other specialty beverages like hot apple cider, teas, iced coffee, fruit beverages, and cocoa in portion packs.

It should be mentioned that GMCR does not own all of the brands of products that they sell. For instance, they produce beverages under well-known brand names, like Tetley (OTC:TTAZF), Tazo, Eight O'Clock, Dunkin' Donuts (NASDAQ:DNKN), Starbucks (NASDAQ:SBUX), Swiss Miss (NYSE:CAG), and Snapple (NYSE:DPS) through licensing and/or manufacturing arrangements, through which GMCR either pays a royalty in exchange for the right to sell these brands or they manufacture the product solely for the brand owner, who then sells the product.

Products that GMCR sells go to supermarkets, department stores, mass merchandisers, club stores, convenience stores, restaurants, hospitality accounts, and to consumers through numerous websites.

The company aims to grow by driving the adoption of the Keurig Single Cup brewer in order to generate ongoing demand for portion packs in households, foodservice, and other places. GMCR often sells the brewers at cost or slightly below cost in order to drive sales of the portion packs. 92% of the company's sales have been attributed to a combination of portion packs and Keurig Single Cup brewers. During fiscal 2013, GMCR had the top four coffeemakers by dollar volume in the United States.

Cash and Cash Equivalents

The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, pay down debt, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.

As of Sept. 28, 2013, Green Mountain Coffee Roasters had $261M in cash and short-term investments that can easily be converted into cash.

During fiscal year 2013, GMCR spent a net $158M on share repurchases, and just declared their first ever cash dividend of $0.25 per share. There is currently $138M remaining on the company's current share repurchase authorization. The company's activities in this area during fiscal 2013 were well covered by free cash flow of $603M.


With manufacturing and retail companies like Green Mountain Coffee Roasters, I like to keep an eye on inventory levels. I usually like to see inventory levels stable or slightly rising from one year to the next. If I see inventory levels rising, then I want to see revenues rising as well, to indicate higher demand for the company's products. I don't like to see rapidly fluctuating inventory levels that are indicative of boom and bust cycles. In some instances, if inventory ramps up without increases in volumes or revenues, then it may indicate that some of the company's products are going obsolete.

At the end of fiscal 2013, GMCR had $676M worth of inventory, which amounts to 15.5% of the company's sales for that year. At the end of fiscal 2012, this level was at 19.9% of sales, while at the end of fiscal 2011, it was at 25.4% of sales. So, we see that inventory levels are accounting for smaller percentages of the company's sales from one year to the next. This is due to very good sales growth that is outpacing any growth in inventory levels. I don't see anything here to indicate that a large number of their products might be going obsolete. So, I see nothing to worry about here at this time.

Current Ratio

Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of its operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.

If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.

The current ratio of Green Mountain Coffee Roasters is 2.55, which is excellent.

Quick Ratio

Most of the time when it comes to short-term liquidity, I end the discussion at the current ratio. However, with companies that have a significant amount of their current assets in inventories, one has to wonder whether all of that inventory can quickly be converted into cash in the event that the company suddenly needs it. Some of the inventory might be obsolete, or have to be disposed of for less than it was originally valued at.

To address this issue, I calculate what I call the quick ratio. The quick ratio is calculated simply by subtracting the inventory from the total current assets and then dividing the remainder by the current liabilities. I usually like to see a quick ratio of at least 1.0. That way, even if the company's inventory is worthless, they will still have enough other current assets on hand to meet their short-term financial obligations in the event of an unlikely disruption to their operations.

The quick ratio of Green Mountain Coffee Roasters is 1.41, which is outstanding as well.

Property, Plant, and Equipment

For retail and manufacturing companies like Green Mountain Coffee Roasters to operate, a certain amount of capital expenditure is required. Land has to be bought, stores have to be built, machinery has to be purchased, and so on. However, less may be more when it comes to outlays for property, plant, and equipment, as companies that constantly have to upgrade and change their facilities to keep up with competition may be at a bit of a disadvantage. However, another way of looking at it is that large amounts of money invested in this area may present a large barrier-to-entry for competitors.

Right now, GMCR has $986M worth of property, plant, and equipment on its balance sheet. This figure is slightly above the $944M that it reported at the end of fiscal 2012, and well above the $579M that the company reported at the end of fiscal 2011. In its 10-K filing, the company said that 48% of its assets in this category are from production equipment, while 14% is from construction in progress, 10% is from computer equipment and software, and 9% is in buildings.


Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case-by-case basis as good companies are rarely purchased at or below book value.

Green Mountain Coffee Roasters has $788M worth of goodwill on its most recent balance sheet, which is just a little bit below the $808M that was reported at the end of fiscal 2012 and inline with the $789M that was reported at the end of fiscal 2011. Their current goodwill is well above the $386M that was reported at the end of fiscal 2010. The increase in 2011 is due to the company's acquisition of LJVH Holdings, a coffee roaster in Canada, for $908M. Of this purchase price, $472M was allocated to goodwill. The small changes in goodwill that were seen between 2011 and 2013 were due to foreign currency effects.

Usually, I don't like to see goodwill account for more than 20% of a company's total assets for the reason that I discussed at the beginning of this section. Since goodwill accounts for 21% of the assets of Green Mountain Coffee Roasters, I would keep an eye on this, as any more increases in this area over the years could lead to issues down the road.

Intangible Assets

Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.

Green Mountain Coffee Roasters currently has $435M worth of intangible assets on its balance sheet. This is less than the $498M that was reported one year prior as well as the $529M that was reported at the end of fiscal 2011. This figure jumped from $220M to $529M between 2010 and 2011 due to the acquisition of LJVH Holdings, in which the company obtained $375M of intangible assets.

Of the company's intangible assets, the bulk of them are in customer relationships, trade names, customer and roaster agreements, and acquired technology. 77% of GMCR's intangible assets have finite lives, ranging from 2 to 16 years. Over the next 5 years, $127M of these assets will be lost to amortization.

While the eventual loss of about $337M from the balance sheet is not a good thing, considering that amount accounts for less than 10% of the company's total assets, and the fact that a lot of this amortization will go on for years to come, I don't see anything to be alarmed about here, going forward.

Return on Assets

The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher the better, although lower returns due to large asset totals can serve as effective barriers-to-entry for would-be competitors. The formula for calculating return on assets looks like this:

Return on Assets = Net Income / Total Assets.

For Green Mountain Coffee Roasters, the return on assets would be $518M in core earnings over the last 12 months, divided by $3.76B in total assets. This gives a return on assets for fiscal 2013 of 13.8%, which is very good. I also calculated the company's returns on assets over fiscal 2012, fiscal 2011, and fiscal 2010 for comparative purposes. This can be seen in the table below.

Symbol 2013 2012 2011 2010
GMCR 13.8% 10.6% 7.78% 7.74%

Table 1: Growing Returns On Assets At Green Mountain Coffee Roasters

These are very good returns on assets that have been growing. Over the last three years, the asset base of GMCR grew from $1.37B to $3.76B, while its core earnings grew from $106M to $518M, showing that while the company's asset base nearly tripled, their core earnings increased almost five-fold. This is a great thing to see.

Short-Term Debt Versus Long-Term Debt

In general, you don't want to invest in a company that has a large amount of short-term debt when compared to the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.

The balance sheet of Green Mountain Coffee Roasters shows that the company is currently carrying just $14.7M of short-term debt, with $12.9M as the current portion of long-term debt and $1.76M as current capital lease and financing obligations.

However, these figures are dwarfed by both the company's earnings and free cash flow. So, I don't see any problems at all with GMCR in this area.

Long-Term Debt

Long-term debt is debt that is due more than a year from now. However, an excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with 3-4 years' worth of earnings.

Right now, Green Mountain Coffee Roasters carries $236M of long-term debt. This is less than the $522M that GMCR carried one year prior as well as the $576M that was carried at the end of fiscal 2011. Of the company's $236M in long-term debt, $76M is in capital lease obligations, while the other $160M is due in 2015 and 2016.

Given that the company's average core earnings over the last three years is $383M, and its free cash flow for fiscal 2013 was $603M, its long-term debt should not be a problem.

Debt-To-Equity Ratio

The debt-to-equity ratio is simply the total liabilities divided by the amount of shareholders' equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how Green Mountain Coffee Roasters stacks up here.

Debt-To-Equity Ratio = Total Liabilities / Shareholders' Equity

For GMCR, it looks like this: $1.12B / $2.64B = 0.42

In the table below, you can see how this ratio has changed over the last few years.

Symbol 2013 2012 2011 2010
GMCR 0.42 0.60 0.68 0.96

Table 2: Debt-To-Equity Ratio At Green Mountain Coffee Roasters

In Table 2, we see that the debt-to-equity ratio at Green Mountain Coffee Roasters is very good, and is less than half of what it was just three years ago. This shows that thus far, management has been doing a good job of keeping its debt under control.

Return On Equity

Like the return on assets, the return on equity helps to give you an idea as to how efficient management is with the assets that it has at its disposal. It is calculated by using this formula.

Return On Equity = Net Income / Shareholders' Equity

Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks.

The return on equity for Green Mountain Coffee Roasters is equal to $518M in net income, divided by shareholders' equity of $2.64B, which is equal to 19.6%.

To illustrate how the returns on equity of GMCR have changed over the last few years, I have created the table below for the return on equity.

Symbol 2013 2012 2011 2010
GMCR 19.6% 16.9% 13.0% 15.2%

Table 3: Returns On Equity At Green Mountain Coffee Roasters

Here, we see that returns on equity have been on the rise at GMCR, as the company's earnings growth has outpaced the growth in the company's equity position. As the company's equity position nearly quadrupled, the company's core earnings increased nearly five-fold. Overall, these returns are very good, and they show that management is making efficient use of its equity.

Retained Earnings

Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:

Retained Earnings = Net Income - Dividend Payments - Stock Buybacks

On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.

On its most recent balance sheet, Green Mountain Coffee Roasters shows a retained earnings figure of $1.25B. In the table below, you can see how this figure has grown over the last three years. Over this time period, we see that retained earnings increased almost six-fold, which is very impressive. This gives the company plenty of money to reinvest back into the business.











Table 4: Retained Earnings At Green Mountain Coffee Roasters


After reviewing the most recent balance sheet, there are several things to like about the financial condition of Green Mountain Coffee Roasters. The company has excellent current and quick ratios, which shows that the company should still be able to meet its short-term financial obligations in the event of an unexpected disruption to its operations. The company has shown very good returns on assets and equity over the last few years, that have been highlighted by earnings growth and increases in the company's asset base as it continues to grow. The company currently has very little debt on its balance sheet, and has exhibited very good retained earnings growth over the last several years. This gives the company more money to reinvest for future growth.

While this is not a comprehensive review as to whether Green Mountain Coffee Roasters should be bought or sold here, I think that its overall financial condition is very good at this point in time.

To learn more about how I analyze financial statements, please visit my new website at this link. It's a new site that I created just for fun, as well as for the purpose of helping others make good financial decisions.

Thanks for reading and I look forward to your comments!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.