Financial Decision Making

This report provides a comprehensive analysis of the financial decision-making process and evaluates the business performance of Roast Ltd. It assesses the company's profitability and financial growth, making it an attractive target for acquisition by Starbucks. The report also discusses the coffee industry in the UK and the challenges it faces.

Financial Decision
Making

EXECUTIVE SUMMARY
Financial Decision-making implies to an organised process or collection of tasks which
help in creation of systematic framework for taking finance and fund related decisions in quick
manner (Brown-Liburd, Issa and Lombardi, 2015). The study-report summaries comprehensive
analysis and evaluation of business performance of Roast Ltd that help to assess that company is
quite profitable and financial performance has also improved as compare to previous year. This
analysis is done through review of company's financial statements and other supporting materials
with aim to support CFO of Starbucks in evaluation of Roast Ltd's attractiveness and
effectiveness as a target company for acquisition-decision by Starbucks. This has been find that
company's overall efficiencies and performance has been enhanced over the year.
MAIN BODY
Part 1 – Industry Review:
On the UK market, common customers like tea and coffee as it was found that every four
adults out of five like coffee. There are also similar kinds of customers that like coffee. In 2019
retail coffee sales hit 69 million kg, up approximately 8% from 2014. The inflation or cultural
trend has produced 17% rise, which amounts to approximately GBP1.27billion. Actually, the
coffee industry, including soil coffee, beans etc., is leading the 65% share in the UK market. UK
retailers or wholesalers are targeting the young age demographic because they are crazier than
the older group. Property costs, labour and Brexit effects are three major challenges in this
industry.
In 2019, the café industry produced approximately GBP6billion in sales, with the sector
growing and reaching around 16200. The coffee market is facing enormous growth between
year-2014 and 2019 and that's about 6.1 per cent, there are 101,034 jobs. The coffee industry's
statistics are growing due to high consumer demand. The sector will expand by an average rate
of around 4.8% over the course of 5-years. The currently growth-rate is 1.9-percent and it
should hit £6.6 billion, this involves current growth (Trend in UK's Coffee Industry. 2019).
Increasing in household spendings towards non-alcoholic beverages and foods is key opportunity
for business.
Costa Ltd, Starbucks Coffee, Pret A Manger (Europe) Ltd and Caffe Nero Group
Holdings Ltd are key players in this industry. Pret A Manger (Europe) Ltd.

Part 2 – Business performance analysis:
2.1 Statement of profit and loss account:
A profit&loss account or P&L account shows a corporation's profitability position as it
involves all the incomes and expenditures. P&L statement also reflects organization's quality to
make revenues/sales, handling expenses, and provide profits and net income. Analysis of this
systems offers wide range of information about company's actual profitability level. This
statements offers comprehensive and more detailed information of company's direct and indirect
expenses along with sources of income (Brunsson and Olsen, 2018).
Roast Limited has reported overall sales of GBP2534000 in year-2018 while company's
sales in year-2017 was just GBP2022000 reflecting around 25.32 percent growth. Business's cost
of sales figures has been increased by around 32.23 percent (From 1505000 GBP to 1990000
GBP during year-2017 to 2018. Gross profits of such corporation has been rose to 544000 GBP
in year-2018 that was 517000 GBP in 2017, this enhancement in the level of gross profit is
indicator of increasing gross profit generation capabilities of company. Operating income in
year-2017 was just nil while in next year there was operating income of 60000GBP.
In business operating profits has been increased from 51000 GBP to 127000 GBP
indicating that business's operational efficiencies in terms of generation of profits has been
increased. Finance costs of business has been increased substantially from 6000 GBP in year-
2017 to 26000 GBP in year 2018 such major rise shows that company has borrowed funds.
While Net-profits are 81000 GBP and 36000 GBP in year-2018 and year-2017 respectively
disclosing a increasing or upward trend in net profitability level. It simply means that company is
efficient to generate net profits and such efficiency level has been grown over the period.
However for interpretation of relationship between different items of income-statement, ratio-
analysis would be effective. In this context following are several ratios related to P&L accounts
items of Roast Ltd, as below:
Gross Profit Ratio:

The gross profit-margin represents actual proportion of your business's sales to gross
profit. It is a crucial indicator of a company's profitability levels (Carvalho, Meier and Wang,
2016). As accordance with stated figures, Roast's gross profit percentage in year-2018 was
21.47percent while in year-2018 this percentage was 25.57percent. It is clear that there is a
decline in gross-margin of business over the period. This decline points that enterprise's
capabilities to control cost of sales and generate revenues have been declined.
Operating Profit Ratio:
A business's operating profit-margin ratio reflects how much profit enterprise is
providing after deducting all variable-costs related to production. This normally stated as
percentages of company's revenues and exhibits company's efficiencies in terms of controlling
expenses related to business-operations (Collier, 2015). The table displays that even after a
decline in gross-margin Roast's operating profits has been improved during 2017-2018. In year-
2017 operating margin was just 2.52 percent which approximately got doubled in year-2018 i.e.
5.01percnet. This significant improvement in operating-profit percentage shows that enterprise's
operational efficiencies has been considerably enhanced.
Net-Profit Margin ratio:

As stated in above prepared table it has been analysed that company's net profit-margin
was 3.2% and 1.78% in year-2017 and year-2018. This percentage over the periods shows that
enterprise's net-profit making capabilities has been enhanced over this period. Company is
efficient to provide net-profits and also there is growth in net-profitability level.
Overall analysis of income-statement shows that Roast Limited is a profit making
organisation and effectiveness to provide returns of company is growing. So in context of
acquisition purpose company is matching with profitability and operating effectiveness criteria.
2.2 Statement of financial position:
Statement of financial position or Balance sheet is crucial statement of enterprise as it
summarises all the significant asset and liabilities of company in comprehensive manner. This
shows assets and liabilities side by side as per their nature and significance. Analysing balance
sheet assist in effective assessment of enterprise's financial position as on a specific date
(Hoffmann and Post, 2014).
Aggregate assets of Roast limited has been increased to 1443000 GBP in year-2018 from
1017000 GBP in year-2017. While enterprise's equity funds are 860000 GBP in year-2018 which
are just 779000 GBP in year-2017 reflecting growth in equity funds. Total liabilities of enterprise
was 138000 GBP which have been reached to 308000 GBP in year-2018. This change is
majorly due to overdraft facility of 73000 GBP and longer-term liabilities. Long term-debts
are increased from 100000 GBP to 275000 GBP during 2017-2018 while trade payables
increased to 275000 GBP from 138000 GBP in 2017-2018b respectively. Share capital level is
constant while retained earnings has been rose from 579000 GBP to 660000 GBP due to
addition of profits.
Cash funds are nil in 2018 which in 2017 was 134000 GBP. Due to heavy investment in
purchase of PPE, there is shift in PPE i.e. 670000 GBP to 996000 GBP during 2017 to 2018.
While inventories are 120000 GBP and 299000 GBP respectively, trade receivable are 148000

GBP and 93000 GBP respectively during 2018 and 2017. Moreover, following is ratio analysis
of key items of balance sheet of company: Roast Ltd for more effective analysis, as follows:
Current ratio:
Year2017 (GBP'000) Year-2018 (GBP'000)
Current assets 447 347
Current liability 308 138
Current ratio (times): Current
Assets / Current Liabilities
1.45 2.51
It is an effective short-term liquidity measure which help to interpret relation between
enterprise's current assets and current-liabilities. 2 or above current ratio is mostly regarded as
appropriate which reflects that current assets value is just double or greater than double of
current-liabilities (Kingsford-Smith and Dixon, 2015). Table shows that ratio in year-2018 was
2.5144 which is above the minimum threshold, although in just previous year current ratio was
1.4513. This improving trend in current ratio is indicator of enhancement in enterprise's short-
term-liquidity situation.
Debt to Equity Ratio:
For effective analysis of financial leverage of company, this ratio is generally used. This
ratio defines relationship between company's aggregate debts and shareholder's equity (Klychova
and et.al., 2014). As shown in table entity's debt-equity ratios are .6779 and 0.3055 in year-2018
& 2017 respectively showing an accelerative trend. A higher ratio denotes to higher risk while
lower ratio reflects lower risk for investors. Here in company's context this increase in debt-
equity ratio is not favourable as this indicates that debts of company are growing faster then its
equity.
Return on capital employed:

Return on CE is specific percentage that shows enterprise's profitability as well as
effectiveness related to utilisation of capital or equity funds. It reflects that company's
performance in terms of utilisation capabilities of its employed capital (Klychova and et.al.,
2014). In year-2018 and 2017 ROCE are 11.19percent and 5.80percent respectively. Increment
in ROCE shows that enterprise's capital utilisation capacities has been increased and corporation
is effectively providing returns on capital fund.
2.3 Statement of cash flows:
Cash-flow report or statement of a corporation reflects the aggregate movement of cash
in and out of enterprise. It primarily contains three activities to assess net free-cash-flow of
company over a particular time-period. Such activities are operating, financing and investing.
Analysing a cash-flow help to evaluate real-time flow of cash funds and liquidity position
(Kotlar and et.al., 2014).
Roast Ltd's free cashflows during year-2018 is negative 730000 which is derived from
aggregation of all the three activities' cash flows and out flows. Analysis of cash-flow of
enterprise shows that from financial operations company has obtained cash flow of pound
175000 under it only a individual source is reported which is proceeds from long-term-
borrowings. Investing activities generated a outflow of pound 358000 and this outflow is resulted
from acquisition of PPE during year-2018. While operating activities of enterprise contributed a
out flow of 24000 GBP in this year. Such outflow is after payment of interest and income tax.
Further analysis of operating activities shows that there is major outflows are due to
Increase(purchase of) in inventories that is 179000GBP and Increase in trade and other
receivables of 55000 GBP while major inflows are due to adjustment of depreciation (32000
GBP), increase in trade payables (97000 GBP). In previous year company has reported a positive
balance of cash i.e. GBP134000 but this year company's free cash out flows are GBP207000

before considering prior year free-cash-flow. Company has not paid any dividend sum over the
period.
The whole analysis of entire cash-flow statement exhibits that entity's cash liquidity
position is not so much favourable as negative cash flow also an indicator of poor working
capital management.
Operating cash cycle: A business cycle is actual length of time an enterprise takes to buy a
product, deliver it and collect money from its buyers in exchange for sold stock. The operating
period of a product depends on a variety of variables, including payments to its clients and
expanded by its vendors to the business (Petersen, Kushwaha and Kumar, 2015). If an enterprise
has more time to make inventory payments to its suppliers, the business cycle can be shortened
by reducing the spending on cash. Nevertheless, if a business allows more time to its buyers to
pay for purchased products, the operational period will increase, since the company needs to wait
even longer for all its cash to be collected.

OCC computations for Roast Ltd reflects that business's OCC is 13-days here notable
thing is that a optimal OCC reflects that enterprise can effective and quickly convert its
inventories into cash. The present OCC is satisfactory but as cafe industry is competitive sector

this should be more lower. Although inventories-days-outstanding cycle is 29-days while Days-
sale-outstanding cycle is 13-days. On other hand, payable-days-outstanding cycle is 33-days.
Overall position of OCC in Roast Ltd case is good in context of acquisition purpose.
Dividend policy: A dividend policy of company relates to practices adopted by enterpises with
relation to payment of dividend. A company's dividend policy can be analysed through
evaluation of dividend payment pattern over prior period (Shepherd, Williams and Patzelt,
2015). This analysis help to interpret company's status in eyes of shareholders, because a regular
divined payment generally shows that investment in company would be profitable but it is not
necessary in exceptional cases like Roast ltd. As company is profit maker and able to provide
ROCE but enterprise has no or null dividend payment history. In year 2018 also company has
not made any dividend payments.
Part 3 – Investment appraisals
Part 3 – Investment appraisal and source of finance:
3.1 Investment Appraisal:
Management forecast: Predictions/Forecast is management of future events whereby, on
the grounds of the preceding prediction, they take potential decisions. In Roast Ltd's perspective,
the group agreed to spend £ 500 million for Romania's extension of its market. For 2017 to
2021, Corporation expects a cash outflow of GBP 6 2, GBP 112, GBP 148, GBP 180 and GBP
224. Roast Ltd's executives anticipated their profits over all of period to be increasing. But they
must ensure that they anticipate less in initial phase, because in better/favourable scenarios they
are faced with numerous complications. Here in project, Initial investment of respective
corporation is GBP 500million and further company's management has estimated revenues of
GBP300 million, GBP560 million, GBP740 million, GBP900 million and GBP1120 million
during the same period respectively. There is doubt about the forecasted figures and assumption
as these are not marching with current business environment as well as operating scale. Thus to
an certain extent assumptions seems not so much relevant for company. The United Kingdom
market already faces the numerous climate-changes threats impacting coffee production. They
must therefore study Romania's weather and choose the correct time to produce. In addition,
Romanian citizens ' interest in coffee must be recognized. It is appropriate for the business to
grow if they are interested in or wants to drink coffee.
Investment appraisal technique:

Purpose of such techniques is to determine viability-position of capital-project or
investment and return they could generate. Investment appraisal-techniques are primarily
categorised into parts: 1. Traditional or non-discounted cash flow criteria or techniques and 2.
Discounted-cash flow or non-traditional techniques. Payback period and Accounting rate of
return are traditional/non-discounted cash-flows while NPV is regarded as Discounted-cash flow
or non-traditional techniques (Sunder, 2016). In this regard here below is critical discussion on
various investment appraisal-techniques along with their benefits and limitations, as follows:
Payback Period: Most effective and widely applied technique, it reflects period or years
requisite for recovering primary/initial cash-fund invested or heavy investment at the start of
year of any project. It is a period where net investment or outlays are sum equal to cash flows
earned till that period. In case payback period is less than the capital-project's overall life than
project would be viable. In this regard, Company Roast Ltd, as figures contained in Exhibit:3, in
project's initial investment is GBP 500 million and life of project is 5 years. Through given cash-
flows assessed payback is four years that is lower than project's entire life i.e. 5 years that
indicate that though this project company will recover it initial investment within project's whole
life. So in terms of payback period, project is viable. However before taking final decision
company should evolute benefits/limitations of such technique, as discussed below:
Benefits: It is time saver approach for short review of any capital investment or project, since it
is simply aggregates cash-flows and pull such aggregate sum up-to certain period which does nor
require any special calculations.
Limitations: This approach is so simple that simple cash-flows without considering time-value
of money variables, are used to assess payback period which in some exceptional case flow cases
may lead to irrelevant/ambiguous results (Valentine and Hollingworth, 2015).
Accounting Rate of Return: This is another major traditional technique in which rate is
measured by deducting non cash expenses like depreciation from aggregate cash flows, then
divide calculated by initial-total investment. Resulted figure is certain percentage/proportion of
aggregate initial-investment corporation can anticipate to gain during project's life. In case of
Roast Ltd, ARR of concerned project is around 18% based on computation using cash-flows
stated. While as given targeted ARR is just 10% so this project will provide 8% additional return
as compare to targeted return. This outcome of ARR points out that the project is viable

profitability wise. Although company must conditioner benefits/limitations of ARR technique, as
discussed here:
Benefits: It provide a effective ranking of different projects thus it is easier to make comparison
though ARR of project. It provides clear status of profitability of any project and offers quick
evaluation.
Limitations: Here this technique also ignores time value of money-factor which provides
relatively less relevancy in decision-making. Also this method also ignores several external
factors which act as obstacle in profit-earning capacity of any specific project.
Net Present Value: It simply refers to net discounted cash-flows which company will generate
in future though any particular project. NPV analysis is exploited to aid in ascertaining how
much an capital-project is worthy. Under it net cash flows are after adjusting all cash
expenditures and extra ordinary items and then discounted through a specific rate. Positive
amount of NPV reflects favourable project while negative one is generally ignored.
Benefits: The apparent benefit of NPV approach is that it considers fundamental persuasion that
future date GBP is worth lower than GBP presently in today date. Here in every year cash-flows
are discounted by some other year of capital investment.
Limitations: Biggest drawback to this approach is that it includes certain guess work on cost-of-
capital of the organization. Considering that capital costs are too minimal would results in
investment being suboptimal. In case capital costs are too high may trigger too many successful
investments to be overlooked.
3.2 Source of finance:s
Equity Financing:
Equity financing involves the swap of part of the company's ownership(in terms of share)
for capital investment into the company. The equity shareholding allows the shareholder to
participate in the income of the corporation. Equity requires continued investment in a
corporation and will not be compensated later on by the firm. The equity position in a
corporation could be in form of shareholders ' shares or even in form of a common or preference
share as in a business, like in the cases of a LLP. Corporations may create various classes of
shares to regulate shareholders' rights to vote. Likewise, different forms of preferred shares may
be used by businesses (Zietlow and et.al., 2018). For example, common inventors may vote
without preferred inventors. Nevertheless, in the event of default or loss ordinary shareholders

are the last in line of company's assets Once common shareholders acquire a dividend, preferred
shareholders earn a pre-determined dividend. Following are several advantages and
disadvantages of equity financing which Roast Limited should consider, as follows:
Advantages: The risk is much less, since this is not a debt and it does not involve repayment.
Capital investment is an ideal way of funding the corporation if company is unable to make
repayment of a loan. Also in case company become bankrupt then monies not required to be
repaid.
Disadvantages: In particular in comparison with debt, equity financing is seen as an expensive
form of funding. The clear reason for this is that equity share holders are expected to earn higher.
Because investing in equity shares is a heavy-risk investment, a shareholder will generally
anticipate a high rate of return.
Debt Financing:
Debt financing means borrowers lend money with the expectation that the borrowed
money plus interests be paid back at a particular time in the future. The payment for debt
financing for borrowers (who lend money to the company) is interest-sum on the amount that the
lender has been lent. Debt funding might or might not be covered. Secured debt requires security
(a financial asset that the mortgage can be issued by the borrower to cover the lender's default).
On the other hand, unpaid debt has no collateral and places the borrower in a less protected
position in terms of payments in the event of a bankruptcy. Major sources of debt financing are:
Banking institutions, Commercial Lenders, Commercial Finance enterprises, loan from related
parties and issuance of bonds.
Advantages: Debt financing not offer ownership rights to borrowers and lenders in company.
Bank or financial-institutions not have rights to influence company's businesses and thus no loss
of controlling here in this case. Once corporation repay borrowed money, all the obligations and
business-relationship will end with borrower/lenders.
Disadvantages: So much debts creates a problem in generating capital because investors view
debts as a heavy-risk possibility, restricting the capacity to generate funds. Enterprise can fall
into major crisis, particularly in difficult times where the corporation's profits decline. in case of
there are huge-debts.

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Online
Trend in UK's Coffee Industry. 2019. [Online]. Available Through
<https://www.ibisworld.com/united-kingdom/market-research-reports/cafes-coffee-
shops-industry/>