Financial Decision Making

This report provides a thorough analysis of the financial business performance of Roast Ltd, including profitability, investment appraisal, and sources of finance. It also includes an industry review of the UK coffee house sector. The report concludes that Roast Ltd is a good acquisition target for Starbucks.

Financial Decision Making

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
Part 1: Industry Review...................................................................................................................3
Part 2: Business Performance Analysis...........................................................................................4
2.1 Statement of Profit or Loss:...................................................................................................4
2.2 Statement of Financial Position:............................................................................................6
2.3 Statement of Cash Flows:......................................................................................................7
Part 3: Investment Appraisal and Sources of Finance...................................................................10
3.1 Investment Appraisal:..........................................................................................................10
3.2. Sources of Finance:.............................................................................................................12
REFERENCES..............................................................................................................................14

EXECUTIVE SUMMARY
The report summarises different aspects of a thorough analysis of financial business
performance of Roast Ltd. Net probability level of company has been reached to GBP81000 in
year-2018 which was GBP36000 in year-2017. This improvement in profitability level
demonstrates that demand for corporation's products is high that assist them to achieve growth
and development. The corporation is competent to pay-out all short-term and long-run
obligations after struggling with issues of high-costs related to coffee-beans procurement. The
corporation's cash status shows this business's status of poor cash flows but this corporation
continues to increase its growing rate because it could be concluded that the acquisition decision
of Roast Ltd can be made by Starbucks.
It is noted from the second portion of this study that Roast Ltd. will expand in the project
to open new shops in Romania so that it strengthens its cash position and raises its sales
revenues.
Part 1: Industry Review
United Kingdom's new coffee house sector is one of the fast-growing sector that continues
to increase due to the widespread social structure of UK society. The division overview is
provided by a top-line analysis, as below:
 The coffee housing sector in UK has reported 6billion pounds of overall sales, as per the
study undertaken by ibis.
 The overall number of enterprises active in the coffee house sector in the United
Kingdom area is about 16199, a rise in comparison to the previous year.
 Costa coffee, Cafe Ritazza, Starbucks, Café Nero and many others are the primary
leaders in such sector. All such strikers operate well because this sector has registered
6.1% yearly growth, sufficient to state a profitable market (Current coffee house industry
of United Kingdom. 2019).
 The above-mentioned company has numerous opportunities, which include developing a
nutritious, organic coffee that can satisfy the recent push towards good health.
In addition to the above-mentioned potential, the coffee houses sector in UK faces many
difficulties today. These are evolving trend towards healthier replacements eg green tea instead
of coffee. The competitive pressure experienced by new competitors in this sector is another

obstacle facing this sector. High profit margins which organizations associated in this sector
enjoy are the reason for this extreme competition.
Part 2: Business Performance Analysis
2.1 Statement of Profit or Loss:
Roast Ltd.'s statement of sales is reviewed to support the Starbucks Chief Financial
Officer to make valid decisions concerning Roast Ltd's acquisition. From the company's income
statement it is shown that its turnover is rising as its year-2017 gross sales have increased to
2022000 pounds and in year-2018 to 2534000pounds.
In addition to the sales, the organization also has been increased its gross profit as well as
even net profit, which indicates that it is competent of increasing business-growth and expanding
in a diverse and competitive framework. Note that the enterprise's profits but expenses have
enhanced also, as the 2017 operating-expenses amounted to 466,000 pounds and the operating
expenses/spending in 2018 reached to 477,000 pounds.
The study is further focused on the assessment of the ratio that can help determine the
organization's financial results effectively.
Gross profit margin
This ratio is a fiscal profitability metric that denotes a company's strength to make profit
from the value spent in labour and materials costs (Correia, Dussault and Pontes, 2015). A rising
gross profit shows the company's success that lets it invest money on potential operating costs.
Particulars Year-2017 Year-2018
Gross profit 517000 544000
Net sales 2022000 2534000
Formula Gross profit / Net sales *100
Result 25.57% 21.47%
Analyses carried out in above table reveal that Roast Ltd's gross profit has been reduced.
In 2018, gross-margin is 21.47-percent which declined to 25.57-percent. Such a margin reduction
does not mean that the decision to buy this organization is optimistic. The gross profit margin is
the correlation of cause-effect among gross-profits and goods sold. The reason for the decline in
gross profit is the rising cost of products produced by the company.

The Roast Ltd's growth could not be measured by this particular range as the reason for
the high high cost of sold products is the high cost that corporation has incurred in procuring
coffee beans from several other European countries that have increased their interest rate in
aftermath of Brexit.
Net profit margin:
This ratio is used to assess the profitability-scenario of an entity that it can gain after all
costs in a financial year. The higher profit margin represents the corporation's high growth
efficiency (Finke, 2013).
Particulars Year-2017 Year-2018
Net profit 36000 81000
Net sales 2022000 2534000
Formula Net profit / Net sales *100
Result 1.78% 3.20%
The above evaluation by Roast Ltd. shows that the company's net profit-margin is
continuing to rise by 1.78% in 2017 to 3,20% in 2018. The rise in the income net margin is
attributed to the management's capacity to monitor and cope with its annual operating
expenditures e.g. payroll, rent etc. The rising net-profit ratio figures for Starbucks is indeed a
positive indicator to find this business for acquisition purposes.
Operating profit margin:
This quantitative measure illustrates a company's potentials to retain a sum as a profit
after all variable production costs, like raw materials, wages, and other business expenses. The
greater the operating margin percentage, the greater the business's success frequency (Gal,
Stewart and Hanne, 2013).
Particulars Year-2017 Year-2018
Operating profit 51000 127000
Net sales 2022000 2534000
Formula Operating profit / Net sales *100
Result 2.52% 5.01%

The outcomes of Roast Ltd.'s operating profit percentage indicate that such a margin get
doubled, a clear indicator of progress in operational capacity and growths. In 2017, operating
profit margin is measured at 2.52%, nearly doubling as 5.01% in 2018. Its development is the
product of this corporation's operational outputs-performance.
The above interpretation of Roast Ltd.'s P&L statements has addressed the fact that Roast
Ltd. is now that in its development cycle or at growing phase and this is also ideal for Starbucks
to acquire it in this phase.
2.2 Statement of Financial Position:
Balance sheet is an organization's statement of financial state that reflects an
organization's accurate and fair status. The Roast Ltd.'s balance sheet showed that overall assets
and liabilities in 2018 have risen. In ear-2017, aggregate assets as well as liabilities were
reported to 1017,000 pounds, that in year-2018 amounted to 1443,000 pounds. The rising value
of assets and equity suggest that the business is well positioned to operate (Govindan, Rajendran,
Sarkis and Murugesan, 2015). Few ratios are determined as following in attempt to evaluate the
argument further:
Current ratio
This proportion describes the fraction of current assets relative to an organization's current
liabilities. This indicates an organization's readiness to repay short-term obligations and debts.
The current idea ratio in the coffee industry is 2:1, which demonstrates that current assets must
be double or two-times of current-liabilities (Kliger and Gilad, 2012).
Particulars Year-2017 Year-2018
Current assets 347 447
Current liabilities 138 308
Formula Current assets / Current liabilities
Result 2.51 1.45
It has been ascertained though above current-ratios of Roast Ltd that potentials of paying
its all the current-liabilities/short-term debts been reduced in year-2018. As the enterprise's
current-ratio in 2017 is ascertained as 2.51 that declined to 1.45 in year-2018. Upon analysis of
each aspect of the business's balance sheet, it has been evaluated that the company's current ratio

was dropped due to the overdrawing facility being used to borrow additional amounts to
purchase coffee beans from other European countries. The lower current ratio is a consequence
of post-Brexit disruptions not of organization's inability to pay-out its current-debts.
Return on capital employed:
Particulars Year-2017 Year-2018
Operating profit 51000 127000
Capital employed 879000 1135000
Formula ROCE = Operating Profit / Capital Employed *100
Result 5.80% 11.19%
Return on employed-capital is a certain percentage showing profits and efficaciousness in
the use of capital or equity funds by the organisation. This represents the success of this
company regarding the capacity to use its resources/capital employed. ROCE percentages are
11.19% and 5.80% respectively in 2017-2018. This Increase in percentage of ROCE
demonstrates that capital-utilisation capacities/capabilities of business has been expanded and
business is effect in generating returns though capital funds.
Debt equity ratio: This metric more clearly exhibits corporation's liquidity position as it covers
entire debts (both short-term and long-term) to assess the proportion with enterprise's equity
(Kotlar and et.al., 2014). In Cafe Industry 1:1 is optimal debt-equity ratio, company with lower
than this ratio reflects poor-liquidity position.
Particulars Year-2017 Year-2018
Total debts 238 583
Total equities 779 860
Formula Total debts / Total equities
Result 0.31 0.68
As above table shows Debt-equity ratio of Roast was 0.31 in year-2017 that improved to
0.68 in year-2018. This improvement in debt-equity ratio is indication that business's overall
liquidity status has been enhanced. This increasing ratio could tend to positive factor for
Starbucks' decision of acquisition of Roast.

Overall evaluation shows that company's financial position is good and in coming period
company will grow, however due to Brexit there are some challenges but company is able to face
them in long-run.
2.3 Statement of Cash Flows:
The cash flow statement incorporates cash's inflows and outflows from three major
aspects: operating investing and financing operations. The Roast Ltd's cash flow statement
indicates negative cash outflow of 73000 pounds, meaning that it spends excessively in cash
which triggered liquidity issues. Analysing cash-flow of entity display that through financial-
operations organization has acquired cash-flow of 175000 pounds here under this single aspect
which is proceeds by long-term-borrowings. Investment's activities created cash-outflow of
358000 pounds and such a outflow is consequence of Property,Plant&Equipment(PPE)'s
acquisition in 2018. Whereas operating-activities has been contributed out-flow of 24000 Pounds
and this outflow derived after interests and income tax expenses (Ogiela, 2013). Another study of
operating activities has shown that substantial outflows occurred as a consequence of the rise in
stocks of 179,000 GBP, a growth in trade and other receivables of 55,000 GBP (32,000 GBP) as
well as the rise in trade-payables (97,000 GBP). The effect of large inflows is an improvement in
the depreciation of stocks. The business noted a positive cash balance in the prior year, i.e.
GBP134000, but the free cash out balance of this year is GBP207000 before taking free cash
flow into account in the previous year. The operating-cash cycle of Roast Ltd. is calculated
below for better review of cash-flow statement:
Operating cash cycle:
This is a metric that companies typically use to assess the time they are needed to turn all
inventories into liquid-cash. This cycle help to demonstrate company's operating effectiveness to
generate cash-flow from operating-activities (Li, 2014). In this context, following are key
computations for deriving ultimate operating cash-cycle of Roast Ltd, as follows:
Details Year 2017 Year 2018
Total days in year 365 Days 365 Days
Inventory turnover ratio 12.54 6.66
Formula: 365 / Inventory turnover ratio

Days inventory outstanding: 29.11 54.80
Total days in year 365 Days 365 Days
Receivable turnover 21.74 17.12
Formula: 365 / Receivable Turnover Ratio
Days sale outstanding: 16.79 21.32
Total days in year 365 Days 365 Days
Payable turnover 10.91 8.47
Formula 365 / Payable Turnover
Days payable outstanding 33.46 43.09
Formula:
Days inventory outstanding + days sales
outstanding - days payable outstanding
Result 13 32
Working notes:
Inventory turnover: Cost of sales / average inventory
Details Year 2017 Year 2018
Cost of sales 1505 1990
Average inventory 120 299
Inventory turnover 12.54 6.66
Receivable turnover: Net sales / account receivables
Details Year 2017 Year 2018
Net sales 2022 2534
Account receivables 93 148
Receivable turnover 21.74 17.12
Payable turnover: Cost of sales / account payable

Details Year 2017 Year 2018
Cost of sales 1505 1990
Account payables 138 235
Payable turnover 10.91 8.47
Calculation of operating cash cycle:
Details Year 2017 Year 2018
Days inventory outstanding 29 55
Add: Days sales outstanding 17 21
Less: Days payable
outstanding 33 44
Operating cash cycle 13 32
As shown in above tabular form, Roast Ltd's Operating-cash cycle in year -2018 is 32
days which was 13 days in just previous year. It indicates that business takes around one month
for conversion of inventories into cash which is adequate level as per cafes-coffee-shops-
industry.
Dividend policy:
This is the strategy of an organisation which is based on the decision of top management
of an organisation regarding distribution of profits among shareholders by the way of dividend.
In this regard Roast Ltd has no dividend-policy in year-2018. Company being a growing entity,
first priority of company is to maintain liquidity and invest funds in business expansion that can
aid company to run efficaciously instead of dividend distribution (Petersen, Kushwaha and
Kumar, 2015).
After reviewing this company's performance in terms of financial statements, this is
evaluated that the corporation is small-scale organization with limited resources and growth in
income and profits. Thus this dividend policy of company does not impacts its brand image and
Starbucks acquisition decision.

Part 3: Investment Appraisal and Sources of Finance
3.1 Investment Appraisal:
Management Forecast:
Roast Ltd is a rising and visionary corporation aiming to expand its operations in
Romania with the opening of its coffee shop. With initial-year of 2017, the managing officials of
this company decided to start this project. The company is expected to earn sales of 300 million
pounds by 2017, up by 560million GBP by 2018, 740million GBP in 2019, 900 million GBP by
2020 and 1,120million GBP in 2021. Roast Ltd going to incurs high-variable operating costs and
secures feasible investments or cash-inflows. The cash influxes are expected to represent 60
million-GBP in 2017, 112 million-GBP in 2018, 148 million-GBP in 2019, 180 million-GBP in
2020 and 224 million-GBP in 2021.
The analysis suggests that over a span of 5 years this business can generate high sales and
huge profits. In this management prediction, no contingencies are believed to lead to financial
problems.
Investment Appraisal Techniques;
These techniques are specific approaches to determine effectively whether a investment
alternative would be profitable or viable or not. These techniques supports decision-making task
of business managers. Managing officials can apply one or more approaches simultaneously to
enhance the accuracy of investment related decisions (Shepherd, Williams and Patzelt, 2015).
Here below is a comprehensive discussion of different investment-appraisal techniques, as
follows:
Payback period:
Payback period is certain time-frame requisite in recovering project's initial-investment
costs. This is years(no.) business would yield to get-back project's initial-investment. The
payback period will therefore be considered as an investment budgeting tool to compare
initiatives and evaluate the period of time it took to have the initial investment returned. The
proposal is usually chosen for the least no. of years. It lacks the money's time-value factor. Most
other investment budgeting methods accept the idea of money's time-value factor. Time worth of
money implies that today's rupee is worth more than tomorrow's rupee. While other techniques,
discount potential inflows and achieve discounted flows (Sunder, 2016). Payback period of Roast
Ltd's project is 4year which lesser than project's total life-period. Which is an indication that

project will provide adequate returns within 4 years equal to initial-investments made. These are
the advantages and limitations of this approach which are relevant to consider, as follows:
Benefits: The short-term analysis of any investments or ventures is time-savvy, because it
actually accumulates cash-flows and brings this sum up to a specific date that does not require
specific measurements.
Limitations: Simple cash-flows without taking account of time-values of the monetary
parameter are used to calculate the repayment/payback duration which can lead to meaningless /
vague results in certain exceptional circumstances.
Accounting Rate of Return: This is a financial metric that slows down the average rate of
return by evaluating the profits to be made by a project. In order to ensure maximum
profitability, it is critical for an organization to achieve a large percentage of returns for their
investment-project (Tridimas, 2012). In the case of Roast Ltd, ARR is 18 percent of given
project while expected return is 10percent which shows that project is able to provide more
return than projections.
Benefits: It presents an efficient grouping of various projects so that comparison by ARR is
smoother. This offers a consistent profitability position for every project and a rapid assessment.
Limitations: The time value of cash factor which is comparatively less important to decision
taking is also neglected in this methodology. This technique This approach also ignores many
external variables which hinder or barrier in any particular investment-project's profitability.
Net Present Value: This approach of investment-appraisal shows actual viability of investment
project. This approach more accurately ascertains the real viability status of any investment
project. Cash flows are effectively discounted by a rate usually cost-of-capital to assess the
difference between total outflow and fair value of aggregate cash-flows. This is more accurate
method as this shows how efficacious project is to provide a profit sum (Valentine and
Hollingworth, 2015).
Benefits: The inherent strength of the NPV methodology is that it assumes that GBP-value in the
future-period is less than GBP-value at present-time. Under it in each year's cash-flows are
discounted to assess the worth capital investment accurately.
Limitations:The top drawback concerned with approach/technique is that it considers few
speculation works related to cost-of-capital percentage. This guess work directly or indirectly
impacts the outcomes and thereby decisions taken based on outcomes.

3.2. Sources of Finance:
Speaking about the modern world, it needs to be grasped that company could only
conduct its role in a structured way in the situation where it requires a fund. It is said that
adequate funding will help to use the tools needed to achieve an organization's goals. In Roast
Ltd's case, they intend to carry out the operation in Italy's commercial industry where they would
need a large funding. There are many ways that the business entity can be effective in raising
funds from which the enterprise can strengthen its efforts to achieve the business objective. The
multiple ways of fund raising have been addressed here which can be helpful to Roast Ltd, as
follows:
Bank Loan: This way is most preferred alternative for a business enterprise in order to increase
or raise fund. Most primary ground to select this specific manner is that this enables enterprise to
make re-payment after a specific reasonable time-period under instalments procedure that offers
additive choice to utilize raised funds decently (Veprauskaitė and Adams, 2013). While payment
is expected based on the instalment plan, interest must be incorporated in it as well. It is one
direction the company would be able to expand its operating function on a larger platform. the
most crucial aspect that needs to be understood in this scenario is that in any of cases, banks will
have the right to bring the ultimate decisions to determine whether or not a party will be
permitted to take loan from bank. Following are several key-advantages and disadvantages of
this manner of funding, as follows:
Advantage: There are no barrier in this form of funding that bank has no interference right in
decisions regarding utilisation of raised funds. Also unlike equity share issuance there is no
threat of loss of control under this source.
Disadvantage: It requires lot of paper works and security against loan. A bank loan in balance
sheet also affects company's liquidity position and leverage level. Continuous repayments of
debts and interests lead to increase in risk of adverse working capital position.
Issue of Equity Share: This is most cost-effective and easy way to raise funds. Through
issuance of shares corporation can obtain funding by shareholders. Also share issue process can
provide rise in company's shares for a short period. Increase in equity also improves company's
liquidity ratios which attracts investors to make investment in company. Also issue of shares
help to add more investors and shareholder in company. Being a quick source without any
ordinary repayments. This involves sale of corporation's equity share which also directly enhance

company's wealth and capital structure. Company with excessive debts can issue share to make
improvements in existing capital structure (Zietlow and et.al., 2018). For small and medium
sized business corporation like Roast Ltd, this method is crucial to make increase in their share
capital and make expansion in quickly-manner. Here are some significant advantages and
disadvantage associated to this source of funding, as follows:
Advantages: No ordinary repayments are expected under this source of funding. Also
here no security is also given by company under this method. Under it there is no borrowing
costs are required to be paid like in case of debt financing.
Disadvantage: Selling of shares implies to selling of share in ownership controls. Also
purchaser of shares or shareholders has right to make voting in significant decision-making of
corporation which sometimes seems a unnecessary hurdle in company's growth.

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Online
Current coffee house industry of United Kingdom. 2019. [Online]. Available through:
<https://www.ibisworld.com/united-kingdom/market-research-reports/cafes-coffee-
shops-industry/>