Financial Performance Analysis and Decision Making for Roast Ltd.

This report provides a comprehensive financial analysis of Roast Ltd., a UK-based coffee chain, focusing on financial decision-making. It begins with an executive summary and an overview of the coffee house industry in the UK. The main body delves into a detailed analysis of Roast Ltd.'s financial performance using profit and loss statement analysis, balance sheet analysis, and cash flow statement analysis, employing ratio analysis techniques to assess profitability, liquidity, and efficiency. The report also examines the application of investment appraisal techniques to support financial decisions, including forecasting and the identification of different sources of finance. The analysis reveals key trends in Roast Ltd.'s financial health and provides insights that could inform strategic decisions, particularly regarding potential acquisitions.

Financial Decision Making

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................4
MAIN BODY...................................................................................................................................4
PART 1: Review about Coffee House Industry...............................................................................4
PART 2: Analysis of business performance....................................................................................5
2.1 Profit and loss statement analysis of Roast Ltd. Through usage of ratio analysis technique
.....................................................................................................................................................5
2.2 Analysis of Balance sheet through usage of ratio analysis technique...................................7
2.3 Cash Flow Statement analysis with the help of operating cash cycle computation and
dividend policy............................................................................................................................9
PART 3: Application and determination of contribution of Investment Appraisal techniques.....12
3.1 Forecasting about management along with usage of investment appraisal-techniques......12
3.2 Identification of different sources of finance......................................................................13
REFERENCES..............................................................................................................................15
.......................................................................................................................................................15

EXECUTIVE SUMMARY
Financial decision is a process that contains the responsibility in respect to all the
decisions that have relation with liabilities and stakeholders equity of an organisation along with
issuance of bonds. These are of three different types and known as application, procurement and
distribution of funds. This has significant amount of contribution behind the attainment of
organisational goals. The organisation considered under this report is Roast Ltd. It is a cafe chain
that has operations in all over UK. The main aim of this report is about the analysis of the final
accounts of an organisation that assist in formulation of decisions by the management of
Starbucks.
The aspects covered in this report includes analysis of the facts about industry and
determination of business performance with the help of different type of ratios. Also, covers the
application of investment appraisal-techniques that assist in building investment related
decisions.
MAIN BODY
PART 1: Review about Coffee House Industry
It is important to analyse industry as this will help to get the information in relation to the
aspects present in market along with their impact. The contribution of this exercise is optimum in
nature regarding development of the business activities. It assist the management in formulation
of their different decisions along with strategies that enable the organisation to attain
sustainability in industry. In the current report, analysis is done in respect of Coffee House
Industry of UK. The gathered information in relation to such analysis is presented below:
 This industry is large in nature and having significant contribution in the economy of UK.
The number of business organisation operates in this industry are huge in amount and
consists both registered or unregistered. Many organisations has diversified business
activities and indulge in the selling activities of cold and soft drinks too.
 Ascertained from the analysis that there are many factors upon which success of this
industry depends includes social and economic condition of UK. The society and
individuals of UK are prefer to consume coffee. Also, the positive trend is visible in per
capita income. This shows the positive sign for the growth of this industry along with all
the organisations prevails in same (Current coffee house industry of United Kingdom.

2019). The sound economy of UK, assist the organisations under this industry to focus
over expansion along with improvement in quality of their products and services that
directly contributes in the growth towards positive direction.
 Increment in demand towards coffee is common in this industry. This would be the
reason that organisations offering coffee has large number of customers along with high
market share.
 One of the main challenge that have been faced by Cafes Coffee Shops or business
industry is emergence of more substitute beverages which turn to decline sales and
profitability of company (Correia, Dussault and Pontes, 2015).
 Variation in minimum wages also have a main effect on operations of an organization
profitability. Beverages industry mainly employ a fairly huge range of low-paid workers.
As it will help an organization in development of its growth and success.
 One of the best advantage or benefit for Cafes Coffee Shops is to growth their business
operations in various nations like India, China etc. These counties have biggest
population as compare to other nation.
PART 2: Analysis of business performance
2.1 Profit and loss statement analysis of Roast Ltd. Through usage of ratio analysis technique
Profit and loss statement is one of the main document of the organisation. This contains
the information about the transactions through which an organisation passes off during the one
year of time period. Adherence of all the accounting principles and effective formulation of
profit and loss account provide the information about profit ans loss in year end. The future
contribution of this towards an management is understood from the fact that this will provides an
opportunity to formulate effective budgets that contains reliable and accurate projections
(Epstein, Buhovac and Yuthas, 2015).
In the current report, analysis of profit and loss account of Roast Ltd. Is ascertained for
the purpose of determine its condition in market. The growth of 25.32% was seen in the turnover
of this organisation in between the year of 2017 to 2018. The figure noticed in 2017 was
£2022000 and this was increased in year 2018 and grab the figure of £2534000. The growth is
also visible in the sales of this organisation in percentage of 32.23 in between 2017 to 2018. It
was increased from £1505000 to £1990000. Increasing trend is visible in operating expenses

where it reached to the mark of £477000 in 2018 from £466000 in 2017. The operating of Roast
Ltd. Ascertained in year 2018 was £60000. From the analysis, determined both operating and net
profit of Roast Ltd. presents increasing trend. The operating profit of this organisation increases
and grab the mark of £127000 in year 2018 whereas in 2017 it was only 51000. The net profit of
this organisation also increases in year 2018 as compared to 2017 i.e. 81000 from 36000. This
depicts that overall profitability of the organisation is in increasing and lots of opportunities are
present in market for further growth.
For further performance of more detailed analysis, ratio analysis technique is used (Finke,
2013). The main contribution of application of these ratios is that help to determine the relation
in between different elements of P&L account of one or more period of time. Application and
interpretation of calculation regarding the Roast Ltd is presented below:
Gross Margin: The main contribution of calculating this ratio is about attainment of
actual sales figure attained y an organisation after the subtraction of cost of sales from overall
turnover. Calculation of gross margin in relation to Roast Ltd is presented below in the tabular
format.
(£'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%
Interpretation: It is ascertained from the above analysis that gross margin of Roast Ltd.
Was decreased in year 2018. The ratio determined in year 2017 was 25.51% whereas it was
reduced and noticed as 21.47% is year 2018. This represents declining capacity of the
organisation to ascertain gross profit after deduction of operating and non operating expenses.
Operating profit ratio: Results of this ratio depicts the ability to earn profits from the
performance of operating functions of an organisation (Kotlar and et. al., 2014). It is calculated
after subtraction of operating expenses but before to the interest costs and taxes. This ratio
depicts the operational effectiveness of the organisation. Calculation related to this ratio is
presented below:
(£'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%
Interpretation: It is observed from the above calculation of ratio that operating profit
capacity of this organisation is just doubled in year 2018. The ratio attained in 2017 was 2.52%
that increased and grab the mark of 5.01% in 2018. This depicts that there is increase in
operational effectiveness of the organisation in year 2018 through which they able to generate
large number of profits. The reason behind such increment was presence of external factors and
their positive impact over their functionality of an organisation.
Net-profit Margin ratio: The main contribution of this ratio is to determine the actual
profitability capacity of the organisation. This will also depicts the relation in between the profit
and turnover aspect of an organisation (Lee and Lee, 2015). Calculation related to this ratio in
respect to Roast is presented below.
(£'000) Year - 2017 Year - 2018
Net profit Allegra 36 81
Net sales 2022 2534
Net profit ratio = Net Profit /
Net Sales
1.78% 3.20%
Interpretation: It is attained from the above determined information that ability of an
organisation is just doubled to generate net profit. The ratio ascertained in year 2018 was 3.20%
which was increased as compared to 2017 from 1.78%. This represents that overall profit
generation capacity of an organisation due to the reason of improvement in operational
efficiency.
From overall analysis of Profit and loss account determined that it is good option for
Starbucks to acquire Roast Ltd as the operating and net profit capacity of this organisation is in
increasing trend and having the ability to earn significant amount of return in future.

2.2 Analysis of Balance sheet through usage of ratio analysis technique
Analysing financial position of an organisation is beneficial in nature regarding
improvement of the decision making of brokers, bankers, investors, company and financial
institutions. Balance sheet is the effective document that include information about many aspects
associated with the organisation. This help to analyse assets and liabilities both along with their
contribution towards formulation of organisational capacity to perform well. The ratios that
would be beneficial in analysis includes current, liquid and working-capital. These aid in
successful determination of short and long term financial strength of an organisation (Montford
and Goldsmith, 2016).
From analysis of the balance sheet of Roast Ltd. Determined its PPE(Property, Plant and
Equipment) value was increased from £670000 to £996000 in between the time period of 2017
to 2018. The reason behind that was organisation's capital expenditure for the purchase of same.
Decrement was seen in year 2018 within the figure of cash and cash equivalent as it observed nil
whereas in 2017 it was £134000. Increment is seen in year 2018 of retained earnings and current
assets. Share capital remains same in both year as no new share was issued. Long term
borrowings of an organisation was increased in year 2018. The other aspects of liabilities that are
increased in 2018 includes bank overdraft, trade creditors and overall aggregate liabilities. In
respect to Roast Ltd, Balance sheet is further analysed with the help of Ratios.
Current ratio: This help to determine the ability of an organisation to pay off short term
liabilities against to their assets (Muradoglu and Harvey, 2012). Ideal ratio is 2:1.
(£'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
Interpretation: It is interpreted from above calculation that ratio declines in year 2018.
This represents that Roast Ltd. Ability decreases to pay off their short term obligations.
Debt to equity ratio: Determination of this ratio help to gather knowledge regarding
associated risk and beneficiaries. Low ratio depicts less risk and high benefits whereas increased
shows vice versa.

(£'000) Year - 2017 Year - 2018
Debts 238 583
Equity 779 860
Debt to Equity Ratio =
Debs / Equity
0.3055 0.6779
Interpretation: It is gathered from the above calculation that ratio is increased. This
represents high risk due to having increased number of creditors.
ROCE: This ratio depicts the organisational ability to generate profits from the
utilization of their resources. Provide information about relation between probability and
efficiency (Porter and Norton, 2012).
(£'000) Year - 2017 Year - 2018
Operating profit 51 127
Capital employed 879 1135
ROCE = Operating Profit /
Capital Employed
5.80% 11.19%
Interpretation: It is ascertained from the above calculation that ratio increases that
depicts high operational efficiency along with optimum usage of resources to generate profits.
Overall, positive for Starbucks to acquire Roast Ltd. In future as able to grab large market
share in market.
2.3 Cash Flow Statement analysis with the help of operating cash cycle computation and
dividend policy
Cash Flow statement includes all the transition of an organisation during the one year of
time period made in cash. This will have huge contribution to assist the management in respect
to determine the liquid position of an organisation to effectively operate daily business activities
without any hindrances (Rao and Tilt, 2016). All the changes related to cash either in the form of
in or out within the organisation included under this statements. In future, this contributes
towards the attainment of the figure of actual free cash flow of company. The main reason
behind the performance of all these functions is about reporting of financial terms related to the

organisation. The different kind of transactions that are considered under this includes proceeds
of bond, capital gain, sales of assets, key debt service, personal expenditures etc.
In relation to Roast Ltd., ascertained from the analysis of cash flow statements that
operating activities depicts the negative balance in year 2018 of £24000. The aspect that was
determined from this fact that outflow activities of cash are more in comparison to inflow. The
major outflow of cash was done in respect to the purchase of inventories of £179000 and
increment in the value of trade receivables by £55000. The investing activities of Roast Ltd also
shows the negative balance of £358000 due to heavy investment in property and plant &
equipments. Increment is visible in long term debts of the organisation and that would be the
reason that financing activities depicts the figure of £175000. In last, from the calculation of the
all three activities determined that negative balance was ascertained in respect to cash and cash
equivalents of £73000. This presents that liquidity position of the organisation is not good and
unable to pay off their short term liabilities effectively.
Operating Cash Cycle: This exercise help in determination of the time period required
for the conversion of stock again in liquid funds and money. The calculation of this cycle
presents an ability of Roast Ltd. Regarding the conversion of their stock into monies along with
carrying on the business regularly without any interruptions (Richard, Kirby and Chadwick,
2013). The main benefit ascertained from this is about availability of overall cash funds within
the business. The three main parts which are included under this cycle are named as outstanding
period, sales outstanding period and payable outstanding period. The formulation that aid in
calculation of this cycle is presented below:
Operating cash cycle = Days inventory outstanding + days sales outstanding - days
payable outstanding.
Its calculation provides an insight into overall performance of an organisation. Smaller
the cycle presents organisational ability to fulfil obligations properly and vice versa. Calculation
in respect to Roast Ltd. Through usage of this method is presented below:
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
Interpretation: It is determined from the above calculation that operating cash cycle of
Roast Ltd . Is 13 days. This depicts that organisation is able to convert stock into cash within 1 3
days. It is sufficient in nature but can be optimised.
Dividend Policy: This help in management of dividend-payout by an organisation to its
shareholders (Saxonberg and Sirovátka, 2014). No divided policy is adopted by Roast Ltd. As
dividend-payout is zero. In year 2018, no divided was paid by the organisation to its shareholders
PART 3: Application and determination of contribution of Investment
Appraisal techniques
3.1 Forecasting about management along with usage of investment appraisal-techniques
Monetary is a crucial factor so management of Roast limited is more focused to raise
about £ 500 million as a capital between the period of 5 years. With such huge amount of cash
flow it is easy for organisation to raise capital in proper manner. The estimate idea to collect cash
receipt is £ 60, £ 112, £ 148, £ 180 and £ 224 million. Further, this predication is wrong for the
year 2018 due to decline in the gross margin and cash flow of organisation. Therefore, with the
appropriate forecast it is easy to readjust company's current performance.

Appraisal techniques are consider more useful tools which are applied by an organisation
to viability of any financial investment and decision (Starcke and Brand, 2012). There are
various techniques of investment appraisal which are determined as below:
Payback period: This introduces to the amount of time period that takes to recover the
investment cost. As stated in exhibit:3, payback period of company is 4 year. This clearly
explains that an organisation would recover its cash outflow which is £ 500 in four year. One of
the main benefit of this technique is it is a a casual and simplex approach. Main drawback of this
tool is in this time value of money is completely ignored.
Accounting rate of return: This is also known as an average rate of return which is a
financial ration and applied in capital budgeting (Epstein, Buhovac and Yuthas, 2015). As stated
in exhibit:3, average rate of investment is around 18%. It is a favourable amount and also below
the forecasted average rate-of-return e.g. 10% so investment is feasible as it is effective for an
organisation to get better return for investment. Main advantage of this technique as it clearly
explain level of profitability for any project of an organisation. Drawback of this tool is it also
ignores time value of money.
Net present value: This introduces as a differences between the present value of cash
inflow and cash outflow over a time period. According to the figures shows in exhibit:3 net
present value of company project is £ 110 million at discounting rate of 5%. It is a favourable
amount that indicate financial viability of any investment. Main advantage of this technique as it
help an organisation in measurement of profitability level. Estimation of opportunity cost is a
major drawback of Appraisal techniques.
3.2 Identification of different sources of finance
In an organisation, the aspect of finance plays a significant role as it lead them to manage
and handle its all managerial as well as operational function in a smooth manner (Kotlar and et.
al., 2014). However, in regard of Roast Ltd, it is desired to expand its market division into Italy,
for which the overall amount which company has been estimated that £400k. Hence, in order to
accomplish the business goal in an effective manner, Roast Ltd, take an initiative to approach
various kind of finance sources which are as follows with their benefits and drawbacks:
Commercial Bank
This source is regraded as one of the most familiar financial institution who deliver the
service of granting loans, accept deposit, offers basic financial products such as saving accounts,

certificates of deposit to individual and businesses. Some of its advantages and disadvantages are
as follows:
Benefits: The core strength of commercial bank is that it does not require any kind of
formalities like issue of prospectus and underwriting for raising loan from banks. Along with
this, it is also viewed as a flexible source of finance because the loan amount varies as per
business needs and also can repaid in advance in case of no requirement of fund (Lee and Lee,
2015).
Drawbacks: The major shortcoming of commercial bank is that it is only available for
short durations and its extension or renewal may be uncertain and difficult. Moreover, it is more
expensive than any other traditional bank accounts (Montford and Goldsmith, 2016).
Retained Earning
It is one of the long term finance source which is considered as a portion of business
profit and it is distributed as dividend to shareholders instead of that it will be reserved for the
purpose of reinvestment into business.
Benefits: The foremost advantage that retained earning render to its users is that it does
not involve any kind of acquisition cost that means organisation contains no obligation to pay
any sort of amount in regard of obtaining retained earning. IN addition to this, there will be no
dilution of ownership and control in case the company adopt retained earning and also strengthen
the financial stability in an improved manner.
Drawbacks: Its main weakness is that there is a possibility of facing over capitalization
issue, if an organisation fails to utilise the available sources at optimal level. Additionally,
retained earning does not permit its shareholders to obtain full benefit of actual earnings that not
only impose dissatisfaction among shareholders but also impact negatively over market value of
shares.
Henceforth, it has been signified from the above explained content that there are various
types of finance sources and each of the m are different from each other in terms of features,
function, roles, interest rate and many more (Muradoglu and Harvey, 2012). Hence, commercial
bank is viewed as an appropriate source of finance for Roast Ltd. This is because, it enable them
to obtain loan in lower rate and also can modify the interest rate as per its business condition or
activities that drive them to manage its financial performance in an improved mode.

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