In-depth Financial Decision Making and Analysis of Roast Ltd

This report provides a financial decision-making analysis for Roast Ltd, a company supplying coffee to Starbucks. It begins with an industry review of the UK coffee house sector, highlighting its growth and key players. The report then delves into Roast Ltd's business performance, analyzing the statement of profit and loss, statement of financial position, and cash flow statement. Key financial ratios such as gross profit ratio, operating profit ratio, net income ratio, debt equity ratio, current ratio, and quick ratio are calculated and interpreted. The analysis reveals insights into the company's profitability, liquidity, and efficiency. Furthermore, the report examines investment appraisal methods and potential sources of finance for Roast Ltd. The operating cash cycle is calculated to assess the time required to convert raw materials into cash. The report concludes with an overall assessment of Roast Ltd's financial health and recommendations for improvement.

Financial Decision Making

Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1: Industry Review...............................................................................................................1
Top line review of current UK coffee house industry.................................................................1
PART 2: Business Performance Analysis.......................................................................................1
2.1 Statement of profit and loss...................................................................................................1
2.2 Statement of financial position..............................................................................................3
2.3 Cash Flow Statement.............................................................................................................5
Part 3: Sources of Finance and Investment Appraisal.....................................................................8
3.1 Investment appraisal..............................................................................................................8
3.2 Sources of Finance...............................................................................................................10
REFERENCES..............................................................................................................................13

EXECUTIVE SUMMARY
The concept of this paper details the financial decision-making process for the project.
The first such segment of the topic report examines various forms of financial reports, depending
on the finance firm's performance. In comparison to both the expense estimate, the second
portion of the relevant article includes various forms of methods involving accounting profit
cost, net present value, and payback date. The main discussion may be introduced to Starbucks
collective where they purchase from the limited company Roasted. Since the majority of their
statements have seen positive effects which states the good image of company.
PART 1: Industry Review
Top line review of current UK coffee house industry
It has already been established at current time that coffee sector in the UK is growing year to
year. The main explanation for market development is that consumers are growing increasingly
attached to beverages and snacks. UK's coffee shop sector is wide enough yet to add to the
growth of the country benefit of the entire. The following criteria should be listed in order to
evaluate the market analysis of it:
 As per study, the coffee industry's gross GDP output for 2017 contributed to about 3.7
billion pounds (Current coffee house industry of United Kingdom, 2019).
 This has been projected that the sector's sales would grow by 4.8 per cent over the
coming years and that the overall volume will be about 6.6 billion pounds.
 The big resource opens to companies working in this field is to promote these coffee or
other drinks that are better tailored to fitness-friendly persons because they neglect milk
coffee.
 There are many companies working in this sector. These would be Roast Ltd, Coffee
Republic. Starbucks, Costa Coffee, 2U Cafe, Muffin Split, Ritazza Caffee, Puccino's,
Nero Caffe etc.
PART 2: Business Performance Analysis
2.1 Statement of profit and loss
For the benefit of both reporting in the context primary, secondary, operational and non-
operating costs along with revenue, both corporate companies produce a report on an annual
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basis such that productivity may be calculated. In order to draw significant amounts of creditors,
it is extremely necessary for a business to insure that even the cash flow statement is consistently
established such that interested stakeholders can predict the expected profits that they will
produce in the possibility (Almenberg and Dreber, 2015). In the Roast Ltd.’s declaration of
income and losses showing that the business's sales were 2022 in 2017, this is raised to 2534, this
implies that it would enable the firm boost its productivity. Total operating earnings are now up
from 517 to 544 for the year ended 2018. As a result of this net income is also raised from 51 to
127 for 2017. The sales analysis also indicates a rise in net income. This was 36 in 2017, which
is raised to 81 in 2018. The preceding factors are determined for the aim of assessing financial
output of the business:
1. Gross profit ratio: This proportion is determined for the purpose of deciding the relation
among gross margin and profits. The key goal of utilizing it is to assess a company's
operating efficiency. This ratio may be measured in order to determine whether Roast Ltd
is capable of producing reasonable income or not.
2. Operating profit ratio: This figure is estimated to assess an entity's capacity to earn
income by covering all of the operating expenses. The executives must also calculate the
ability of Roast Ltd to produce income for the upcoming cycle (Barth, Papageorge, &
Thom, 2017).
3. Net income ratio: this measure is measured as it is determined after covering all costs,
bonuses, taxes and fees in order to analyse the total amount of earnings produced for the
year. It may be used to assess whether or not Roast Ltd would meet the aim of earning
income.
Name of ratio Particulars Formula 2018 2017
Gross profit ratio
Gross profit Gross profit /
Revenues *
544 517
Revenues 2534 2022
Results 21.47% 25.57%
Operating profit ratio
Operating
profit
Operating profit /
Revenues *
127 51
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2534 2022Revenue
5.01% 2.52%Results
Net profit ratio
Net profit
Net profit / Revenues *
81 36
Revenues 2534 2022
Results 3.20% 1.78%
This has been calculated from the aforementioned figures that perhaps the company gross
profit level was better in 2017 relative to 2018, that indicates that the entity's financial efficiency
in this year was decent compared with 2018. Operating and net income figures reveal as of 2018
Roast Ltd's productivity is lower than 2017. This reveals the business produced higher earnings
in 2018 than in the past year. Those figures demonstrate that the business success is high in the
financial year, so that it will draw the vast amount of buyers. They have to work to reduce the
aggregate cost of the product marketed in this particular regard as gross profit estimate is based
on the gross total profit. In case if sell costs are bigger than the gross profit margin will be lower.
They will therefore aim to reduce spending on sales. In the end their production is powerful for
both years, especially in 2018.
2.2 Statement of financial position
Company use to prepare financial position report for the intent of assessing whether or not
the enterprise is able to perform well in the international or domestic market. It is really
necessary for all firms to produce it on an annual basis whereby all internal and external
shareholders like staff, suppliers, owners, consumers, government, etc. will monitor company
success. They expect different specifications that are important, translucent, reliable, compatible
etc. In case if it is overlooked by businesses than there could be a lower concern among company
partners (Bhayat, Manuguerra and Baldock, 2015). It is being estimated from the Balance Sheet
that perhaps the obligations side of Roast Ltd.’s corporate equities will rise to 860 from 779 in
2018. The explanation for this is rise in the entity's overall equities. There was also an rise in
long-term coffee shop debt which indicates that the administration has taken loans in the
potential to carrying out activities. The company's existing obligations have now raised from 138
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to 308. The reasons of this spike are bank overdraft and disposed payable exchange. The
inventory dimension indicates rising non-current investments, which implies the organization has
acquired additional properties, plants and facilities to better carry out operating operations.
Owing to an improvement in accounts receivable and stock levels, net assets are still growing in
the present year. In Roast Ltd.’s sense it is often measured for the intent of results measurement
corresponding ratios. All of them are defined as follows:
1. Debt equity ratio: This is among the main ratios used to calculate financial power. It
is important to utilize external obligations rather than internal assets for both
companies in order to boost the potential to produce better returns. This formula
should be determined in order to assess the very same capacity of Roast Ltd
(Chambers, Echenique and Saito, 2016).
2. Current ratio: This is a form of equity ratio that is determined to assess whether or
not an enterprise should be able to cover any of the short-term obligations with
existing assets throughout the year. This will be used to assess Roast Ltd liquidity
amount.
3. Quick ratio: In such a measure, existing core resources are taken for estimation
purposes in order to identify the capacity to satisfy short-term commitments with the
aid of capital and cash equivalents. This ratio will be determined in order to examine
whether Roast Ltd is capable to cover the liabilities from instant cash.
Calculation for important ratios is discussed underneath:
Name of ratio Particulars Formula 2018 2017
Debt equity ratio
Total debts
Total debts / Total
equities
583 238
Total equities 860 779
Results 0.68 0.31
Current ratio
Current assets Current assets/
Current liabilities
447 347
Current liabilities 308 138
Results 1.45 2.51
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Quick ratio
Quick assets
Quick assets /
Current liabilities
148 227
Current liabilities 308 138
Results 0.48 times 1.64 times
This has been calculated according to the above estimates that in 2018 Roast Ltd.’s capacity
of using debts rather than securities which indicates that the company's output is increasing over
time. Current ratio findings indicate that the company profitability is weak in 2018 relative to
2017. Quick ratio, at the other side, is also quite limited for 2018. All suggest the entity's
profitability is very minimal. Roast Ltd.’s efficiency is not really strong owing to weak liquidity,
as per the financial status report. Null cash is the key factor for this in 2018. Thus as a result
the capacity the company is therefore decreased to compensate the sum of short-term obligations.
2.3 Cash Flow Statement
It is prepared with the aim of calculating three various activities such as financing, operating and
investment. This provides the information about inflow and outflow of cash during one year of
time period (Füllbrunn and Luhan, 2015). From the assessment of the cash flow statement of a
Roast Ltd. determined that organisation has negative flow of cash i.e. outflows. This clearly
depicts that organisation is under the debt and paying heavy amount of cash to pay off their
liabilities. It is also clear from assessment that issue of liquidity is exist within an organisation
that impacts negatively over the day to day operational capacity. For further analysis of the cash
flow statement of Roast Ltd., operating cash is calculated which is presented below:
Operating Cash Cycle
This is calculated by the organisation generally for the purpose of understanding the time
period required to an organisation in conversion of their inventories within monetary resources
(Boella, Di Caro and Leone, 2019). This is also known as cash conversion cycle that includes the
information related to routine activities. The effective application of this cycle provides the
opportunity to gain the information about efficiency of an organisation. The formula which is
used for the purpose of calculating operating cash cycle in relation to the Roast Ltd. is the
number of days when inventory is outstanding, number of days when is sale is outstanding and
the number of days when payment is outstanding.
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Particulars 2017 2018
Total days in year 365 365
Inventory turnover 12.54 6.66
Formula 365 / inventory turnover
Days inventory outstanding 29.11 54.80
Total days in year 365 365
Receivable turnover 21.74 17.12
Formula 365 / receivable turnover
Days sale outstanding 16.79 21.32
Total days in year 365 365
Payable turnover 10.91 8.47
Formula 365 / payable turnover
Days payable outstanding 33.46 43.09
Formula
Days inventory outstanding + days sales
outstanding - days payable outstanding
Result 13 32
Working notes:
Inventory turnover: Cost of sales / average inventory
Particulars 2017 2018
Cost of sales 1505 1990
Average inventory 120 299
Inventory turnover 12.54 6.66
Receivable turnover: Net sales / account receivables
Particulars 2017 2018
Net sales 2022 2534
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Account receivables 93 148
Receivable turnover 21.74 17.12
Payable turnover: Cost of sales / account payable
Particulars 2017 2018
Cost of sales 1505 1990
Account payables 138 235
Payable turnover 10.91 8.47
Calculation of operating cash cycle:
Particulars 2017 2018
Days inventory outstanding 29 55
Add: Days sales outstanding 17 21
Less: Days payable
outstanding 33 44
Operating cash cycle 13 32
It is ascertained from the above analysis that operating cash cycle of Roast Ltd. 32 days
in year 2018 whereas 13 days in year 2017. This clearly depicts that this organisation takes the
time period of one month in conversion of their raw materials into cash. As per the workings of
the industry, this time period falls under the category of effective benchmark.
Divided policy
This is the strategy adopted by the organisation regarding distribution of their profits
among shareholders in the form of divided (Siegel-Hawley, 2020). The decision paying dividend
is upon top management. In relation to the organisation Roast Ltd., the management decided for
no providence of dividend in tear 2018. As per the views of investigator, this decision of an
organisation is right and valid in nature. The nature of Roast Ltd. organisation is growing so first
they invest their profit in assets that help in development of their operational efficiency instead
of distributing of same among the shareholders.
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From the assessment of the cash flow statement, balance sheet and income statement of
an organisation, it is cleared that company is small in nature that has restricted value of profits
and revenue. While, talking about the growth and development of an organisation then the
growth rate is high that build this organisation as viable for acquirement by Starbucks
(Taghizadeh-Yazdi, Farrokhi and Mohammadi-Balani, 2020).
Part 3: Sources of Finance and Investment Appraisal
3.1 Investment appraisal
Management Forecasting
Roast Ltd. is a growing organisation. The nature of this organisation is ambitious who is
planning to develop their business in Romania through launching of their new coffee shop. The
decision of starting this organisation is taken by management in starting of the year 2017. The
management of an organisation also has forecast that they will going to earn the revenue of 300
million pounds in 2017 that will simultaneously increase up to the limit of 560 million pounds in
2018. The management also forecast the earning power for the years 2019, 2020, 2021 as 740
million pounds, 900 million pounds and 1120 million pounds. It is also assumed that the
organisation Roast Ltd. will attract high variable cost against to the business operations and able
to secure the viable amount of contribution or cash flows. The amount of cash which will be
forecasted for the following years is £60 million in 2017, £112 million in 2018, £148 million in
2019, £180 million in 2020 and £224 million in 2021 (Alves and et al., 2019).
It is clear from the above analysis that the organisation is going to earn high amount of
revenue and profits in coming 5 years of time period. The organisation does have any
contingencies plan. This will result in future as financial issue but does not impacts the viability
of project.
Investment appraisal techniques
Payback period
This is the time when the sum of the profits from your net income is necessary to purchase the
resources. A basic approach is to assess the threat related to the proposed enterprise. A
speculation with a shorter recompense period is seen as preferable, as the financial expert's
inherent expense is under threat for shorter timeframes. The estimate used to set the repayment
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deadline is known as the repositioning strategy. The repayment deadline is communicated in
parts of years and years. The equation for the reprint strategy is overseen: Divide the cost of
money (which is assumed to be completely at the beginning of the task) by measuring the net
money flow produced by the enterprise each year (which is assumed to be consistently equal is)
(Kareva and Memedi, 2019).
This is considered as the time period that an organisation takes in ascertainment of the amount of
initial investment. This will help the management to know about the time of months and years
that they going to take for evading their all amount of initial investment. The payback period of
Roast Ltd. is ascertained as 4 years. This clearly depicts that the organisation takes the time
period of 4 years in the recovery of the initial investment of 500 million pounds (Del Baldo,
Arcari and Ruisi, 2019).
There are many different benefits and limitations are attached with using of this method
of investment appraisal. The benefit associated is that this is simple to use and easy to
understand. It means not required to have professional trained staff in calculation of payback
period. This provides the quick solution. The drawbacks attached with this includes ignorance of
time value money and unequal coverage of cash flows. This limits the analysis through
ignorance of the profitability margin and return on investment.
Accounting rate of return
ARR, additionally termed as a straight or normal speed of return, is a speculative equation that is
used to determine annual income or to benefit an enterprise. Thus, it figures out how much cash
or return you will have as a financial expert on your venture.
It is important for an organisation to attain high percentage for their project. This is so
because it enables high level of profitability. In relation to the Roast Ltd. The ARR is 18%.
The benefit associated with this ARR technique is help in comparison of two projects.
The rates associated with it is easy to calculate that provides accurate view of profit. The
limitation attached with the application of this method is about non consideration of time factor
that impacts the fast decision making ability.
NPV
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Net present value (NPV) is an estimate of future income (positive and negative) over the entire
existence of a speculation limited to the present. The NPV exam is a type of implicit assessment
and is widely used in funds and represents an estimate of a business, speculative security, capital
work, new discoveries, cost reduction programs, and anything that involves income.
This is also applied to the series of cash flows in relation to the different period of time. In
the current case of Roast Ltd., ascertained that organisation will have NPV of 110 million
Pounds. The aspects which ae used in the computation of this value include years, discounted
factors, cash flows and present values.
The benefit of this technique is consideration of all available years’ cash flow along with risk
factors. This is also known as the good measure of profitability. The limitations associated with
its use include estimation of opportunity cost not the investment value cost. This makes the
difficult to ascertain the exact amount of earnings and returns. This method also ignores sunk
cost and optimistic values that provide unfair position of investments (Berretta, 2019).
From the all above discussion, it is clear that investment by Roast Ltd. in opening of new
stores at Romania is viable in nature. This will help to improve their cash position and
profitability.
3.2 Sources of Finance
Sources of financing are as wide as they are long; however, they mainly fall into two
classifications: Internal and external sources of money. Internal sources of fund are reserves that
originate from inside the association. There are some examples of internal funding such as cash
from sales, sale of surplus assets as well as profits company hold back to finance development
and expansion. External source of finance are reserves raised from an outside source. Bank
overdrafts, trade credit, share issues etc. All these are considering internal and external sourcing
of finance that will be beneficial for an organisation in development of its business growth and
success in marketplace easily. Along with this, there are some useful sources of funding for
Roast Ltd, which will be explained as below with their advantages and disadvantages. These are
described as below:
Bank loan: This is an effective source of finance that helps business by providing loan to the
organisation in an agreed repayment schedule. In addition, bank loan is generally preferable
option for an organisation to raise accurate amount of capital. The main reason behind adopting
bank loan as a source of finance is that it allows Roast Ltd to do refund after some time period on
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