Corporate Financial Management: Costa Coffee Case Study Analysis

This report presents a financial analysis of Costa Coffee, a prominent British coffee house company. It begins with an introduction to Costa Coffee and the rationale for selecting the company for the case study, emphasizing its brand recognition, product quality, and global expansion. The report then delves into key financial ratios, including the current ratio, net profit ratio, gross profit ratio, and return on equity, providing calculations and interpretations for the period from 2012 to 2016. The analysis highlights the company's performance against industry benchmarks. The report also explores Costa Coffee's sources of finance, such as ordinary shares, loan stock, bank lending, and franchising. Furthermore, it examines the debt to equity ratio and the valuation of shares, including net asset value and price-earnings ratio, to assess the company's financial health and market performance. The conclusion summarizes the key findings, noting areas where Costa Coffee excels and where it may underperform compared to market standards.

CORPORATE FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................2
TASK 3............................................................................................................................................3
TASK 4............................................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
INDEX OF TABLES
Table 1: Ratio Calculation...............................................................................................................2
Table 2: Debt to Equity Ratio..........................................................................................................4
Table 3: Valuation of Share.............................................................................................................4

INTRODUCTION
Costa coffee is a leading brand of Britain. The report is based on the Costa coffee. Report
describes about reasons of chose the particular company and the financial ratios of the company.
It describes that what are the different sources of finance where company raise the funds. It
shows net present value as well as the price earning ratio of the Costa coffee.
TASK 1
Costa coffee is a British multinational coffee house company, and a wholly owned
subsidiary of Whitbread. It is the second largest coffee house chain in the world and the largest
in Britain, so behind this reason the Costa Coffee is chosen for this case. The particular company
is chosen for the case study because it is a famous brand which is associated with high quality. It
has products that boast of a very powerful retail (Hausman, 2012). Another reasons for choose
the company are it has a reputation for value of money, convenience and a wide variety of
products over the world as well as it has grown significantly over the years, and has experienced
global expansion. It serves high quality at the affordable price, so due to this all reasons the
Costa coffee is selected for this case.
TASK 2
Table 1: Ratio Calculation
2012 2013 2014 2015 2016
Current assets 148 171 196 164 245
Current liabilities 368 409 475 584 693
Current ratio 0.4 0.42 0.41 0.28 0.35
Net profit 267 304 328 370 391
Net sales 1778 2030 2294 2608 2922
Net profit ratio 15.02% 14.98% 14.30% 14.19% 13.38%
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Gross Profit 1490 1680 1990 2275 2554
Net sales 1778 2030 2294 2608 2922
Gross profit ratio 83.80% 82.76% 86.75% 87.23% 87.41%
Net income 267 304 328 370 391
Shareholder's Equity 1277 1535 1774 1972 2403
Return on Equity
ratio 20.91% 19.80% 18.49% 18.76% 16.27%
Current Ratio: Current ratio is a liquidity ratio that measures whether a firm has enough
resources to meet its short-term liabilities (Lee and Heo, 2016). It is calculated on the basis of
current assets and current liabilities. In this case the current ratio of Costa coffee is 0.40 in year
2012. It increased up to 2014 and then start to decrease. It decreases from 0.41 to 0.35 in year
2014 to 2016. The benchmark of the ratio is 2:1. Here the company is not performing well
according to the ideal ratio. Company is performing poorly in the industry or market because it is
not achieving the benchmark of current ratio.
Net Profit Ratio: Net profit ratio is the ratio of after tax to net sales. It is a popular ratio
that shows relationship between net profit and net sales (Uechi and et.al., 2015). The ideal ratio
or benchmark of net profit is 10-15%. In this case the net profit is continuously decreasing but
according to the ideal ratio it is performing well in the market.
Gross Profit Ratio: Gross profit is a financial metric used to assess a company's financial
health and business model by revealing the proportion of money left over from revenues after
accounting for the cost of goods sold (Brigham and Ehrhardt, 201). The benchmark of gross
profit is 70-75%. According to benchmark the Costa coffee is performing very well in market. It
has more than 80% gross profit every year.
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Return on Equity Ratio: It is a profitability ratio that measures the ability of a firm to
generate profits from its shareholders investment in company (Brigham and Daves, 2012).
Benchmark of this ratio is 22-25%. According to this company is underperforming in the market.
TASK 3
Sources of Finance of Costa Coffee: The Costa coffee raise funds from the different sources
during the past five years, the sources are as given below:
Ordinary Shares: The Costa coffee company is raising funds from the equity shares from
last five years. In this equity shares are issued in the market through IPO and FPO process. Here
company issues preferences shares, equity shares etc.
Loan Stock: Loan stock is long-term debt capital raised by the company for which
interest is paid, usually half yearly and at a fixed rate (Moffett, Stonehill and Eiteman, 2014). In
this there are debentures for which the coupon rate of interest can be changed by the company, in
accordance with changes in market rates of interest.
Bank Lending: Borrowing from banks are an important source of finance to companies.
Here the Costa coffee company is raising funds from more than past five years from the Banks.
Financial Institution: The coffee company is raising funds from the financial institutions
which provide the funds to the companies (Liao and et.al., 2012).
Franchising: The company is having franchises in many countries, by which it raises the
funds. Franchising is also the best way for raise funds in business.
Table 2: Debt to Equity Ratio
2012 2013 2014 2015 2016
Debt 530 503 433 512 873
Equity 1277 1535 1774 1972 2403
Debt to equity ratio 0.41 0.33 0.24 0.26 0.36
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Debt to Equity Ratio: It is a measure of the relative contribution of the creditors and
shareholders in the capital employed business. The ideal ratio of this is 0.5:1. Here the company
is not performing well in market. The debt is high compare to equity in this coffee company.
TASK 4
Table 3: Valuation of Share
2012 2013 2014 2015 2016
Total assets 2960 3175 3348 3734 4405
Current liabilities 368 409 475 584 693
Outstanding shares 1564 2530 3744 4717 4401
Net asset value 1.66 1.09 0.77 0.67 0.84
Stock price 1589 2530 3744 4713 4120
Earning per share 0.76 0.85 0.91 1.02 1.08
Price Earning Ratio 2090.79 2976.47 4114.28 4620.59 3814.81
Net Asset Value: It is the value of an entity's assets minus the value of its liabilities
divided by outstanding shares. In Costa coffee company the net asset value is low which shows it
is not performing well.
Price Earning Ratio: PE ratio is the ratio of a company's stock price to the company's
earning per share. Higher the PE ratio is better for the company. In this case the PE ratio of
company is better so as per this the company is performing well.
CONCLUSION
From the above report it can be concluded that the Costa coffee company is performing
well in the market but at some criteria the company is underperforming compare to the market or
industry. In this case the company is using different sources of finance to raise funds in business.
As per the valuation company is underperforming in net assets but having high PE ratio.
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