Financial Decision- Making

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Executive summary

In the report given below ROAST LTD is experiencing high growth and revenue in the company that owns the business of ROMANIA that follows the winning case of court against the Tostatto café that has good brand image in the consumers mind. Further, companies gave priority to the valuation of liquidity before doing any investment in assets which was long term in nature.

The further observations states that:

• The profit of the company is increasing.
• The turnover of asset ratio of the company is falling.
• Further it was seen that ROAST LTD had spent £354k for acquiring their plant, property & equipment that will give them benefit to the company by using it in an efficient manner & operations.
• The current growth rate which is accurate is 25% and management has become ambitious in estimating the forecast.

After observing the company’s profit index, it is concluded that the investment evaluation is done by expanding the coffee chain stores in Romania. The coffee’s retail sales in UK have been expected to touch 69 million kilos and this has grown by 8% from the year 2014. The coffee industry has been projected to develop further since the country’s budding generation is becoming the largest coffee consumers of the country.

Table of Contents

Executive summary: 1

Part 1: Industry overview: 3

Part 2: Business Performance Analysis. 4

2.1 Profit Loss Statement: 4

2.2 Balance Sheet Statement: 7

Non-Current Assets. 8

2.3 Statement of Cash Flow.. 9

Payable Days: 10

Part 3. 11

3.1. a Management Forecast 11

3.1.b Investment Appraisal Techniques. 12

3.2 Sources of finance. 13

Part 1: Industry overview

United Kingdom has been considered as one of the major consumers of coffee with almost every four adults consuming this beverage. The coffee’s retail sales in UK have been expected to touch 69 million kilos and this has grown by 8% from the year 2014. The coffee industry has been projected to develop further since the country’s budding generation is becoming the largest coffee consumers of the country (Market-inspector.co.uk., 2020).

As the attraction towards coffee has increased, it has led to an increase in the number of rivals within the market. Costa Coffee is one of the prominent players in this industry having nearly 2121 stores operating across the country and Starbucks follows it with 897 outlets while Café Nero has 650 outlets.

Costa Coffee and Starbucks are the two main coffee players in the market and the performance of these two companies are stated below:

• Costa Coffee is considered as the second biggest coffee company across the globe due to its presence in almost 31 countries. Although, Starbucks is the leading coffee players’ in UK, Costa Coffee leads the UK market.
• Costa Coffee has more than 2121 restaurants situated in Yorkshire itself and this helps the company to generate major portion of its revenue. Starbucks has followed this company by possessing 897 stores and has plans of further expansion (org., 2020).
• Costa Coffee possesses vast opportunities for developing if it plans to invest efficiently in its program of business expansion. The company has its outlets present in 31 countries while Starbucks has its stores located in nearly 70 countries. Starbucks has immense opportunities since it concentrates on diversification and the company also aims to satisfy its customers and this has helped the company to increase its revenue.
• The important connection for both the companies is the heightened competition with the passage of time since entering the market is easy as there is very little obstacles. Both the companies are threatened by another cause, the substitute beverage, tea. This has replaced the consumption of traditional coffee as it possesses greater health benefits (com., 2020).

Part 2: Business Performance Analysis

2.1 Profit Loss Statement:

Revenue Generation:

It can be stated that the “ROAST LTD” financial statements are being observed from the year 2018 & the year 2017 which amounts to £2.5 M & £2.02 M. The firm increases its efficiency of customers instead of having huge competition in the prevailing market of US. The revenue also grows and this results from phase 1 which expands the chain of coffee in “Romania” that generates extra of 350k in the organization (Shehu, 2019). Further, the case of court length against the café Tostado even decided to factor the company ROAST LTD that helps firm in generating extra income which amounts to £25k in the court and for damages it amounted to £45000. These factors even combined the reason which is critical reason for the revenue increase.

Cost of Goods Sold

COGS have 2 years that was consecutive and stood at £1.9 M & £1.5 M. This increase in price was because of the increase in scrutiny of public & demand which rises for organic and even trade fair coffee that resulted in increase in the entire expense cost of the product. Then, the phase 1 even expanded the outlet of chain coffee in Romania which contributed towards the leading firm whose operation cost was also leading (Semerci, 2018).

Analysis of Gross profit

This measure helps the company’s sales markup which is above COGS. From the below table, it can be said that the margin for the firm for 2 years were stood at 21% & 26%. The rise in COGS in the year 2018 had put strain on the entire revenue generation for firm. Then, the product’s increase cost even demanded for organic & trade fair coffee which even increased and had a negative impact on the margin growth. The gross profits margin was reduced and indicated how company was affected due to inflation even with the country’s downturn economy (Vaghela and Chavda, 2020). As, inflation was highest this resulted in the rise in the cost of raw materials and reduced the firm’s margin profit. This even recommended that company even started their activities like calculating finances & even managing human resource that reduces their expense and hence increases the margin of profit.

Operating profit Ratios

This indicates that the sales amount covers all the expenses of the company. The ratio of operating in the year 2018 and the year 2017 which stands for 5% & 3%. Although the cost of operating of the company is increasing in the year 2018 which is compared in the last year, the company has increased the marginal its profit. This is due to the company’s gross profit which has increased and results in the increase in the revenue. Hence, the company should focus on the issue which is behind the increase of expense that will benefit them to keep in check in haul (Langemeier and Yeager, 2018).

The issue behind this increase in the expense is because of the remuneration of the director, depreciation charges, and charges of bad debts, maintenance of store, and cost of distribution, advertising and marketing which has increased in the year 2018. This is the issue which is due to the inflation which has rose in the country which is with the focus management decision on brand publication by market extensive strategy. Further, the management may compensate over to their directors that shall be controlled for avoiding the expense. The bad debts & charges of depreciation is increased and indicates the capital which is spent in many critical areas that will contribute for boosting the firm’s revenue (Nurfadillah, 2016). The distribution cost is increased, and it can be a positive indicator as this suggest the company in supplying the product which more than last year, hence this will highlight the expense.

It is recommended that the company starts cutting down the expense by assessing the area, that will contribute to boost the revenge and therefore the price of these area should lower the level of significant areas that will increase the margins of operation in company.

Net profit Ratios

This signifies that the company’s net sales have deducted all the expenses and taxes. The net profit for the year 2018 & 2017 that is 3% & 2%. Although there is an increase in the margin of profit, which improves the indication of net profit of the company that the firm will generate high income despite of the COGS’s growth & the operating expense is successful (Atz et al., 2019).

Hence, it is recommended that the company starts expanding in both the international and national country which will boost the sales with the increase in the company’s customer base.

Return on equity

This suggests that the company’s capital is generated by investing the equity capital. It is observed that the company “ROE” in the year 2018 & the year 2017 was 12% & 6%. This indicates that the company ROAST LTD has smartly invested their equity shares that has resulted in yields which can contribute the shareholder’s goal for maximizing wealth (Atz et al., 2019). It is recommended that the company ROAST LTD starts seeing the trends in market that is changing & investment is efficient that curbs the risk which is associated with them.

Return on capitals employed

This indicates the company’s yield the capital investment in many ventures & operations. The ROCE in the year 2017 & in the year 2017 was 4.42% & 7% which suggests that they are boosting the returns which is because of making strategic decisions & making the market effective (Atz et al., 2019). This is advised that the company can maintain & enhance the profit which reduces the capital employed and improve the company’s entire ROCE further.

2.2 Balance Sheet Statement:

Table 3: Statement of analysis showing trend s of Financial Position

Non-Current Assets

This indicates that the firm’s assets are not utilized in a year & this even provides long term value to their company. It is seen in the balance sheet that the firm’s noncurrent assets in the year 2018 & in the year 2017 was £96.6 k & £67 k. This suggested the company that the investment was increased in ROAST LTD and they acquired assets that are long term and added long term value in the firm. This was recommended that by tying huge capital amount on these non-current assets this resulted in low quality liquidity (Stock Analysis on Net., 2020). Therefore, companies gave priority to the valuation of liquidity before doing any investment in assets which was long term in nature.

Current Asset Turnover

This indicated that the company’s competency was to generate profit with the help of company’s current assets. It can be seen from the below graph that the turnover in the year 2018 & 2017 was 5.67 &5.83, which shows the decline in ratio. Although this fall dint has much impact on revenue and even the turnover kept declining and the firm’s liquidity position in the market even reduced their generation of revenue soon (Csimarket.com., 2020).

Total Assets Turnover Ratio

This indicates that the operations & sales of the firm has acquired their total asset. The graph shown below states that the TATR in the year 2018 & 2017 was 1.76 & 1.99, which shows that the money incurred on assets was £1 and generated sales of £1.76. Hence, in the year 2018, TATR was reduced in comparison with that in the year 2017 this indicates that the yield was reduced because the fixed assets depreciation was increased and this declined their efficiency, hence smooth’s the operation (Finbox.com., 2020). This suggests that the company starts investing in acquiring assets & even enhances the sales that boosts the revenue in the year.

Current Ratio

This states that the company’s ability always meets the obligations that are short in nature and the firm’s current assets. This is seen from the below graph that the current ratio of the 2 years is 1.45 & 2.51. With the ratio which is more than 1 and prefers investors that indicates high index of liquidity, it was observed that the ratio was reduced in the year 2018 as compared to that in the year 2017 which suggests that the company’s liquidity is decreased due to increase in the company’s liabilities (Macroaxis., 2020). This recommends ROAST LTD should pay the obligations for maintaining the liquidity.

Capital Gearing

This measures the finance risk and expresses the debts with equity. From the graph given below it can be said that the ratio of gearing in the year 2017 & 2018 were 23.40% & 40.40%. The gearing ratio which is high states that debts are more than equity (Lucas, 2020).      Therefore, increase in this ratio says that the company’s obligation rises with time and adds to the repayment burden. Hence, it’s recommended that the company finances their activities by using the equity shares and attracting more and more company’s investors.

Equity Debt Ratio

This ratio states that the company compares their business equity & debts. Investors mainly prefer ratio which is less than 1 and indicates that the obligation was less than equity and therefore the company’s liquidity is more. The debt to the equity ratio in the year 2018was 0.68 & that in the year 2017 was 0.31, this shows that the ratio was increased and suggests that their obligations was less than equity and ROAST LTD is suggested that they should reduce the capital which is borrowed & focus more in improving their company’s equity (Macrotrends.net., 2020).

2.3 Statement of Cash Flow

After going through the ROAST LTD’s cash flows in the year 2018, it was seen that the company incurs high outflow of cash than the inflow in many activities. The firm generates outflows of cash which was 24k through firms operating activity and suggests that the company was not much successful in curbing their operating expense.

Further it was seen that ROAST LTD had spent £354k for acquiring their plant, property & equipment that will give them benefit to the company by using it in an efficient manner & operations (Gordon et al., 2017). Therefore, it is considered that the company’s expenditure and investment are estimated to get high return in hauls that is long.

However, the company generates cash flows which is positive, and which amounts to £175k that contributes the entire company’s revenue. The amount is gained by proceeds which is from the borrowings of long term.

In the last, it was seen that the company is not successful in cash generation & cash equivalents that can be invested in business. Instead they spend £73k on many activities that results in the cash outflows. This even results in financial funds lack age and therefore the company is recommended to curb their expense which is relation to the operations of business which increases the statement of cash flow.

Operating cash cycle

The company’s operating cycle of cash can be assessed by many ways those are:

Inventory Turnover Period

This indicates that the company’s duration holds the inventory for selling them. Therefore, the graph given below it was seen that the firm’s ITP in the year 2018 & the year 2017 was 54.84 & 29.1 which indicates the ROAST LTD facts that sells their product is increased in the year 2018 which is in comparison with last year. The firm suggests that the turnover was 54.84 and this suggests that the inventory can be held for 54days before then can be sold. This is because the competition was increased, and the volume of sales was decreased this will suggest the company to enhance their turnover or it is not possible for them to cope with the competition (Renneboog and Szilagyi, 2020).

Receivable Collection Period

This shows how long do the company takes to settle their customer account. The firm’s RCP in the year 2017 &2018 was 21.32 & 16.79 that shows that the business collection period was in comparison with the year 2017. This suggests that company’s customers take 21 days maximum period for paying the amount which was owned by the company. The RCP change is because of change in the policy of credit control which was in difference between the mixture of credit transactions and cash transactions.

Payable Days:

This suggests that the company’s average day is settled by the debts. The day’s payable for 2years was 43.10 & 33.47. The payable days change shows that the increase or decrease shows that the supplier and cash change & the managements inability to maintain the adequacy in the ledgers that are payable.

Dividend Policy

The ROAST LTD is followed by the dividend policy of residual that shows that company pays their dividend only by covering the expenditure of capital & cover working capital. The major investors prefer that the policy is made and makes sense in the operations of business. Investors even hesitate that the companies invest their dividend payouts and increases their debts by curbing their index of liquidity in process.

Hence, it can be said that the ROAST LTD has made correct decision by not paying for dividends to their shareholders as in the year 2018, total liability was increased and even the outflows of cash from the operating activity (Investor.starbucks.com., 2020). By paying the dividends in a position will have severe effect on the firm’s stability of finances. This will have further addition to the payment which is a burden on the long- and short-term debts.

Part 3

3.1. a Management Forecast

The firm’s management decides to expand their business for the chain of coffee stores in Romania. This means that the firm has agreed to invest around £500 million which needs to fund their external source. However, with every year the firm’s expense was increasing with the inflation which is prevailing & downturn of economy in UK.

As, per the revenue forecast of management in the firm it expects to grow their revenue by 41%. The current growth rate which is accurate is 25% and management has become ambitious in estimating the forecast.

The revenue forecast of management in the firm grows when it is related to the sales cost which is same as sales growth. Even though the company’s sales price has resulted 23%-24%. The increase in the sales price has proposed a project that amounts to .41%, that is high in comparison to the condition at present & company’s operation (Sparks, 2020). This will affect the margin of contribution. Even though the same change in sales cost & revenue will result in same contribution.

In the beginning of the business, the cost of variable is seen that the lowest is £240 Million which then starts increasing every year that amounts to highest in the end of 5^th year that was £896k.

Hence, the revenue should be noted in the business that stood higher in the 5^th year that was £1.12 M. There was increase in the sales that indicates that the profit was high and projects that the investment was quite successful.

3.1.b Investment Appraisal Techniques

Payback Period:

The pros and cons of this process are given below:

Pros

• This indicates whether they should invest or not in the short period
• This is an easy method for computing & use widely.

Cons

• This method is based on assumption hence low index is reliable.
• This do not consider time value money.

Hence, from the above case study it can be said that the projects of payback period is 4 years and suggests that the return duration on the investment is considered low and therefore it is considered a good investment option (Gorshkov et al., 2018).

Accounting Rate of Return

The pros and cons of this process are given below:

Pros

• This is a period which calculates ARR naturally and doesn’t require more knowledge to understand.
• This is based on techniques of net operating.

Cons

• This do not consider time value money
• The computation of ARR keeps changing every year and therefore it’s very less reliable.

Hence, from the above case study it can be said that the projects of ARR is 18% and the company estimated 10%.Hence, it suggests that the return duration on the investment is considered high and therefore it is considered a good investment decision (Porter and South-Winter, 2017).

Net Present Value (NPV)

The pros and cons of this process are given below:

Pros

• This consider time value money
• This process entails the index of profitability during investment and makes effective decision for making investment.

Cons

• This is a complex method and requires expertise.
• This is that rate of discounting decided by the company’s management and may not be correct.

Hence, from the above case study it can be said that the projects of NPV is £110k Hence, it suggests that the return duration on the investment is considered high and therefore it is considered a good investment decision. They have good potential to earn more profits in the future and is an excellent investment option (Leyman and Vanhoucke, 2017).

3.2 Sources of finance

The finance sources states that the funds and channels of the firm gets assistance in finance that fulfils their goals. The source is generated internally or even borrowed from the sources like the objectives of bank. Hence the 2 sources are: –

1. Bank Loan:

This indicates that the money is borrowed from the institutions of finance which is based on business credit worthiness. A high score of credit benefits the company to sanction their loans quickly and even vice-versa. The advantages & disadvantages of this source are given below: –

Advantages

• The bank loans interest is tax subjected which reduces the fraudulence chance.
• This source is very reliable and borrows funds that is within a period.

Disadvantages

• The bank loans interest is increasing along with the increase in borrowed amount.
• The banks from where loans are borrowed and takes a lot of time to process the complicated that amounts that the loan is quite high (Oseifuah and Manda, 2017).

2. Equity Share Capital

This indicates that the capital amount is generated internally by the shares of the company who sells individually to the investors. The advantages & disadvantages of this source are given below: –

Advantages

• This source is very reliable and is funded since the amount generated was high and it can be then utilized in many business areas.
• The management do not require repaying the capital of equity to their investors.

Disadvantages

• The maintenance cost & servicing equity capital will be quite high.
• The business overcapitalization even leads to due to excess amount of equity capital (Hornuf and Neuenkirch, 2017).

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