Financial Decision Making: Industry Review, Business Performance Analysis, Investment Appraisals

This study analyzes the cafe industry and the business performance of Roast Ltd. It includes an industry review, analysis of profit and loss account, statement of financial position, statement of cash flows, and investment appraisals.

FINANCIAL DECISION
MAKING

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
MAIN BODY...................................................................................................................................3
Part 1. Industry review:...............................................................................................................3
Part 2. Business performance analysis:.......................................................................................3
2.1 Analysis of profit and loss account statement:......................................................................3
2.2 Statement of financial position:............................................................................................5
2.3 Statement of cash flows:.......................................................................................................8
Part 3. Investment appraisals:...................................................................................................11
3.1 a Management forecast: Management forecast:..................................................................11
3.1 b Investment appraisal technique:......................................................................................11
3.2 Source of finance:...............................................................................................................12
REFERENCES..............................................................................................................................14

EXECUTIVE SUMMARY
This study summarises the review of cafe industry with aim to effectively analyse
business performance of corporation Roast Ltd. The main aim of performance analysis of Roast
Ltd, is to recommend Starbucks UK in decision of acquisition of Roast Ltd. Here for
performance analysis, Roast Ltd's P&L, Balance sheet and cash flows are analysed critically.
Also several investment appraisal techniques are thoroughly evaluated to provide assistance in
decision-making process.
MAIN BODY
Part 1. Industry review:
 UK coffee-house industry contains all unlicensed enterprise and licensed companies
which are engaged in selling of coffee, beverages, food items and soft drinks.
 The entire UK coffee-shop market is of around £10.1bn and in UK there are around
25,483 shops and outlets.
 The growth in coffee shop sector in the UK has risen 7.9 per cent per annum over two
decades, but turmoil created by Brexit's economic volatility tends to disrupt the industry.
 Branded coffee shops achieved a strong growth of around 8.7 percent to around 8,149
stores during year 2018. Furthermore, during 2019, the resilience of UK market is a
major problem for the sector.
 Coffee shops are ideally positioned to catalyze the increasing preference of customers for
experienced and digitally altered retail models – 45 percent of the industries surveyed
consider facebook and twitter as the best way of advertising.
 During year-2018, coffee-shop industry appeared to be plagued by persistent confusion
with respect to UK's future dealings with EU. During the last Eighteen months political
stalemate has helped increase concern about workload shortages, increasing prices,
expenditure and eroding brand trust (Cafe Industry: UK. 2019).
Part 2. Business performance analysis:
2.1 Analysis of profit and loss account statement:
A corporation's financial statements includes balance sheet, income-statement and cash
flow. Here income-statement or P&L is most vital statement which shows company's

profitability scenario and current level. This statement involves all operating and non operating
expenses to derive actual net profit of company for specific time-period. Analysis of
corporation's income-statement help to assess the how efficient company's operations are to
generate net profits after considering all business expenses (Agarwal and Mazumder, 2013). This
analysis framework is used to evaluate entire cost systems and the efficiency of a business.
During a given period of time, it helps to assess the profitability level.
In this regard, Roast Ltd's income-statement review reveals that the company's revenue
have grown between the years of 2017 and 2018 from 2022,000 to 2534,000 pounds (25.32
percent growth), with production costs increasing between 2017 and 2018 from 1055,000 pounds
to 90 million pounds (32.23 percent growth). Operating revenues of the Corporation were 60,000
in year 2018. Operating costs, on the other hand, rose from £ 466,000 in 2017 to £ 477,000 in
2018. Operating profits of 127000 and 51000 in 2018 and 2017 were published by Roast Ltd.,
showing an upwards trend respectively. In 2018 and 2017, the corporation's net income amount
was 81000 and 36000, reflecting an improvement in total profitability.
Evaluation of distinct ratios will be beneficial in further efficient interpretation of the
corporation's P&L account. Ratio helps to understand the output of the corporation by evaluating
the key ties of various items throughout one or more periods of profits. Two equations for the
study of Roast Ltd's income statement are as follows:
Gross Profit Ratio:
(GBP'000) Year-2017 Year-2018
Gross profit 517 544
Net sales 2022 2534
Gross profit Margin = Gross
profit/ Net sales x 100
25.57% 21.47%
This is key profitability ratio commonly applied by managers to evaluate business's
actual fiscal wellness by exhibiting sum remain out of revenue after providing costs incurred
against goods sold (Kramer and Weber, 2012). Evaluation of the corporation's gross margin
(percentage) revealed that the gross margin business gained in year 2018 is 21.47%, which was
of 25.57% for year-2017. This suggests that the performance of the corporation to generate gross
profits before any operating or non-operating expenses has been decreased over the period.

Operating Profit Ratio:
(GBP'000) Year - 2017 Year - 2018
Operating profit 51 127
Net sales 2022 2534
Operating profit ratio=
Operating profit/ Net sales x
100
2.52% 5.01%
This ratio forms and evaluates relationship among business's operating profits and entire
net-revenue obtained though its operations or net-sales figures. It is also a kind of profitability
ratio which is expresses generally in percentage form (Lusardi, 2012). In 2018 and 2017, the
operating ratio in the corporation was 5.01 percent and 2.52 percent. The trend indicates that its
operating operations have improved the company's ability to make profits. This basically means
that business costs have been reduced and that operational profits have been improved.
Net-Profit Margin ratio:
(GBP'000) Year - 2017 Year - 2018
Net profit 36 81
Net sales 2022 2534
Net profit ratio = Net Profit /
Net Sales
1.78% 3.20%
This ratio expresses a relationship between net amount of profits earned by corporation
and net sales through its entire business operations. It is more clearly shows corporation's net
profitability level and demoted in certain percentage (Lu, Won and Cheng, 2016). As shown
above, the net profit ratios of the table business in year-2018 and 2017 were 3.2 percent and 1.78
percent. That simply specifies that the degree of net profitability of the organization has been
enhanced. Over the time, the aggregate net-margin creation potential of the business has been
improved and it would be advantageous in terms of profit opportunity for acquisition purposes.
2.2 Statement of financial position:
Company's balance sheet is vital statement which clearly shows company's financial
position over a specified time frame. Analysis of balance sheet is essential aspect in

comprehensive evaluation of company's overall business performance. A balance sheet contains
the different items of assets and liabilities side by side in a proper classified manner. Under
analysis of balance sheet, each stated item in it is thoroughly analysed by comparing and
identifying trends. This kind of analysis help to identify different financial and non - financial
aspects about company's performance over a particular period (Gamble, Boyle, Yu and Bennett,
2014).
It has been noted, in this context, th2.3 Statement of cash flows:at the corporation has
made capital expenditure for purchasing property, plants and equipment (PPE) as the PPE cost of
the company was raised from £670000 to £996000 in 2017 to 2018, as shown in a review of
items listed in the Roast Ltd Statement of Financial position. Another noteworthy aspect is zero
cash and cash equivalents stated during 2018 by company while during year2017 it was £
134,000, which indicates that in 2018, the corporation utilized all cash resources/funds. The
current total assets figure was at £ 447000, that in year-2017 was £ 347000. In 2018, the
Company has granted no securities, because the equity capital of the corporation is £ 200,000 for
both years. Respective organization's overall-retained earnings are £ 660,000 in 2018, which
amounted to £ 579 000 in 2016, including income and general reserves or special reserves. So
cumulative equity figure rise to £ 860000 from £ 779000.
Long-term lending for firms is drastically increasing, with long-term debt for businesses
hitting £ 275,000 in 2018, which amounted to £ 100,000 in 2017. During 2018, the corporation
also obtained a overdraft account of £ 73,000. During the duration of 2017-2018, business
creditors are adjusted from £138000 to £235000. In 2017 to 2018, overall obligations/liabilities
have been increased by £ 345,000 (from GBP 238,000 to GBP 583,000).
In addition, a number of key metrics are described in the analysis for better assessing the
financial position of the respective organization when taking account of key balance sheet
elements. Ratio-analysis offer a better insight into the real-time fiscal or actual monetary
situation of the business (Hoffmann and Post, 2014). The following are important business ratio-
metrics in this respect:
Current Assets Ratio: This ratio related to short-term liquidity demonstrates whether a
corporation can pay off its current obligations and liabilities with all of its current assets. This
measure is relevant to find out organization is and isn't financially stable. The current ratio of 2
or beyond 2 is commonly accepted as a preferred standard which simply means that the current

assets of the organization will equate to double or more than double that of the current liabilities
of the organization (Nga and Ken Yien, 2013).
(GBP'000) Year - 2017 Year - 2018
Current assets 347 447
Current liabilities 138 308
Current ratio = Current
assets / Current liabilities
2.51 times 1.45 times
The above figures reveal that the corporation's current ratio in year-2017 was higher than
two times, that is 2.51, while it decreased to 1.45 times in year-2018. The fall in the current ratio
means that companies have lost flexibility in the servicing of current obligations by their current
assets.
Debt to Equity Ratio:
(£'000) Year - 2017 Year - 2018
Debts 238 583
Equity 779 860
Debt to Equity Ratio =
Debs / Equity
0.3055 0.6779
This ratio act as indicator of long-run liquidity performance of corporation. Debt-equity
ratio of one or more than one is considered as effective ratio below this level indicates business's
long-term-liquidity position is not adequate (Seshan and Yang, 2014). As the figures indicate, the
debt-to-equity ratio of the corporation has risen from 0.3055 over the period from 2017 to 2018
to 0.6779. This increase in debt-equity ratio reflects that company's long-term liquidity position
has been improved.
Return on capital employed:
(GBP'000) Year - 2017 Year - 2018
Operating profit 51 127
Capital employed 879 1135
ROCE = Operating Profit / 5.80% 11.19%

Capital Employed
This ratio is classified as efficiency ratio as it shows how efficient company is to utilise
its all funds employed in business activities. This ratio is crucial for investors because it indicates
how much return company will provide on investment or funding made by them in company
(Duclos, 2015). As shown in the table the ROCE rate of the enterprise was enhanced from 5.80%
to 11.19%. Which demonstrates that the capacity of Roast Ltd to produce returns on total capital
invested has been increased. It also implies that respective organisation is viable and
economically sound for investing purposes.
2.3 Statement of cash flows:
The objective of the cash flow statement is for a specified period of time (generally
quarterly and yearly) to indicate where money (cash flow) is created and where funds (cash
outflows) is expended. The liquidity and longer-term solvency of a corporation is critical for
analysis. Rather than accrual based accounting, the cash flow report utilizes cash-basis
accounting to be used by many businesses for balance and income statement (Carvalho, Meier
and Wang, 2016). This is critical since an organization can produce accounting sales but can not
obtain the money. It can produce taxes and revenues but don't provide the tools to remain
solvent. Analysis of a cash-basis flow statement assist in assessment of corporation's actual cash
position and liquidity position.
As in context of Roast Ltd, analysis of cash-flow statement for year 2018 shows that
during the year company's net cash generation from all operating activities is GBP 24000
(Negative figure). This cash outflow is due to amount spend towards purchase of stock and
delayed collection or increase in debtors. Amount of cash out flow towards inventing activities
during this year is GBP 358000 which solely due to purchase or capital expenditure towards
Property,Plant and Equipments. Lastly there is a cash inflow of GBP 1750000 in year 2018
though corporation's financing activities. Here this in flow is occurred as a consequence of
Proceeds from long-term borrowings. By accumulation of cash flows all the three activities
company's net increase / (decrease) in cash flows are (207000) while after considering Cash and
cash equivalents at the start of year, company's cash flow at year end is negative GBP 73000.
Operating cash cycle: For effective analysis of cash-flows, this ratio is crucial as it shows the
true picture about how effectively company is generating cash from its operations. The OC

presents an insight in to the productivity of a business. A shorter period is preferable and shows a
more effective and productive sector (Yalcin, Bayrakdaroglu and Kahraman, 2012). A shorter
period means that a business can quickly recover its cost in inventory and has ample cash to
fulfil its liabilities/obligations. If an operating cycle is longer, it can lead to issues with cash
flow. It is time for a company to convert buys into client cash receipts. This cycle is the no. of
days cash of the company remains bound in the company's operations. The evaluation of cash
flow utilizing OCC also shows how well the organization handles its working capital in general.
OCC is categorised into three-major aspects which are: 1. Inventories outstanding-period,
payable outstanding-period and sales-outstanding period. Here below is formula of operating
cash-cycle, as follows:
Operating cash cycle = Days inventory outstanding + days sales outstanding - days payable
outstanding.
In this regards. following are several calculations for OCC or operating cash-cycle of corporation
Roast Ltd, as follows:
For year 2017:
Days inventory outstanding= > 365/inventory turn over
= > 365/12.54
= > 29 days
Days sale outstanding=> 365/ receivable turn over
= > 365/21.74
= > 17 days
Days payable outstanding=> 365/ payable turn over
= > 365/ 10.90
=> 33 days
So operating cash cycle => (29+17-33) days
=> 13 days
Working Note:
Inventory turn over= cost of sales/ average inventory
=> £1505/£120
=> 12.54

Receivable turn over => net sales/account receivable
=> £2022/£93
=> 21.74
Payable turn over => cost of sales/ account payable
=> £1505/£138
=> 10.90
For year 2018:
Days inventory outstanding would be equal to => 365/ inventory turn over
=> 365/ 6.65
=> 55 days
Days sale outstanding would be equal to: 365/ receivable turn over
=> 365/ 17.12
=> 21 days
Days payable outstanding would be equal to => 365/ payable turn over
=> 365/ 8.47
=> 44 days
So operating cash cycle => (55+21-44) days
=> 32 days
Working Note:
Inventory turn over => Cost of sales/ average inventory
=> 1990/ 299
=> 6.65
Receivable turn over => Net sales/ account receivable
=> 2534/148
=> 17.12
Payable turn over => Cost of sales/ account payable

=> 1990/235
=> 8.47
The operating-cash cycle calculations of the Roast Ltd have shown that the whole
operating cash cycle of the business is 13 days. Lower operating time shows that a business can
turn stocks into money more quickly. As assessed above corporation's OCC is around thirteen
days, this period is sufficient but as company is operating in cafe industry such period should be
lower (Forbes, Hudson, Skerratt and Soufian, 2015). However current period is also acceptable,
since corporation's inventories-days outstanding period is around twenty nine days and Days-sale
outstanding time-span is around thirteen days. Whereas payable-days outstanding period is
around 33-days. The whole calculation and analysis points out that Roast Ltd's operational
efficiency is quite good as operating-cash-cycle is optimum.
Dividend policy: It is a practice which the company implements to control its shareholder
dividend payment percentage. Several analysts suggest that dividend policy might be
theoretically irrelevant, given that stakeholders can sell their share or stocks if they need funds. It
was evaluated for company Roast Ltd that the corporation has not pursued a divided plan, since
the dividend payment of the company is null. Roast Ltd didn't pay its investors any dividend in
year 2018.
Part 3. Investment appraisals:
3.1 a Management forecast: Management forecast:
Roast Ltd's management unit is looking to raise about £ 500 million in capital. Across
five years from year 2017 to year 2021, a prediction produced of cash flows. According to the
business's estimate, their cash-flows or cash receipt will contribute to £ 60, £ 112, £ 148, £ 180
and £ 224 million. But this prediction gone wrong between 2017 and 2018. Further fall in gross-
margin as well as negative cash-flows indicates that such management predictions would not be
achieved. Therefore, the prediction should be readjusted according to current outputs of the
business.
3.1 b Investment appraisal technique:
The methods often used to to assess the feasibility of financial decisions and capital
investments taken by the corporation are called different instruments and steps. Profitability-
index, NPV, internal return rate, payback period, and accounting-return rate are the core

investment- appraisal techniques. The outcomes of every new venture, such as the acquisition or
takeover proposal, are primarily measured. In this context, various significant Investment
appraisal-techniques are addressed as follows:
Payback period: This clearly defines the time period expected to recover cumulative initial
investment or capital costs. It clearly lays no. years corporation can took to reimburse initial
proposal investment (Baker and Ricciardi, 2014). As shown, the payback period of 3 companies
is 4 years. It states specifically that the business will restore 500 million pounds cash outflow in
course of four years which is therefore feasible because the payback period is much less than the
whole of the venture, i.e. five years.
Benefits: This is the easiest and most convenient approach without any complex equations or
hypotheses.
Drawback: Some time outcomes of this method seems irrelevant due to avoidance of factors
like inflation, time-value of money etc.
Accounting rate of return: This is method under which a certain percentage is measured and
this percentage reflects how much return company would get form any project or investment
made. As can be seen in Figure: 3 project's ARR is around 18 percent. That percentage of project
is more than project's expected return so the ARR of 18 percent is effective, indicating that
investment or project is able to provide profits more than the expectations.
Benefits: This methodology is valuable to businesses because it explicitly defines every plan or
proposal's degree of profitability.
Drawback: This approach often lacks critical factors such as money's time-value, since cash
flows taken under it are not discounted (Chowdhuri, Yoon, Redmond, and Etudo, 2014).
Net-Preset Value or NPV: The findings of this approach demonstrate that any investment is net
viability. It is a popular and generally used way of assessing whether or not investment-proposal
would be profitable. The corporation's investment-proposal NPV is £ 110 million at cash flow
discounting rate of 5%, as illustrated in figures shown in exhibit:3. A positive value of NPV is a
determinant of any investment-proposal's financial viability.
Benefits: This techniques offers more precise and accurate outcomes about proposal's viability
as here cash-flows are effectively discounted.
Drawback: This method's main disadvantage is that no particular amount is used here to
measure cash-flows, so that the findings are sometimes unreliable.

3.2 Source of finance:
In business finances are critical because company could not function without funding for
a day. Therefore, it is important to search for efficacious finance sources. Source of finance is
based on the amount of cash, the complexity of the company, the time-frame of repayment, the
mixture of debts and equities, etc. The choice of sources often relies on the uses for which
funding are required. Funding necessary for the purchase of machinery, land & building, etc.
from these sources should be acquired, the tenure shall be five to ten years. The medium-term
funding is needed for more-than one year but lower than five years. Funds for covering daily
costs from quick-term sources must be obtained. As in given case Roast Ltd is require more
investment during 2019 in Italy which is around £400k. For such a huge amount company should
evaluate the benefits as well as drawbacks of multiple sources of funding, as follows:
Equity Financing: This is sources under which company's securities and stocks are sold in
market for raising funds. This is major source though which company can raise funds for short-
term as well as long-term objectives. This source of finance is most preferred as sometimes it
help to increase the overall wealth of company. Following are several benefits and limitations
associated with this finance source, as follows:
Benefit: The major benefit of equity finance is that the cash obtained from it is not obliged to be
repaid. Equity funding doesn't really drive cash out of organization, so overall liquidity position
remain in control after equity fiance.
Drawback: The biggest downside of equity financing that here is the loss of control and portion
of ownership. Controlled ownership might be lost as a result of forced public sale of securities.
Decentralized ownership also contributes to the loss of direct controlling over the organization.
Debt Finance: Debt Financing occurs whenever a corporation generates funds by issuing bonds,
bills or notes to individuals and/or retail investors for operating capital or capital spending. The
persons or entities are lenders in exchange for loaning money and obtain a guarantee to
reimburse the principal and debt interest. Here below are few advantages and drawbacks of this
source, as follows:
Benefit: A principal benefit of bond issuance and borrowings from lenders would be that a
owners have full ownership. While this not happen in case with equity source, as shareholders
have a corporation's proprietary rights.

Drawback: A debt financings drawback is that corporations are obliged to repay the loan
principal together with interest-costs. Corporations with cash flow issues can find it challenging
to pay back the funds. Corporations that failed to repay their loans on time incur penalties.

REFERENCES
Books and journals:
Agarwal, S. and Mazumder, B., 2013. Cognitive abilities and household financial decision
making. American Economic Journal: Applied Economics. 5(1). pp. 193-207.
Kramer, L.A. and Weber, J.M., 2012. This is your portfolio on winter: Seasonal affective
disorder and risk aversion in financial decision making. Social Psychological and
Personality Science. 3(2). pp. 193-199.
Lusardi, A., 2012. Financial literacy and financial decision-making in older
adults. Generations. 36(2). pp. 25-32.
Lu, Q., Won, J. and Cheng, J.C., 2016. A financial decision making framework for construction
projects based on 5D Building Information Modeling (BIM). International Journal of
Project Management. 34(1). pp.3-21.
Gamble, K.J., Boyle, P.A., Yu, L. and Bennett, D.A., 2014. Aging and financial decision
making. Management Science. 61(11). pp. 2603-2610.
Hoffmann, A.O. and Post, T., 2014. Self-attribution bias in consumer financial decision-making:
How investment returns affect individuals’ belief in skill. Journal of Behavioral and
Experimental Economics. 52. pp. 23-28.
Nga, J.K. and Ken Yien, L., 2013. The influence of personality trait and demographics on
financial decision making among Generation Y. Young Consumers. 14(3). pp. 230-243.
Seshan, G. and Yang, D., 2014. Motivating migrants: A field experiment on financial decision-
making in transnational households. Journal of Development Economics. 108. pp. 119-
127.
Duclos, R., 2015. The psychology of investment behavior:(De) biasing financial decision-
making one graph at a time. Journal of Consumer Psychology. 25(2). pp. 317-325.
Carvalho, L.S., Meier, S. and Wang, S.W., 2016. Poverty and economic decision-making:
Evidence from changes in financial resources at payday. American Economic
Review. 106(2). pp. 260-84.
Yalcin, N., Bayrakdaroglu, A. and Kahraman, C., 2012. Application of fuzzy multi-criteria
decision making methods for financial performance evaluation of Turkish
manufacturing industries. Expert Systems with Applications. 39(1). pp. 350-364.
Forbes, W., Hudson, R., Skerratt, L. and Soufian, M., 2015. Which heuristics can aid financial-
decision-making?. International review of Financial analysis. 42. pp. 199-210.
Baker, H.K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Chowdhuri, R., Yoon, V.Y., Redmond, R.T. and Etudo, U.O., 2014. Ontology based integration
of XBRL filings for financial decision making. Decision Support Systems. 68. pp. 64-
76.
Online:
Cafe Industry: UK, 2019. [Online]. Available through:
<https://www.worldcoffeeportal.com/Latest/News/2019/UK-coffee-shops-achieve-20-
years-of-sustained-grow>