Financial Study of Roast Ltd.
Executive Summary (objective and key findings) (250)
The report has the main objective of finding out the positioning of a company in the commercial segment through a detailed study of all the necessary financials. The company chosen for this purpose is Roast Ltd. For providing justice to the investigation, a review of the UK coffee market will be given as the company is prominent in such a market. A big player in the UK coffee market, that is, Starbucks is currently proposing an acquisition activity with the company. The ultimate purpose of this study is to analyze the extent of the suitability of the company for being a target of this acquisition.
Considering the main findings of the report, it can be discussed that the company has experienced a high rate of expenses in 2018 as compared to 2017. As a result, the overall cost of the company has moved up along with the upward shift of the revenue structure. The growth in revenue has exceeded the growth of the expenses, which is why the profit figure has increased. From the ratio analysis, it can be understood that the company has not been able to fully utilize its inventory and for generating growth in profit in the current year. However, the company has effectively used its short-term assets to meet up its short-term debts. The operating cycle of the company has also shortened down in the current year, which means the company is using advanced technology for speeding up its production process.
Part 1
Review of the coffee market in the UK (summary of the key players, performance, opportunities, and challenges) (250)
The coffee market in the UK is traditionally well-known for its highest consumption rate. Coffee can only be successfully grown near the equator. Due to this reason, the domestic value chain of coffee starts with the import of the product at the entry point of the UK. After the import, the coffee is sold to the consumers employing various channels such as retail shops, in-home consumption channels, out-of-home coffee shops, restaurants, and many others. Through this sales process, regular instant coffee is known for its largest turnover in the country, amounting to £810 million in the current years (Urwin et al. 2019). This turnover is equivalent to approximately 54% of the total turnover, which has been over £1.5 billion. Recently, there has been the introduction of various other kinds of coffee materials, such as coffee pods, roast, and filtered coffee. The turnover amount of fresh ground coffee pods has been £305 million, which is influenced by the growth in the coffee shop culture of the UK and the growing demand for ‘barista-quality’ coffee among the consumers.
(Source: https://www.britishcoffeeassociation.org/assets/files/uploads/BCA%20CEBR%20-%20The%20economic%20value%20of%20coffee%20in%20the%20UK%2020%20April_FINAL.pdf)
The coffee sector contributes about one-ninth of the total GDP of the UK in the foodservice sector, amounting to over £3.7 billion. Estimating the value of the average cup of coffee consumed by an individual of the UK, it can be stated that 76% of this value of coffee has been produced in the UK (Terouzi and Oussama 2016). From this data, it is quite clear that the largest segment of the foodservice sector of the UK is the coffee sector, having such high margins of profit.
Part 2
Business performance of the company
2.1 Comment on the financial performance through Profit and loss statement (with ratio analysis) (300+200 ratio write-up and calc. and 300 on the rest)
Ratio Analysis
Gross Profit Margin
The gross profit margin ratio is an indicator of the sales revenue that can be kept by a company after the deduction of the direct expenses associated with the production (Jayawardhana 2016). The ratio determines the percentage of sales that is available for profit generation or reinvestment after the exclusion of the cost of goods sold (COGS).
The analysis of the result of this ratio reveals that the company has not managed to keep a good revenue figure for the generation of profit in the current year. Though the individual numbers of profit and net sales have increased, still the combined effect from these two elements has shown a downfall.
Return on Shareholder’s Equity
This is another critical ratio of the profit and loss statement, which is used for evaluating the gains that have been provided to the shareholders of the company in proportion to their investments (Murni et al. 2019, February). The metric is the ratio between the net income generated as a profit for the shareholders and the stakes of the shareholders.
The change in this ratio has been positive over the year. The percentage has increased from 5 to 9 from 2017 to 2018. The investment of the shareholders has increased. However, the greater income figure has compensated for the change in investment. As a result, the percentage of return earned by the shareholders have increased quite significantly in this one year.
Operating Margin
An operating margin ratio finds out the leftover revenue of the company after the deduction of the variable costs of the company, such as the costs of raw materials, labor, and overhead (Desta 2016). The return of the sales figure of a company is equivalent to this ratio, as both these ratios show how well a company can manage its returns.
Considering the trend of this ratio, it can be clearly stated that the company has been efficient in managing its operating expenses, and this has led to an increase in the operating income of the company. As a result, profit has shown a positive trend. Overall, the combined effect of sales and operating profit has been on the upper side, which is quite impressive.
Comment on the financial performance of Roast Ltd. (250)
The profit and loss report of the company displays the financial statement of the company and the change in its essential financials over the one year. The statement has provided a summary of the revenues and the expenses associated with the production of the company during the financial year 2017-18 (Akinleye and Fajuyagbe 2019). The profit and loss statement also reveals a measurement of the firm’s profit over this fiscal year. Suitable horizontal and vertical analysis can reveal the change in the essential financials and provide guidance to the current financial condition of the company.
The important financials that can be extracted from the profit and loss statement of the company are revenue, cost of goods sold, operating profit, and overall profit or loss for the reporting period. Through horizontal analysis, the growth in revenue can be found out to be 25%, while the growth in costs has been 24%. As a result, the profit has simultaneously increased by 4% (Pustylnick 2017). The operating profit has shown a sharp rise of 59% due to an exceptional increase in the operating income by 60%. Considering the increase in tax expenses and the finance costs, the overall profit and loss have witnessed a steady growth of 55%. This shows that the financial condition has improved quite substantially within this reporting period of one year. In the segment of operating expenses, some of them have increased dramatically. Therefore, the company still needs to manage its costs and show further improvement in the coming days.
2.2 Comment on the financial position of the company (with ratio analysis) (300+200+300)
Current Ratio
The current ratio is a determinant of the relationship between the existing assets and the current liabilities of the company. The ratio signifies how well a company can manage its assets for fulfilling its obligations (Budiharjo 2019). A higher ratio shows that the company has a positive working capital in hand.
The ratio has been higher than 1 in both the financial years for the company. This means that the company has been able to successfully utilize its assets for lessening its debt burdens. However, the trend has fallen downwards in the current financial year, and the growth of fall has been quite significant.
Debt to equity
Debt to equity indicates the proportion of the assets of the company that is supplied by the creditors versus the number of assets supplied by the owners or the stockholders of the company (Masri and Abdulla 2018). This ratio also shows the proportion of debt and equity funds used by the company for financing its assets.
The ratio has always been less than one for both the financial years of 2017 and 2018. In 2017, the figure had been quite impressive and had shown that the funding has mostly been based on equity; that is, most of the assets have been supplied by the stockholders. However, the trend has slowed down; that is, debt funds have increased, which is a negative signal for the company.
Working capital
The working capital is the difference between the current assets and the current liabilities of the company (Devalkar and Krishnan 2019). The figure shows whether the company is capable of paying its current obligations and whether it has sufficient cash for running its daily operations.
The figure has been positive for both the reporting periods of 2017 and 2018. This shows that the company has higher current assets than current liabilities and can quickly liquidate its existing assets for running its daily operations and meeting up its short-term obligations. The company is also capable of making its payments on time.
Comment on the financial position of the company (270)
The balance sheet of the company shows the figure of its bottom line at a particular reporting period. The balance sheet is a snapshot that furnishes the financial figures of the critical accounts of the company, such as its assets, liabilities, and the equity of the principal shareholders. The purpose of the balance sheet is to provide an idea to the interested parties regarding the current financial position of the company, that is, the segments which the company owns as well as owes (Stoenoiu 2018). On the whole, the summation of the assets, liabilities, and the equities of the company reveals the net worth of the company.
The assets are the resources used by the company for the daily operations of the business. The fixed assets of the company have increased over the year, while the liquid cash of the company has dropped down to zero. This shows that the company has to liquidate its current assets for getting liquid cash at hand. The liabilities are the obligations of the company that the company owes to different creditors (Nallareddy et al. 2018). The current debts must be paid within a year, while the non-current obligations are long-term borrowings. From the balance sheet of the company, it can be observed that the growth of current liabilities has been higher than that of non-current liabilities. This has put pressure on the company for generating quick liquid cash. The equity figure has increased due to an increase in the retained earnings of the company, as the company has not paid any dividend to its shareholders in the current year.
2.3 Evaluation of the cash position in 2018 (calculate and explain the operating cash cycle for 2018 and 2017, dividend policy with reasons for not making dividend payment) (500+350)
Evaluation of the cash position (200)
From the examination of the cash flow for the financial year 2018, the cash flows generated from the three kinds of activities can be noticed. The cash flow generated from the operating activities relates to the inflow and the outflow of cash from the central business activities of the company (Wei et al. 2017, June). The inventories, receivables, interest, and income taxes paid have increased, showing a negative result during 2017-2018, while payables, operating profit, and cash generated from operations have displayed a positive effect. The overall cash flow from these activities has been negative, showing higher outflow than inflow.
Cash flow from investing activities relates to the purchase of the fixed assets as well as other investments of the company have increased over the period, showing negative net cash flow from the investing activities. This means that the outflow from the investing activities has been higher than the inflow due to an increase in the payment amount for the assets. The financing activity of the company relates to only one element, that is, proceeds from the long-term borrowings (Yanti 2017). The net cash flow from this activity has been positive, which shows that the company has successfully repaid its obligations on time. This shows an excellent financial position of the company. Overall, the outflow has been higher than inflow for the company considering all the three activities.
Operating cash cycle (100)
An operating cash cycle quantitatively measures the efficiency of a company’s management in carrying out its operations smoothly and effectively. The decreasing trend of operating cash cycle over the period is a positive sign as it signifies that the company is taking less time to collect its receivables (Booth and Zhou 2017). The operating cash cycle of Roast Ltd. has shown a decreasing trend within the year. It has indicated that the company is efficiently turning over its inventory for collecting receivables from the customers and debtors. This also shows an excellent financial position of the company in the context of running its production process.
Dividend policy (170)
The policy of distribution of dividends is required for dictating the number and amount of dividends to be paid to the shareholders along with the frequency in which the dividend would be paid (Alenazi and Barbour 2019). The most common dividend policies can be categorized mainly into four types, that is, regular dividend policy, stable dividend policy, irregular dividend, and no dividend policy. The company can follow a consistent dividend policy, which dictates to pay out a particular amount of dividends every year irrespective of the profit or loss. In the current year, however, the company has followed a no dividend policy.
The company has not given any dividend to its shareholders in the current year, and therefore, its retained earnings have increased drastically. In certain conditions, when the company is going through a financial strain, it might not choose to disburse dividends to the shareholders for safeguarding its financial reserves for the coming days (Al-Rahahleh 2017). In this case, the company might plan to reimburse the money for future investments without paying it out as dividends to the shareholders.
References
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