Financial Decision Making - Roast Plc

The above measured ratios show that this firm's situation is better than in the last year. Like in year 2017, the value of net profit margin was of 1.78% that raised in next year and became of 3.20%. The reason of this variation in net profit margin is the higher earned net revenue in year 2018. As regards the business's operating profit ratio, it can be found that their ratio in 2017 was 2.52 percent, which increased in the year 2018 to 5.01 percent. It demonstrates that in 2018 this ratio is nearly double compared to 2017. Although in 2017 their gross margin was higher than in 2018. As in 2018, it fell by 21.47 percent because in the year 2018 this was of to 25.57 percent. That's because their gross profit margin did not rise by large standards, while their revenues raised by tremendous gape.

Overall, as per Roast limited company's profit and loss account review above this can be reflected that their financial results is strong in 2018. In order to assess their performance a wide range of ratios are computed and interpreted which are presenting a better result in year 2018. Company's performance is weak only in the context of gross profit margin. Thus, this is essential to them to minimise total amount of cost of sales so that gross profit can increase. Apart from it, their overall performance is excellence in year 2018.

2.2 Statement of financial position.

The statement of financial generally known as balance sheet. Preparation of this statement is essential for companies so that stakeholders can become aware about company's monetary efficiency. It can be defined as a type of statement which includes detailed information regards to assets and liabilities for an accounting period (Kramer and Weber, 2012). This statement is categorised into three parts which are of assets, liabilities and equity. Under section of assets, brief information regards to current assets, non current assets etc. is included while in section of liabilities detailed information regards to current and non current liabilities is included. In addition, the equity section contains information about shareholders funds, debenture etc. are covered.

In accordance of balance sheet of above Roast plc company, this can be seen that under non current assets there are different types of assets such as properties, plant & equipments etc. The value of these items was of £670000 in financial year 2017 and in year 2018, it increased till £996000. This shows that company purchased non current assets of £326000 during year 2018. In the context of current assets it can be find out that there are different number of assets like stock, trade & receivable, cash etc. The amount of stock was of £120000 in year 2017 that enhanced in next year till £299000 which shows that company did more of number of transactions in this year. As well as the value of receivables also increased in 2018 by 59.14% and became of £148000 while in previous year this was of £93000. Along with, company did not have any cash in year 2018 but in year 2017, it was of £134000. In a conclusive manner, this can be stated that company had more number of assets in year 2018 as compare to year 2017.

The equity and liabilities section consists information about liabilities and debts. Such as the amount of shareholders capital is same in both of years which is of £200000. The retained earnings value is variant in both of years. In year 2017, it was amounted by £579000 that enhanced in next year 2018 by 14% and became of £660000. This is so because they earned higher net revenue in year 2018. In combine, the total value of equity was of £779000 in year 2017 that increased in year 2018 and became of £860000. The company had long term borrowings of £100000 in year 2017 which raised in next year 2018 and became of £275000. This is showing that company is focusing on taking debts from outsiders and that's why the amount of net borrowings has been increased in year 2018. In the context of current liabilities section, this can be seen that there are more number of items like bank overdraft, bills payables etc. In financial year 2017, there were no bank overdraft but in year 2018 company withdrew excess amount of £73000 from bank. The amount of trade payables was of £138000 in year 2017 that increased in next year till £235000. In a combined manner, this can be seen that they had total liabilities of £238000 and £583000 for year 2017 & 2018. Herein, below some types of ratios are calculated and interpreted in accordance of balance sheet of above company:

Current ratio:

Quick ratio:

Return on capital employed:

The above presented tables shows liquidity position and efficiency of generating returns of company. In order to assess liquidity condition of Roast plc, two ratios are calculated which are current and quick ratio. The current ratio of company was of 2.51 times in year 2017 which reduced in next year 2018 and became of 1.45 times. It is indicating that company is not able to meet the criteria of ideal current ratio in year 2018 which is of 2:1. The cause of this lower performance in year 2018 is increased amount of current liabilities in compare to year 2017. Same as the current ratio, the quick ratio of company is also weaker in year 2018. Such as in year 2017, this was of 1.64 times which reduced in next year and became of 0.48 times in 2018. Again company failed to meet the ideal form of quick ratio which is of 1.5:1 times. Apart from it, the efficiency of company in order to generate return from capital has been increased in year 2018 as compare to year 2017. Like in year 2017, this was of 5.80% which enhanced in further year and became of 11.19%. In collective manner, this can be stated that Roast plc's performance is better in year 2017 in comparison to year 2018.

2.3 Statement of cash flows

The word cash flow can be commonly described as in and out of money during a specified period of time. To evaluate the cash balance of corporations, a cash flow statement is produced that provides specific information on the total amount of transactions contributing as cash receipts. As well as other practices that become a source for cash outflow (Lusardi, 2012). In addition, it is planned from three forms of activities which are investing, financing and operating.

It can be found in the sense of Roast Limited Company that the cash flow from operating activities in 2018 was £(24000). It means that more activity has become the source of cash outflow. In addition, cash flows from investment activities are also available. It was £(358000) in 2018, that's because this year they didn't sell any properties and made land purchases. Although, they had cash inflow of £175,000 from financing activities. Ultimately, they had a negative cash balance (73000). Overall, it can be commented that the cash flow status of Roast limited is not in a good condition.

Operating cash cycle- The cash conversion cycle (CCC, or Operating Cycle) is the time frame between purchasing product from a company and receiving cash from receivable accounts. In other words, this can be defined as time period which is taken by a company in order to convert credit purchases into cash (Baker and Ricciardi, 2014). There is a particular formula to compute operating cycle which is as follows:

Operating cash cycle = Days inventory outstanding + days sales outstanding - days payable outstanding.

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

Analysis- In accordance of above computed cash conversion cycle it can be assessed that in year 2017, this was of 13 days. On the other hand, in year 2018, this was of 32 days. In collective manner, it can be stated that efficiency of converting purchase into cash had been decreased in year 2018 as compare to year 2017.

Dividend policy- It can be described as a sort of policy linked to the stakeholders' dividend payment. This policy is a way of paying dividends to various stakeholders. In the sense of Roast limited company, this can be assessed that they did not make any payment of dividend to their shareholders (Lu, Won and Cheng, 2016). Their approach of not paying dividends is poor because this can impact their reputation among external parties. The profit & loss account shows that they had enough amount of net revenues in year 2018 which was of £81000 and more then to year 2017.

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Part 3. Investment appraisals:

3.1 a Management forecast-

The management team of Roast limited company is planning to make an initial investment of £500 million. In regards to this investment, they have project the value of cash flows in five years starting from year 2017 and ending at year 2021. They are expected to gain cash flow of £60, £112, £148, £180 and £224 million. On the behalf of this cash inflow, it can be find out that they are making projection of higher cash flow which is not easy to gain on investment of 500 million. Eventually, they are expected to earn total cash flow of 724 million (60+112+148+180+224).

3.1 b Investment appraisal technique: There are various kind of technique of appraisal some of them are mentioned below such as-

• Payback period- This is a type of technique which is related to estimating total time period in order to get back investment amount (Forbes, Hudson, Skerratt, L. and Soufian, 2015). It is measured in term of years or months. It is too essential for companies to compute time period before making any investment in which they can recover their invested amount. In regards to Roast limited company, they computed payback period of their investment and it is of about 4 years. The projected time period is of 5 years. Hence, in terms of payback period technique their project is efficient and they should make investment. The above technique has some limitations and benefits which are as followings:

Benefits- This technique is useful for small investments and because of this it becomes easier to compute payback period. Along with the calculation, this is also easy to understand (Gamble, Boyle and Bennettm, 2014).

Drawbacks- The main issue under this technique is that it neglects factor of time value of money. This factor is needed to be consider because cash flow which is gained during early year of project get higher volume.

• Accounting rate of return (ARR) - This technique is also known as average rate of return. It can be defined as a kinds of method which is related to assessing annual amount of earnings on an investment. In simple words, this is defined as a way of computing annual returns on investments which are expected by investors (Hoffmann and Post, 2014). In the aspect of Roast plc, it can be find out that their accounting rate of return of their proposed project is of 18%. While they are expecting to gain rate of return of 10%. This can be beneficial for above company in order to make investment in that investment proposal. The ARR technique has some limitations and benefits which are as followings:

Benefits- It contributes in a significant manner in the context of assessing possible profit level from any investment. As well as similar as to above mentioned method, this is simple to compute (Seshan and Yang, 2014).

Drawbacks- Along with the benefits, this technique has some drawbacks also such as under it time value of money factor is ignored. As well as terminal value of project is also avoided in this method.

• Net present value- It can be defined as a type of technique of assessing value of project in which present value of projects is evaluated by making difference between discounted cash flow and initial investment. This method is widely used by companies in order to analyse current position of investment projects (Nga and Ken Yien, 2013). In the aspect of Roast limited company, this can be assessed that company's net present value is of 110000 on the investment project which they are planning. This method has some limitations and drawbacks which are as followings:

Benefits- It has different types of benefits in order to analyse efficiency of projects such as under this time value of money factor is considered.

Drawbacks- One of the main issue of this technique is that under it cost of capital is assumed which makes produced results not so reliable.

So, this is all about the critical evaluation of various types of investment appraisal technique. As well as under all investment techniques the efficiency of project is proved better.

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3.2 Source of finance.

In context of financial market, there are board range of sources related to finance which are utilised through organisation for accomplishing financial requirements. So, Roasted Ltd. Firm can able to accumulate funds from various sources. Some of them are discussed below:

Long term funds: It is considered as a kind of financial sources that are obtained through enterprise for above 1 year. This involves few sources that are:

• Equity share: This is defined as the key sources that shows the organisation ownership. It is broadly utilised through entities for accumulating large amount of funds (Duclos, 2015). It is one of the safest way of gaining higher amount of funds in quick time. Along with under this, possibility of risk also remains lower. In respect of Roasted limited company, it may obtain financial help from this sources.

Advantage: There is not any specified charges for ordinary shares. In case business gains more profitability then dividend may be paid but there should not be any obligation for paying dividends (Chowdhuri, 2014).

Disadvantage: The firm do not has a legal responsibility for paying dividends upon shares. So, there is higher probability for investors that they may loose dividends.

Short term funds: It is regarded as the sources of fund that are obtained through enterprises for below 1 year. This involves few sources that are:

• Loan from co-operative banks: This is considered as the quick term funding source. Through obtaining funds from this particular sources, this become easier for organisation to make interest payment as it facilitates paying option into instalment (Carvalho, Meier and Wang, 2016). As well as companies can get financial assistance in less time period and cost. It becomes possible because these banks have branches at various locations. In respect of Roasted limited company, it may accomplish their financial requirements through assistance respective source.

Advantage: In this, if loan have been charged so there will be not any liability of lender. Banking institution must not take roles of ownership within enterprises and in this particular case.

Disadvantage: The main disadvantage of this sources of funds is, it have complex procedures of mortgage as bankers observe previous record of enterprise before approval (Yalcin, Bayrakdaroglu and Kahraman, 2012).

Therefore, from the above two sources of funds, this is recommended that respective organisation have to take loan from co-operative banks as with the help of this they may get funds at low rate.

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