Financial Decision Making: Starbucks' Takeover of Roast Ltd Analysis

This report provides a comprehensive financial analysis of Roast Ltd, a UK cafe franchise, focusing on financial decision-making in the context of a potential Starbucks takeover. The analysis includes an industry review, examining market trends and challenges within the coffee shop sector. The core of the report analyzes Roast Ltd's financial performance through its profit and loss statements, balance sheets, and cash flow statements, utilizing financial ratios to assess profitability, liquidity, and solvency. The report also explores investment appraisal techniques, such as dividend yield, NPV, and payback period, considering their advantages and disadvantages in the context of Roast Ltd. The findings aim to assist Starbucks in making informed decisions regarding the acquisition of Roast Ltd, offering insights into the company's financial health and potential for growth.

Financial Decision Making

Contents
EXECUTIVE SUMMARY.........................................................................................................................4
MAIN BODY..............................................................................................................................................4
Part 1. Industry Review:..............................................................................................................................4
Part 2. Business Performance Analysis:......................................................................................................5
2.1 Analysis of profit and loss account statement....................................................................................5
2.2 Statement of financial position:.........................................................................................................7
2.3 Statement of Cash flow....................................................................................................................10
Part 3. Investment Appraisals:...................................................................................................................14
3.1 a Management forecast....................................................................................................................14
3.1 b Investment appraisal technique:...................................................................................................15
3.2 Source of finance.............................................................................................................................16
REFERENCES..........................................................................................................................................18

EXECUTIVE SUMMARY
Financial decision-making refers to a systemic procedure that contributes to choices about
the obligations, securities and stock funds of the organization (Baker and Ricciardi, 2014). The
study summarizes the evaluation of Roast Ltd's financial reporting and some other fiscal details,
the UK cafe franchise, with the intention of assisting Starbucks in choice-making on the takeover
of this cafes chain. The research also discusses various methods to portfolio valuation, including
reporting dividend yield, NPV and pay-back period, thus keeping in mind the drawbacks and
advantages of these methods in Roast Ltd sense.
MAIN BODY
Part 1. Industry Review:
• Cafes Coffeehouses or retail sector includes combined unlicensed company dealing in the
distribution of coffee including cold beverages as well as other beverages.
• Growth in the sector is influenced by both financial and social factors, like rises in average
annual average income, preferences for coffee shops across alternative social media, or rising
competitive pressures for coffee flavors and suppliers.
• The industry has expanded greatly during the last few years, guided by enhanced expectations,
as coffee cultivation became more popular amongst buyers
• Market revenues are expected to enhance from 2019-20 to about £6.6 billion at an exacerbated
annualized of 4.8 per cent over five years, plus 1.9 per operating profits over the present year.
• Multiple challenges are also facing the market, including the formation of more direct
replacement drinks turn leads to a decrease in national commitment to coffee.
• The greatest benefit for this industry is the expansion of its companies into separate companies
such as China, India, in which the workforce is massive (Boyle, 2013).
• The Caffe Nero Group, Costa Limited, Pret-A-Manger and others are businesses with either the
total market dominance across the UK in this economy.

• Increases in average wages will have a huge impact on the degree of productivity of the market
managers. Coffee houses and coffee company usually hire a relatively large variety of tight-paid
workers, and the labor costs are a significant percentage of net income by traders.
• Domestic cost of food and un-alcoholic drinks covers products bought from supermarkets,
cafes, and stores. Even though some of these expenditures benefit industries that compete with
the shops-coffee shops market, higher overall household consumption on these goods usually
suggests better opportunities for market businesses.
Part 2. Business Performance Analysis:
2.1 Analysis of profit and loss account statement
The P&L statement evaluation involves examining the various row components in a
document, and also monitoring patterns for similar line items over many periods. This approach
is being used to recognize a business's value systems as well as its ability to make money
(Huston, Finke and Smith, 2012). It helps to assess the degree of likelihood of a business over a
given time. This research helps to identify the projected success of the company and frames a
strategy with more credible and precise forecasts.
In this sense, Roast Ltd's revenue report review reveals that the company's turnover grew
from £2022000 to £2534000 (25.32 percent growth) between 2017 and 2018, while the
company's sales cost improved from £1505000 to £1990000 (32.23 percent growth) between
2017 and 2018. Operating profits for the Organization in 2018 was 60,000. Although production
costs rose from £466,000 in 2017 to £477,000 in 2018. At 2018 and 2017, Roast Ltd posted
annual profit of 127000 and 51000 suggesting an upward trend, separately. The gross net income
of the company in 2018 and 2017 was 81000 and 36000 accordingly, and indicates the relative
performance of the organization that will be enhanced.
Introduction of specific ratio will be beneficial for more successful review of the business's
P&L report. Ratio helps understand the success of the organization when examining main
relationships in one or even more segment income statements between various recorded objects
(Lee and Lee, 2015). Below are some ratios relevant to Roast Ltd's revenue-statement evaluation,
as adopts:

Gross Margin: This shows a particular share of the revenue that the business reported
after removing operating costs from the total retention. Under chart presents the gross margin
estimate of Roast Ltd as per the revenue and gross margin statistics published, as obeys:
(£'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%
Review of the business's total margin(percent) shows that the gross margin company gained in
2018 was 21.47 percent, which in 2017 was 25.57 percent, suggesting a declining trend. It
ensures that the productivity of the corporation in providing total revenue has been decreased
before subtracting any operating or non-operating expenses.
Operating profit: This ratio covers gross income company gained since paying all of its
operating costs even before investment expenses and taxes. That supports to understand the
operational efficiency of an organization (Lusardi, 2012). The table below shows the operating
profit ratio of Roast Ltd for two years, as obeys:
(£'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%
The operating ratio of the business in 2018 and 2017 is 5.01 percent and 2.52 percent,
pointing to a growing trend. Another pattern indicates that the company's capacity to produce

income has been improved through its net cash. This also clearly means that the operating costs
of the company have been reduced and that total revenues have therefore improved.
Net-Profit Margin Ratio: The most important ratio that helps to assess the overall net
risk or position status of a product (Montford and Goldsmith, 2016). The ratio indicates the
correlation between aggregate-profits and business aggregate-turnover. The table given shows
the net-margin ratio of Roast Ltd, as obeys:
(£'000) Year – 2017 Year - 2018
Net profit 36 81
Net sales 2022 2534
Net profit ratio = Net Profit /
Net Sales
1.78% 3.20%
As shown above, the net profit ratios of the table business in 2018 and 2017 are 3.2 percent and
1.78 percent. That explicitly says that the net viability standard of the organization has been
increased. Throughout the time, the company's net-margin development potential has been
improved and will be advantageous in respect of possibility for takeover purposes.
2.2 Statement of financial position:
Assessment of the financial reporting condition helps equity traders, equity analysts,
creditors, financial and business companies or corporations to efficiently determine the viability
value of the capital invested in a particular business or to make choices such as takeover or
consolidation. Capital structure analysis may be defined as a pure measurement of the properties,
responsibilities and resources of a company (Muradoglu and Harvey, 2012). This audit usually
takes place at designated time periods, such as annual or monthly. The method of evaluating
balance sheets is being used to derive specific numbers on the company's earnings, resources and
responsibilities. The most important aspect to be kept in mind in the review of financial reports is
whether or not companies should incur penalties to remain in successful service. Current ratio,
solvent or accelerated ratio and free cash flow will serve to rapidly calculate the organization's
short- and lengthy-term financial clout.

In this context, as a result of the review of the budget aspects mentioned in Roast Ltd's
Report of Financial Condition, the business produced capital spending on the acquisition of
Land, Plant or Equipment as the PPE valuation of the company was improved from £670,000 to
£996,000 between 2017 and 2018. One interesting point with this is that the money and
marketable securities of the business, which in 2017 was £134,000, were listed as zero in 2018,
indicating that the firm used all of its financial resources throughout 2018. Although current total
amount of wealth was achieved at £447,000 in 2017 which was £347,000. No shares were issued
by the business throughout 2018 as the stock equity of both years of the business is £200000. In
2018, the accumulated earnings of the net income or other capital business were registered at
£660,000, which was £579,000 in 2017. Hence cumulative stock funds are rising from £779000
to £860000.
Long-term interest payments of the business are rising dramatically, as lengthy-term
liabilities of the firm were exceeded at £275,000 in 2018, which was £100,000 in 2017. A
banking debit allowance of £73,000 was also purchased by the organization in 2018. Although
exchange stakeholders for the business were adjusted from 138000 to 235000 during most of the
2017-2018 timeframe. In the year 2017 to 2018, net debts were raised about £345000 (from
£238000 to £583000). In addition, many key factors are described in the study for better
explanation of the corresponding overall financial condition when considered significant budget
items of the financial statements.
Current Ratio: This is a quick-term leverage calculation ratio that demonstrates the
government's ability to paying off all its existing obligations and obligations with all its existing
assets. It is a important ratio for determining whether or not the business is comfortable
financially. The current ratio of 2:2 is widely recognized as an advantageous amount which
essentially means that the current assets of the business ought to be twice or more than twice the
current liabilities of the business (Nga, and Ken Yien, 2013). The table above shows the present
distribution of Roast Ltd for 2017 and 2018 as obeys:
(£'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 information in the figure on the current company proportion indicates that the
current job ratio in 2017 is higher than 2 i.e. 2.51 levels, whereas in 2018 it has fallen to 1,45
times. Having a reduction in the current ratio means that there has been a decline in the ability of
the business to meet existing liabilities with current assets.
Debt Equity ratio: The debt-equity ratio means total value of loans, or gross interest
payments, based on the total value of the capital. They derive these figures from the balance
sheet. Note that the ratio does not actually tell us how poor or successful an inventory is since no
financial indicators such as total value or share price are used here. Decreased estimates for the
debt-to-equity ratio indicate less uncertainty and that is helpful (Petersen, Kushwaha and Kumar,
2015). The enhanced savings-to-equity ratio is detrimental, because it means that companies that
rely mostly on external investors and are thus at elevated risk, especially higher inflation. An
upward trajectory in the debt-to-equity level is disturbing, because it suggests a rise in the
percentage of an assets of the company financed through liquidity position.
(£'000) Year – 2017 Year – 2018
Debts 238 583
Equity 779 860
Debt to Equity Ratio =
Debs / Equity
0.3055 0.6779
As numbers suggest the debt-equity ratio of the group has been improved from 0.3055 to
0.6779 between 2017 and 2018, showing that the lengthy-term economic output of the group has
been reduced. For the firm, that is not a good indication as it indicates that monetary flexibility is
also not good.

Return on Employed Capital: Return on Employed Capital (ROCE) is a monetary
measure that contrasts productivity of a company and quality with which it uses its capital. The
ratio measures whether a company is producing income from its capital-investment. The ROCE
metric is also regarded as an important productivity factor, which is often used by investors to
determine portfolio efficacy (Porter and Norton, 2012). Easy discrepancies in asset value and
overall obligations are the resources hired. The description is the 2018 and 2017 Roast Ltd
ROCE, as pursues:
(£'000) Year - 2017 Year - 2018
Operating profit 51 127
Capital employed 879 1135
ROCE = Operating Profit /
Capital Employed
5.80% 11.19%
As the table shown, the ROCE proportion of the business has been raised from 5.80% to 11.19%.
This demonstrates the profitability of Roast Ltd in delivering yield on cumulative resources
engaged as improved. It also reflects that the company is appropriate for business purposes and is
financially stable.
2.3 Statement of Cash flow
A cash flow is an important statement report that includes all improvements in cash all in
or all out to evaluate the business's real earnings growth. Examination of it begins with a starting
sum and creates an ending surplus since accounting for all monetary profits and expenses
accumulated throughout the time (Richard, Kirby and Chadwick, 2013). Cash-flow measurement
is often utilized for financial statement purposes. A firm's cash inflow is the difference between
its excess cash at the beginning of a financial cycle and then at the close of some moment in
time. The income includes dividend income from bonds and selling of resources that compensate
for operational expenses, discretionary spending, main debt repayments, and acquisitions of
resources like equipment.

It can be seen in Roast Limited Business's context that the expected returns from
continuing operations were unfavorable £24,000 in the year-2018. It indicates more activities are
being causing money outflows. Administrative expenditures are primarily induced by the
procurement of sales volumes of £179,000 and by an rise of £55,000 in trade liabilities. Although
the future value from spending operations are unfavorable £358000 due to strong capital
spending in the acquisition of land, capital expenditures business. Rising lengthy-term liabilities
culminated in customer deposits of £175,000 from supporting operations. Money and marketable
securities at the close of last year was minus £73000 when evaluating cash flows from various
activities. This demonstrates that the funding status of the organization is not great as it is not
able to produce cash flows from the corporation.
Operating cash cycle: This is an operation ratio that estimates or determines an
estimated time it takes to turn corporate holdings / receivables into current or cash assets. The
ratio illustrates real cash flow outside the organization and demonstrates how quickly the
company turns all of its assets into cash monies. Acknowledgement of this process is necessary
in order to boost the total specifications of money finances in industry; this process is
categorized in 3 main sections, which are unfinished stockpiles, exceptional periods and unpaid
periods of selling. Here below is formula of operating cash-cycle, as follows:
Operating cash cycle = Days inventory outstanding + days sales outstanding - days payable
outstanding.
The OC offers insight through an organization’s organizational efficiency. Almost all, a
shorter period is favored, suggesting a more stable and efficient enterprise. A shorter time shows
that a company can cover the costs of product easily, and has sufficient capital to meet the
responsibilities. If a company's OC is high it can create cash flow issues. The foregoing are the
operational money-cycle figures of Roast Ltd.
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= 365/ inventory turn over
= 365/ 6.65
= 55 days
Days sale outstanding= 365/ receivable turn over
= 365/ 17.12
= 21 days
Days payable outstanding= 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
From the above estimates of company Roast Ltd's operating cash-cycle, it was calculated
that the average operational credit-cycle of the company is 13 days. The lower period of
operations indicates that the organization is more effective in turning stocks into money. As in
the OCC of the relevant business is 13 days which is sufficient but as per the situation of the cafe
industry this proportion should be optimized further but it is also appropriate to have current
OCC. Company's out sailing measured inventory-days are 29 days and the remaining duration of
Days-sale is 13 days. Though unpaid days-payable are 33 days. Net review reveals that the
business runs successfully as the OCC is at an appropriate stage.
Dividend Policy: This is a strategy which is implemented by the company to control its
percentage of dividend-payout for equity or stock owners. Many analysts say that a payout
strategy may be technically meaningless, as shareholders might sell their portion of stocks or
bonds if they need funds. This has been examined in the respective sector that the sector does not
pursue a divided strategy because the dividend payment of the organization is zero. Roast Ltd
has not paid its investors any dividend sum in the year 2018.
Part 3. Investment Appraisals:
3.1 a Management forecast
Overseeing business unit Roast limited is aiming to make over £500 million in cash
expenditure. With a prediction made over five years from year-2017 to year-2021 on cash flows.
According to the money-inflow or investment of their projected business throughout the
specified timeframe will be £60, £112, £148, £180 and £224 million together. Yet the prediction
has gone very wrong throughout 2017 and 2018. Additional fall in operating margin and adverse

cash flow indicates that the enterprise does not meet these administration estimates. Readjusting
this estimate as per the actual output of the organization is therefore recommended.
3.1 b Investment appraisal technique:
It is known as basic instruments and metrics that are used to determine the feasibility of
any company's annual decisions and investments. Profit margin ratio, net present value, internal
rate of return, payback period, and accounting rate of return are the principal investment-
appraisal methods. They are primarily implemented to determine the success of any new
initiative, such as the decision to acquire or merger (Saxonberg and Sirovátka, 2014). In this
framework, various important portfolio evaluation approaches are discussed as obeys:
Payback period: It simply suggests the period of time required to recover the actual
cumulative associated costs in the expenditure or plan. Literally it determines no. Business will
take years to repay original project contribution. As seen in the exhibit: The payback period for 3
business is 4 years. That specifies that in about 4 years the organization will restore cash
accumulation of £500 million which is so feasible as the payback time is shorter than the total
project duration i.e. 5 years.
 Advantages: It is the easiest and most relaxed solution that involves no complicated
measurement or conclusions.
 Disadvantage: The definition of cash accumulation and moment-value is completely
disregarded in this methodology that decreased its quality.
Accounting rate of return: It's another critical approach that demonstrates how often profit
business could get from any project. Capital ARR is 18 percent. That is a successful profit
number and also underneath the expected ARR i.e. 10 per cent so that investment is profitable
because it is profitable to receive capital in returned type.
 Advantages: This approach is useful for the organization because it explicitly defines the
amount of productivity of any venture or expenditure.
 Disadvantage: This methodology often avoids main elements such as money tracking
error, as credit-flows are not deducted now in this system.

Net present value: Results of this methodology show net profitability of any investment. It
is the most popular and commonly used approach that helps to determine whether or not
expenditure is a profit-making measure. As per the numbers the NPV budget of the organization
is £110 million at a 5 percent discount rate. A positive NPV is an measure of any project /
investment economic viability.
 Advantages: This more reliable portfolio valuation tool, as this approach discounted
earnings at a defined rate with the goal of considering the present value of interest
amount.
 Disadvantage: The biggest downside to this approach is that no particular percentage for
discounting cash flows has been recommended here, so therefore occasionally it can
contribute to unreliability in outcomes.
3.2 Source of finance
The origin of financing chosen by a rental agency affects its financial efficiency, balance
sheet and status of volatility. And the organization will assess the lengthy-term and quick-term
impact of these sources before making any decision regarding the current sources of funding.
Roast Ltd is considering a further investment of £400k in Italy from year-2019 in this sense. As
well as a conversation about various sources of financing proceeds as occurs:
Equity Finance: This is the most value-effective and critical path from which
organization can secure £400k financing and without extra costs. Within this source enterprise
will release its public share. It is a reliable methodology of arranging such a massive investment
profit for the company (WEBSTER, 2014).
 Advantage: The main advantage of an equity stake is not any commitments or liability to
pay the money back provided by this process.
 Disadvantage: The biggest downside of debt financing here is reduction of leverage and
equity stake. Property can be destroyed in the face of unnecessary collective distribution
of stocks. Decentralized management also contributes to the lack of substantive power
over business.

Debt Finance: In contrast to profit, when a business acquires capital by lending to be paid in
full by the business in years to come, it is called debt financing. This can be either safe or
unmonitored. It is a fast origin that Roast Ltd could utilize to purchase funding.
 Advantage: The opportunity to pay off bulky-cost debt is a major advantage of debt
servicing, rising hundreds of euros of mortgage payments. Rising rate of return reduces
corrupt money-flow.
 Disadvantage: A disadvantage from debt funding is that, including profit, companies are
required to start paying back mortgage amount sum. Organizations with deposit-flow
problems can find it difficult to pay back the debt and repayments.

REFERENCES
Books and Journal
Baker, H. K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Boyle, G., 2013. ‘She's usually quicker than the calculator’: financial management and decision‐
making in couples living with dementia. Health & Social Care in the Community. 21(5).
pp.554-562.
Huston, S .J., Finke, M. S. and Smith, H., 2012. A financial sophistication proxy for the Survey
of Consumer Finances. Applied Economics Letters. 19(13). pp.1275-1278.
Lee, S. W. and Lee, K.H ., 2015. Decision Making Model for Selecting Financial Company
Server Privilege Account Operations. Journal of the Korea Institute of Information
Security and Cryptology. 25(6). pp.1607-1620.
Lusardi, A., 2012. Financial literacy and financial decision-making in older adults. Generations.
36(2). pp.25-32.
Montford, W. and Goldsmith, R. E., 2016. How gender and financial self‐efficacy influence
investment risk taking. International Journal of Consumer Studies. 40(1). pp.101-106.
Muradoglu, G. and Harvey, N., 2012. Behavioural finance: the role of psychological factors in
financial decisions. Review of Behavioural Finance. 4(2). pp.68-80.
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.
Petersen, J. A., Kushwaha, T. and Kumar, V., 2015. Marketing communication strategies and
consumer financial decision making: The role of national culture. Journal of Marketing.
79(1). pp.44-63.
Porter, G .A. and Norton, C .L., 2012. Financial accounting: The impact on decision makers.
Cengage Learning.
Richard, O. C., Kirby, S .L. and Chadwick, K., 2013. The impact of racial and gender diversity in
management on financial performance: How participative strategy making features can
unleash a diversity advantage. The International Journal of Human Resource
Management. 24(13). pp.2571-2582.
Saxonberg, S. and Sirovátka, T., 2014. From a Garbage Can to a Compost Model of Decision‐
Making? Social Policy Reform and the C zech Government's Reaction to the
International Financial Crisis. Social Policy & Administration. 48(4). pp.450-467.
WEBSTER, A., 2014. Financial decision making under uncertainty. Academic Press.