Effective Financial Decision-Making for Starbucks

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• Roast. Ltd is in very good position as it generates higher profits by effectively maintaining the capital. This in turn encourages Starbucks to acquire Roast Ltd.
• Roast Ltd. has a positive net margin because it helps to convert its sales into the profits. This is one of the most beneficial and attractive source for the Starbucks to acquire the business operations of Roast plc. 
• Roast Ltd tends to have lower liquidity ratios, but it tends to have good debt to equity and gearing ratio which helps in effectively meeting its debt obligations. This in turn attracts, Starbucks to acquire Roast Ltd.
• Starbucks needs to take into consideration factors related with high receivable and payable days.
• Roast Ltd. Tends to have effective credit position and in turn tends to focus on effectively carrying out sever al business operations.
• Roast Ltd. also tends to focus on expanding its business to Romania. This is considered to be an effective measure for Starbucks to carry out business across various part of the globe.

PART 1: INDUSTRY OVERVIEW

Roast Ltd. is a coffee house chain which was established in 2008 in Romania, UK. With the digital age, it has become one of the crucial part of the cafe culture. It tends to seek strong supplier connection in Italy (Maye, Kirwan and Brunori, 2019).

It has been evaluated that, coffee industry has been growing at a greater pace. Approximately 95 million coffee cups has been consumed on the everyday basis in UK (The Economic Impact of the Coffee Industry, 2019). Over 2.25 Billion coffee cups has been consumed in the world on the daily basis. The UK coffee market is considered to be the 5^th largest coffee consumer in the Europe. Growth in the coffee industry has led to improvement in the working of the economy (Aerts,., Berecha, and Honnay, 2015).

• 90% of the coffee production has been taking place in the developing countries.
• UK coffee market contributes around £17.7 Billion in the UK economy.
• UK coffee market has generated annual sales of 4 billion from across 7470 coffee shops in the UK (Ferreira, 2017).
• The UK coffee market tends to grow 10% every year which has led to high degree of employment with 210,325 job opportunities. 
• The revenue generated in the UK in 2019 from coffee market is estimated to be US$ 8,087 million and average revenue per capita is estimated to be US$ 119.76.

Key players in coffee house industry

Costa Ltd: This is one of the leading coffee house chain and is the subsidiary of the Coca Cola company. Costa Ltd was founded in 1971 by Bruno Costa and Sergio Costa and is headquartered in Dunstable, England, UK (KanapickienÄ— and GrundienÄ—, 2015). Costa coffee Ltd tends to operate 2,467 outlets in United Kingdom and around 1,412 outlets across the globe in 31 countries.

Starbucks: It is an American coffee house chain and cooperation which was founded on 31^st March 1971 by Jerry Baldwin, Zev Siegl and Gordon Bowker. It is headquartered in Seattle, Washington, United states. Starbucks tend to have approximately 988 stores in UK. It is considered to be one of the largest coffee house company across the globe which is the key opportunity for the business to grow and expand its business in several other locations. The major challenge faced by the Starbucks is associated with the rise in the price of the coffee beans. The major opportunity associated with Starbucks is that, expansion and diversification of business in developing markets.

Caffe Nero group: This is the premium European coffee house company which was founded in the year 1997 and is headquartered in London, England, UK. This company carry out its business operations of 1000 coffee houses in across 11 countries. It has around 566 outlets in United Kingdom.

Key challenges faced

• Rise in the price of property and rent cost is one of the major challenge faced by the coffee house industry (Liang and et.al., 2016).
• Maintaining customer footfall due to increase in competition is a challenge for business.

Key opportunities

• Increase in the spending in food and beverages by the customers of UK.
• It led to improvement in the economy and also results in high employment opportunities the benefit of the economy.
• It is considered to be the leading and growing industry sector which helps in expansion of business operations within several developing countries (Aerts,., Berecha, and Honnay, 2015).

PART 2: BUSINESS PERFORMANCE ANALYSIS

2.1. Statement of Profit and Loss.

Interpretation: Profit and loss statement helps in summarizing the cost, revenue and expenses during a particular fiscal year. Roast Ltd. has been performing exceptionally well, with the increase in cost of sale from 1505 in 2017 to 1990 in 2018. This means company has been controlling its cost and improving its productivity. This leads to increase in gross profit to 544 in 2018. The operating profit of the company has increased from 51 in 2017 to 127 in 2018. This states that, Roast Ltd. has generated high degree of profits on the revenue. The ROCE of Roast Ltd. Has increased from 5.01% in 2017 to 8.80% in 2018. The percentage change is estimated to be 75.50%. ROCE determines the profitability of the organization. Increase in the percentage of the ROCE indicates more economical and effective utilization of the capital. The return on equity (ROE) has increased from 4.62% in 2017 to 9.42% in 2018. The percentage change is estimated to be 103.81%. High ROE is considered to be better (Morales-Díaz and Zamora-Ramírez, 2018). ROE is considered to be the measure of efficiency. Increase in the ROE of Roast Ltd. States that, there is an increase in the ability to improve higher profits by effectively utilizing its capital. The Gross margin of the Roast Ltd has reduced from 25.57% in 2017 to 21.47% in 2018. The percentage change is estimated to be -16.04%. The decline in the gross margin is mainly related with the shrinking revenue relative associated with the higher cost of selling goods. The net margin of the Roast Ltd has increased from% in 2.522017 to 5.01% in 2018. The percentage change is estimated to be 98.70%. It tends to evaluate, the net income of the company with total sales (Razumovskaia, and et.al., 2016). High degree of change in the net profit of Roast Ltd indicates that, company is very efficient at effectively converting its sales into the profits.

2.2 Statement of Financial Position

Interpretation: Statement of Financial Position helps in determining the equity, liabilities and asset of the company. The liquidity ratio of the company helps in measuring the ability of the company to mitigate short term needs and obligations. The current ratio of the Roast Ltd. is 2.51 in 2017 and 1.45 in 2018. The percentage change is estimated to be -42.28%. The appropriate current ratio of the company is 2:1. This in turn states that, the company must have 2 times of the current assets in order to pay off its short term liabilities. The decline the current ratio indicates reduced ability of the Roast Ltd to generate cash and meet its short term obligation on a timely manner (Engle-Warnick Pulido, D. and de Montaignac, 2016). The quick ratio of the Roast Ltd. is 2.51 in 2017 and 1.45 in 2018. The percentage change is estimated to be -70.79%. Quick ratio tends to indicate the ability of the company to pay the current liabilities without any source of additional financing. The lower quick ratio in 2018 indicates that, company is struggling to pay off its debts due to reduced ability to yield cash. The debt- equity ratio of the Roast Ltd. Is 12.84% in 2017 and 31.98% in 2018. The percentage change is estimated to be 149.10%. This in turn states that, company is focusing on financing its growth in order to meet its debt obligations. The gearing ratio of the Roast Ltd. Is 11.38% in 2017 and 24.23% in 2018. The percentage change is estimated to be 112.97%. This in turn states that, company is increasing its debt levels rather than equity. This results in high degree of financial risk to the company. The interest coverage ratio of the Roast Ltd. Is 8.5% in 2017 and 4.88% in 2018. The percentage change is estimated to be -42.53%. This in turn states that, company is increasing its debt burden, with lower earnings in order to mitigate interest payments (Kim, Gutter, and Spangler, 2017). The dividend coverage ratio of the Roast Ltd. Is 1.2 in 2017. The dividend per share of the Roast Ltd. Is .15 in 2017.

2.3 Statement of Cash Flows.

Interpretation: Operating Cash Cycle helps in determining the length of time which has been required from purchase of the stocks and receipt of the cash. It helps organization in determining the time estimated to convert purchases into the cash receipts of the business. It has been evaluated that, the inventory days of the Roast Ltd has increased from 29.10 in 2017 to 54.84 in 2018. The percentage change is estimated to be 88.44%. It states that, business is stocking up the inventory which in turn indicates that, the fund has not been tied up or utilized appropriately (Tracy, and et.al., 2017). The receivable days of the Roast Ltd has increased from 16.79 in 2017 to 21.32 in 2018. The percentage change is estimated to be 26.99%. It has been evaluated that, the Roast Ltd Has been selling its product on credit which might results in several cash flow problems. It states, company are taking longer time to collect the cash from the customers which in turn affects profitability of the business. It has been evaluated that, the payable payment period of the Roast Ltd has increased from 33.47 in 2017 to 43.10 in 2018. The percentage change is estimated to be 28.79%. This states that, Roast Ltd is taking more day to pay back the cash to the suppliers. This in turn worsen the financial conditions of the company which leads to increase debt for the company. The net asset turnover of the Roast Ltd has decreased from 2.30 in 2017 to 2.23 in 2018. The percentage change is estimated to be -2.94%. It has been evaluated that, the decrease in the net asset turnover ratio of the Roast Ltd indicates that, the efficiency of the company is decreasing (Morales-Díaz and Zamora-Ramírez, 2018). This states that, the company is not effectively utilizing its assets to yield higher sales.

PART 3: INVESTMENT APPRAISAL

3.1.a. Management forecast.

Investment appraisal is an effective technique as it help in interpreting and identifying the attractiveness of the particular project. The key purpose associated with the investment is that, it helps in assessing the viability of the particular project (Hosaka, 2019). There are various types of investment appraisal techniques which mainly includes payback period, net present value, accounting rate of return profitability index and internal rate of return. Roast Ltd tends to focus on expanding its business operations in Romania, which in turn tends to require new investment in various equipments and properties within the coffee house chain. Caffè Tostato has been accused to copy and steal brand designs of the Roast Ltd. This in turn tends to result in collection of £25 million in legal costs and £45 million in damages from Caffè Tostato. It has been evaluated that, the initial investment has been made of £500 million. The revenue generated from the 1^st year is estimated to be £300 million, in subsequent year the revenue generated was £560 million, in next year the revenue generated was £740 million, in 4^{t h} year £900 million and in the 5^th year the revenue generated was £1120 million. The variable cost for the Romania expansion is increasing year after year from £240 million in year 1 to £896 million in the 5^th year. Payback period helps in effectively determining the stipulated time required to recover the cost which has been incurred on the particular portfolio or project. The major benefit of the payback period is to analyse the investment risk and also focus on enhancing liquidity of the business (Alkaraan, 2017). The major limitation of pay back period is that, it tends to ignore time value of money. Accounting rate of return is estimated to be the percentage of return which has been expected from the initial investment cost. The major benefit of the Accounting Rate Of Return is that, it tends to consider the total savings over the complete economic life of specific project. The major limitation of Accounting Rate Of Return is that, it is reliable on the profits rather than on cash flows. Net present value is very useful for the investors to determine that, whether an individual will get negative or positive return on the particular investment of the project (Ndanyenbah and Zakaria, 2019). The major benefit of the NPV is that, it takes into consideration the concept that the future dollar of the company is worth less than the value of the dollar today (Advantages & Disadvantages of Net Present Value in Project Selection, 2019). The major limitation of the NPV is that, it requires prediction of the cost of capital of the organization. The management of the company has evaluated that, the Roast Ltd must expand its business to Romania because it will get the return from the particular project after the period of 4 years. This in turn results in greater profit and higher revenue from the Romania project. Roast Ltd. will earn 18% return which in turn is a very profitable example to expand its business to Romania. Romania expansion is considered to be the viable and profitable project because it attains NPV of £110 million. This in turn leads to higher operational growth and profitability for the business in order to carry out business in the different market to attain better outcomes.

3.1.b. Investment Appraisal Techniques.

Payback Period

Interpretation: Payback period is considered to be the length of time which has been required by the company to recover the initial investment in the particular project (Harris, 2017). This is a very effective method which in turn helps in evaluating the time required to earn back the money invested in project. The initial investment made by the Roast Ltd is estimated to be 500. The cash inflows of the company has been increasing every year. The Roast Ltd will take 4 years to recover the amount invested in the project. Shorter payback period tends to determine that, it is one of the most attractive source of investment.

Accounting Rate Of Return

Interpretation: The Accounting Rate Of Return is a strategic financial ratios which in turn helps in evaluating the return, which has been generated from the net financial gain of the projected capital investing (Mahmoud and Neale, 2016). The cash inflows of the company has been increasing from year after year. The average profit of the Roast Ltd is estimated to be 44.8. The average investment is made of around 250. It has been evaluated that, the Accounting Rate Of Return of the Roast Ltd. Us estimated to be 18%. It means 18% return has been generated from the initial capital investment made by the company in a specific project.

Net Present Value

Interpretation: The net present value is referred to as the difference between the P.V. Value of the cash inflows and the P.V. Value of the cash outflows over a stipulated period of time (Kolawole, 2016). NPV is very useful in analysing and interpreting the profitability of the particular project. It has been evaluated that, the total discounted cash inflows of the Roast Ltd is estimated to be 610 and the initial investment made by the company is 500. Hence, the NPV of the project is 110. The positive NPV of the company indicates that, the investment made in the particular project by the Roast Ltd is considered to be worthwhile.

3.2. Sources of Finance.

Source of finance for any business mainly comprise of equity, debentures, debt, retained earnings, bank loan, letter of credit, working capital loan, personal savings, bank borrowings, venture funding, etc. this is mainly classified on the basis of the ownership, time period, control and various other sources of generation (Lichtenberg Ficker and Rahman-Filipiak, 2016). Effective source of funding for the business helps in arranging capital and finance for the particular company. This in turn leads to higher operational growth and profitability. Roast Ltd tends to focus on carrying out further investment in Italy of around £400 k from the year 2019 which in turn helps in effectively expanding its business operations and attain greater heights. Source of finance is considered to be for the short term and it has to be paid back within the stipulated time being. 

Bank loan is considered to be an effective measure or source which in turn is useful in borrowing the amount for the particular set period. This source of fund is effective and has to be repaid with interest within the agreed schedule dates. The repayment of the amount is based on the size of the loan and also the duration for which the loan is taken. It is considered to be one of the most effective and suitable source of the financial structure in order to carry out the operations with efficiency (Razumovskaia, and et.al., 2016). The key benefits associated with the bank loan as a source of finance for the Roast Ltd is that, Bank loan is considered to be cost effective in relation with the interest rate charged by the bank, when compared with the overdrafts and credit cards which tends to charge high interest rate. Bank loan is beneficial because it is one of the most simple way to have access to the funds with the streamlined application process. It is one of the most flexible source and it also tends to provide various tax benefits (Engle-Warnick Pulido, D. and de Montaignac, 2016). On the contrary the major disadvantage associated with the Bank loan is that, it tends to lay down a lengthy paper work procedure which in turn is considered to be a time consuming process. In order to avail loan from the bank, it is very crucial for the company to require strong credit. Another limitation with the bank loan is that, it requires collateral to avail loan from the bank. 

Equity financing is considered to be one of the most effective financial measure which in turn helps company to carry out the operations of the business with the help of using debt, equity, or both (Maye, Kirwan and Brunori, 2019). Equity is referred to as the cash which has been paid into the company, by owner or investors who has been contributing within the business. Equity investment is done by issuing shares within the organization. This in turn helps in effectively carrying several business operations which in turn leads to higher sustainable growth and productivity. The major advantage associated with the equity financing is that, company is under no obligation to effectively repay the amount which has been acquired through equity financing. Equity financing is considered to be less risky and it helps the business to assist in long term planning for the business. On the other hand, The major disadvantage of the equity is that, the investors of the company tends to expect high degree of return on the money invested in the business (Morales-Díaz and Zamora-Ramírez, 2018). Equity financing is considered to be one of the most time consuming process to collect stipulated amount of fund. It also leads to several regulatory and legal issues while raising funds through equity financing.

Hence, it has been concluded that, bank loan is considered to be one of the most effective source because it is one of the most easy and flexible source of funding. It helps in gaining advantage of various tax benefits of the company which in turn results in higher operational growth and effectively carrying out business operations. Bank loan results in paying back the interest at a comparatively lower rate (Mahmoud and Neale, 2016). This in turn effectively helps in carrying out several business operations in a systematic and appropriate manner and attain business goals and objectives. This helps in expanding the business to Romania which results in high degree of operational growth and performance.

For more - Study of Unethical Practices on Business Environment

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