Effective Financial Decision Making: Key Strategies

From the second part of this report, it has been found that the project of expanding business in Romania is viable for Roast Ltd. and they should consider to adopt this project.

Part 1: Industry Review

Roast Ltd. is an independent coffee house of United Kingdom which was established in the year of 2008. This company operates in the coffee house industry of United Kingdom which is considered as one of the most rapidly growing industry. Analysis of this industry is conducted below using top line review:

• Total revenue earned by the coffee house industry of United Kingdom in 2019 is 6 billion pounds.

• According to world coffee portal, (2019), a total of 7.1% businesses of coffee houses established in 2017 and 5.8% established in 2018 which lead to a total of 16199 coffee houses in UK.

• The industry of coffee houses of UK is experiencing an average annual growth of 6.1& in last five years that is 2014-2019.

• Due to current trend of coffee houses, this industry has a total employment of approximately 101,034 employees.

• Key players of this industry are Costa coffee, Starbucks and Café Nero. Costa coffee is the most growing organisation which has doubled its number of store in just eight years. Costa coffee has 2121 outlets in United Kingdom and is ranked number one in terms of highest outlets. Starbucks has total of 898 outlets and café Nero has 650 stores.

• These market players are other market participants of coffee house industry UK are performing well as they have generated net revenue of 6 billion pounds in just one year.
• Coffee house industry of UK has various opportunities to even grow more and develop their operations. These opportunities involve current trend of social media marketing in which the companies operating in this industry can market and promote their coffee using social media platforms such as Instagram and Facebook. Launching healthier coffee substances such as green coffee is also an opportunity for coffee houses to capture the current trend of providing healthier choices. 
• There are few challenges as well which are faced by Coffee industry of UK. These challenges are BREXIT fallout due to which organisations has to pay high amount to procure raw coffee beans due to which cost expenses has increased. Other challenges in this industry include challenging high street trading and growing trend of being healthy.

Part 2: Business Performance Analysis

2.1 Statement of Profit or Loss

This financial statement is an official record in which an organisation transacts it’s all expenses and revenues which have occurred in an accounting period with the aim of presenting true and fair financial performance of an organisation (Browne, 2013). Roast Ltd. is a medium scale organisation which has opportunistic expansion plans. Financial position of this organisation is assessed in order to assist Starbucks with an acquisition decision. From the P&L statement of Roast Ltd., it has been seen that revenue and profits of this organisation is increased as this company has enhanced their operational efficiency and activities by increasing the expenses such as finance cost and operational expenses. Revenue of this organisation increased from 2017 to 2018 as 2022000 pounds and 2534000 pounds respectively. Gross profit is increased by 27000 pounds in and year and net profit is increased by 45000 pounds in a year which is considered as sound profitability for a medium scale company. This statement can be further analysed using few ratios such as gross profit, net profit and operating profit margin.

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Gross profit – This margin is a technique of ascertaining profit making ability of an organisation which reveals how the activities of an organisation is operating (Greveand Hodge, 2013). The value of gross profit is used by an organisation to pay their operational expenses which implies higher the gross profit margin is, the smoother operations of the company can be conducted.

From the above table analysis, it has been observed that the gross profit of Roast Limited has decreased from 25.57% in 2017 to 21.47% in 2018. This decrease in gross profit margin has been caused due to heavy cost of goods sold that is 1990000 pounds. From the exhibit 2 of the case study, it has been seen that Roast Ltd. is a growing company and it does not compromise with their raw materials. Due to BREXIT fallout, Roast Ltd. has to pay high amount for procuring coffee beans from other states due to which their cost of goods sold increased highly which ultimately resulted in low gross profit margin in 2018. Even after the low gross profit margin, Roast Ltd. is suitable to be acquired by Starbucks as gross profit of this company is still increasing even after high cost of goods.

Net profit margin – This margin is a statistical measure which is calculated using net profits and net sales which are earned by an organisation in one accounting year (Bertini, Gambarelli and Stach, 2013). This profit is represented in percentage; higher the margin percent, better the profit making ability of the organisation. In the industry of coffee house of United Kingdom, it is important to have high net profit margin as the overall industry is considered to earn high revenues.

From the above analysis of net profit, it has been evaluated that net profit margin of this company has increased from 1.78% in 2017 to 3.20% in 2018. It can be seen that this margin has been approximately doubled in just the period of one year. This high net profit margin shows that this company is able to earn profits even in dynamic external environment. This shows the ability of controlling the operating expenses occurred in Roast Ltd.

Operating profit – This is a financial measure which helps to determine the level of return which an organisation has gained against their sales revenue. This revenue is computed using operating profit and net sales value of an accounting year. This ratio will help to determine operational efficiency of this Roast Ltd.

From the above table, it has been observed that the result of operating margin has been doubled in the year of 2018. Net operating profit margin was 2.52% in 2017 which increased to 5.01% in 2018. This increasing margin is the evidence that Roast Ltd. is capable of operating effectively and can earn reliable profits to grow and develop.

The above analysis of the statement of Profit and loss indicates that Roast Limited is facing issues due to BREXIT fallout and other external environmental factors but even then this company is callable of gaining high profit margins from which they can ensure their reliable growth in coffee house industry of United Kingdom.

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2.2 Statement of Financial Position

The balance sheet is considered as the official statement of the financial position of an organization which includes total final values of all assets and liabilities (Lungu, Dascalu and Colceag, 2015). These recorded values are procured from the pre-developed financial statement and trail balance which assist external and internal stakeholder to be aware about true financial position of an organisation in market. Roast Limited is a medium scale organisation of which a comparative balance sheet is provided. This statement shows that the total of assets and liabilities of this company are valued at 1017000 pounds in 2017 which further increased in 2018 as 1443000 pounds. Equity of this company is earned through the mediums of share capital and retained earnings which shows this company is even more reliable as its shareholders tends to invest high in the operations of this company. This statement of financial position is analysed below using key ratios of current, debt equity and return on capital employed ratio.

Current ratio – This measure is the liquidity ratio which shows the short term debt paying ability of an organisation. According to this ratio, if an organisation has sufficient current assets to pay off its current liabilities then it has a sound liquid position. This ratio is usually computed by comparing current assets from current liabilities. In the industry of coffee house, 2:1 is considered as the ideal current ratio which helps an organisation to pay all its liabilities occurring for short time period.

The above ratio analysis of short term liquidity shows that current ratio of Roast Ltd. has been increased from 2.51 in 2017 to 1.45 in 2018. The reason behind this decreasing current ratio is high trade payables and bank overdraft facility which is used by this company in year 2018. It was seen in aforementioned gross profit margin that Roast Limited is facing high cost expenses of procuring coffee beans and these expenses are paid by them using overdraft facility of bank due to which current ratio has been decreased. This analysis shows that Roast Ltd. is capable of paying their short term debt obligations.

Debt equity ratio – This is a liquidity efficiency ratio which shows if a company is using two parts of debt capital and one part of its own capital to operate in the market, then it is an efficient organisation (Cartwright and Cooper, 2012). This measure is usually computed using total debts and equities which an organisation has in an accounting year.

From the above ratio analysis, it has been observed that this ratio was ascertained as 0.31 in 2017 which increased as 0.68 in 2018. This increasing ratio is an indication of the continuous growth of this organisation which will help them in future to acquire ideal debt equity ratio of 2:1.

Return on capital employed – This is a financial ratio which can be measured using organisation’s profit making ability and capital which is employed by the organisation for an accounting year (Zietlow and et.al., 2018). This ratio indicates the level of return which can be gained by the company against their capital which is employed. An increased ROCE is a clear sign of active efficiency of the organisation.

From the above analysis, it has been seen that return on capital employed ratio was calculated as 5.80% in 2017 which increased to 11.19% in 2018. This increased ratio shows that the company is capable enough to earn revenue and profit against the capital employed by the shareholders.

The above analysis of statement of financial position it has been observed that the liquidity position of Roast Limited is sound and they are capable of providing returns on the capital which employed by their shareholders. This provides indication to Starbucks company that they can consider to acquire Roast Ltd. as it will enhance their revenues and brand image.

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2.3 Statement of Cash Flows

This statement is the written document which combines all the cash inflows and outflows which an organisation is experiencing while conducting activities of operating, investing and financing (VeprauskaitÄ— and Adams, 2013). This statement is the evidence of reflecting whether or not an organisation has sound cash position to pay of their regular expenses. In context of Roast Ltd., cash flow position of this company is being analysed using the method of operating cash cycle.

Operating cash cycle is the technique of measuring the total time which an organisation uses to convert their all the inventories into monetary resources (Agarwal and Mazumder, 2013). This measurement states that if the OCC is low that means organisation is efficiency capable of converting their efforts into cash. The OCC of Roast Ltd. is analysed below sing various working notes.

Working notes:

The above analysis shows that the total operating cycle of Roast Limited is 32 days in 2018 which means in the period of just 32 days, this company will be able to convert all their inventories and efforts into cash by which expenses can be paid by the company. By this analysis, it can be interpreted that Starbucks should acquire Roas

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