Acme Food Company: Financial Strength Analysis of Target Companies

This memorandum presents a financial strength analysis of three target companies—Astrobucks, White Mountain Coffee, and Krunchy Krust—for the Acme Food Company's potential acquisition. The analysis, conducted to guide the acquisition decision, examines the financial health and performance of each company using balance sheet and income statement data. Key financial ratios, including current ratio, debt-to-assets, debt-to-equity, gross profit ratio, operating profit ratio, and net profit ratio, are calculated and compared to assess short-term solvency, capital structure, pricing strategies, and profitability. Additionally, return on assets and return on equity are evaluated to determine the efficiency of asset utilization and actual return on investment. The analysis concludes that while Astrobucks has a strong market share, White Mountain Coffee offers a more favorable return on investment, making it the recommended acquisition target.

Running head: FINANCIAL STRENGHT ANALYSIS
Financial Strength Analysis
Name of the Student:
Name of the University:
Author’s Note:

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MEMORANDUM
To: The board of directors
From: [Name, Designation]
Date: 27 August 2019
Subject: Financial strength analysis of the companies
Introduction:
This memorandum is prepared to analyze the financial strength and financial stability of
the target companies for acquisition decision. Before taking a decision of acquisition of a
company various available options and the value of the business need to be analyzed and based
on the analysis, the optimum decision should be taken for acquisition of the company having the
maximum value of the business and future profitability.
Details of the target companies:
There are two ways of growing business, one is the generic route and the other is the
indirect route. In generic route, business organizations expand their business operations through
plaguing back their earnings into the business. On the other hand, acquisition of companies is an
indirect route of growing business strategies, companies acquires all the assets of an existing
business unites to gain access to the assets and markets of the target company. The Acme Food
Company wants to enter into the upscale coffee market. Three best brands in the coffee and
beverages are available for acquisition, which are, Astrobucks, White Mountain Coffee and the
Krunchy Krust. White Mountain Coffees is an established and renowned coffee chain based on

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USA and they are having international presence. Astrobucks is also an international brand in the
coffee chain and having their outlets in various countries. Krunchy Krust is also in the same
industry and performing well since the last couple of years. In the following parts of this memo,
their financial health and financial stability have been analyzed and presented.
Financial Health of the target companies:
Financial health of the companies can be analyzed from the balance sheet information.
Balance sheet information can be computed to interpret the financial health and solvency of the
company. In the following table, some of such important balance sheet ratios have been
presented for an easy comparison of financial health of the three target companies.
Key Balance Sheet Figures
(Figures are in thousands)
Astrobuck
s
White
Mountain
Krusty
Krunch
Total Assets 2,729,746 59,990 410,487
Current Assets 924,029 22,612 147,094
Fixed Assets 1,805,717 37,378 263,393
Total Liabilities 647,319 24,842 137,135
Current Liabilities 608,703 13,354 59,687
Long term Liabilities 38,616 11,488 77,448
Net Worth 2,082,427 35,148 273,352
Ratios:
Current Ratio 1.52 1.69 2.46
Debt to Assets 0.24 0.41 0.33
Debt to Equity 0.31 0.71 0.50
The Astrobucks is having the highest net worth while the White Mountain Coffee is
having the lowest net worth. Net worth is the difference between the total liabilities and total
assets and it is the intrinsic or true value of the business. There for in terms of net worth or net
value of assets, the Astrobucks is in a better position. Current ratio is a measure of short-term
solvency, and the Krusty Krunch is having the highest current ratio of 2.46:1. In terms of debt to

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assets, the Asteobucks is in a better position as compared to other two companies. Debt to equity
is one more parameter, which explains the capital structure of the company. Astrobucks is having
the lowest debt to equity ratio, which indicates a high long-term solvency. Therefore, Astrobucks
is having greatest and favorable parameters expressing the financial health of the company, it can
be said the Astrobucks is having a good financial health.
Financial performance analysis:
Fro a conscious decision about the acquisition of a business, the profitability and the
future prospects and growth of the company must be analyzed. Income statement figures can be
used for analyzing the profitability and or projecting the future growth of the business. In the
following table some of such important income statement figures have been analyzed and
presented comparatively for interpreting and understanding the profitability and future prospects
of the three target companies.
Key Income Statement
Figures (Figures are in
thousands)
Astrobucks White
Mountain
Krusty
Krunch
Sales Revenue 4,075,522 116,727 491,549
Gross Profit 2,389,594 49,011 110,060
Operating Income 386,317 13,121 59,817
Income Before tax 436,335 11,511 54,773
Net Income 268,346 6,266 33,478
Ratios:
Gross Profit Ratio 58.63% 41.99% 22.39%
Operating Profit Ratio 9.48% 11.24% 12.17%
Net Profit Ratio 6.58% 5.37% 6.81%
In terms of total sales, the Astrobucks is having the highest volume of sales and the
White Mountain is having the lowest volume of sales. Volume of sales indicates the demand and

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market share of the company. Therefore, the Astrobucks is having the highest demand for their
products and they are having the highest market share in the industry. Gross profit ratio indicates
the pricing strategies and the efficiency in direct cost management. The Astrobucks is having the
highest gross profit margin of 58.36%, which indicates their efficient pricing strategy and cost
effectiveness. In terms of operating profit and net profit, the Krusty Krunch is having a good
mark but the Astrobucks is having a significant amount of profit in dollar value. Therefore, the
Astrobucks can be considered as more profitable and sustainable business situation than the other
companies can.
Return on assets and return on equity are two more important parameters which need to
the considered for analysis of the financial health of the company. It expresses how much the
business is able to earn income as a percentage of the invested capital or value of assets. Return
on assets is the measurement of management efficiency, which expresses the efficiency in
utilization of the assets of an organization for the business operations with an objective of
generating revenues and earning higher amount of net income. On the other hand, the return on
equity is a more relevant and relative measure of actual return on investment as the equity is the
net worth or net investment of a company. For a valid comparison of their return on investment
following two ratios can be cited.
Feasibility and return ratios Astrobuck
s
White
Mountain
Krusty
Krunch
Return on Assets 14.15% 21.87% 14.57%
Return on Equity 18.55% 37.33% 21.88%
White Mount is having the highest return on assets and the Astrobucks is having the
lowest return on assets. In terms of return on equity, the White Mount is having the highest

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return of 37.33%. These two parameters interpret the actual profitability with respect to the
investment and the white mount is having the favorable figures for these two parameters. Hence,
it can be recommended to go for acquisition of the White Mountain Coffee, which can generate a
good return for their investments.
Conclusion:
From the above analysis it can be concluded that, before making a decision of acquisition
of any existing company or business units, their financial health, financial strength and
profitability must be analyzed and well understood, otherwise, the investment decision may lead
to a big failure for the company. To make such an analysis various balance sheet and income
statement information can be used and with the help of certain balance sheet ratios the key
figures can be well interpreted. Based on the balance sheet figures and computed ratios for the
three target companies, it can be concluded that, thought the Astribucks is having a good market
share and profitability, but compared to their investment, it is less feasible than the White
Mountain have. Therefore it can be recommended to go for acquisition of the White Mountain
Coffeee.
Signature
[Name, Designation]

6COMPANY ACCOUNTING
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