Introduction
The company study consists of three components: financial performance, projections, and recommendations. First, a company's financial performance is evaluated based on its ability to generate income. In this regard, financial efficiency ratios emphasize the relationship between income and sales and income and employed assets. Second, the company's financial performance can be evaluated based on the value of its shares to investors.
Ratio Analysis
The following ratios have been derived from the financial statement.
Ratio Formula 2009 2008
Liquidity ratios
ratio of current assets to current liabilities
Current obligation 242,000
207,000
= 1.17 234,000
191,000
= 1.23
Quick ratio Current assets –stock
Current liability 242,000-44000
207,000
= 0.96 234,000-38000
191,000
= 1.03
Asset management ratios
Ratio of inventory turnover InventoryX 365
Cost of sales 44,000 times 365 days
420,000
=39 days 38,000X 365
389,000
= 36 days
Receivables days outstanding X365
Annual sales – –
Turnover of total property
Total assets 930,000
888,000
= 1.05 915,000
962,000
=0.95
Debt management ratios
Total debt to total Assets Total debt
Total assets 469,410x 100
888,000
=52.86% 529,700x 100
962,000
= 55.06%
EBIT to Interest earned multiple
Interest costs of $10,000
23,710
=0.42 61,000
28,700
=2.12
Performance ratios
Operating margin EBIT
Sales 10,000X100
930,000
=1.08% 61,000X 100
915,000
=6.67%
Margin of profit Net income
Sales -13,710 X 100
930,000
= -1.47% 32,300 X100
915,000
=3.53%
Basic earnings power ratio(ROTA) EBIT
Total Assets 10,000X100
888,000
=1.13% 61,000X 100
962,000
=6.34%
Return on Equity Net income accessible to owners of equity
Equity -13,710 X 100
418,590
= -3.28% 32,300 X100
432,300
=7.47%
Table 2
RATIO 2009 2008
Trade creditors / total current assets 207,000
242,000
= 85.5% 191,000
234,000
=81.6%
207,000 trade creditors versus total assets
888,000
=23.3% 191,000
962,000
=19.9%
Long term loans payable/ total assets 262,410
888,000
=29.6% 338,700
962,000
= 35.2%
Equity/total assets 418590
888,000
=47.14% 432,300
962,000
=44.94%
Cost of sales/sales 420,000
930,000
=45.16% 389,000
915,000
=42.51%
Operating expenses/sales 500,000
930,000
=53.76% 465,000
915,000
=50.82%
Cash/ sales 198,000
930,000
=21.29% 196,000
915,000
=21.42%
Accounts receivable/sales – –
Inventories versus sales 44,000
930,000
=4.73% 38,000
915,000
=4.15%
Total current assets/sales 242,000
930,000
=26.02% 234,000
915,000
=25.74%
Noncurrent assets/sales 646,000
930,000
= 69.46% 628,000
915,000
=68.63%
Total assets/sales 888,000
930,000
=95.48% 962,000
915,000
=105.14%
Using the ratios calculated above, one will make following observations for the management.
Ratios de rendement
The profitability ratios have been declining. There is a reduction in operational profit from 2008 to 2009 i.e. just 1.67% to 1.08%, additionally the profit margin has declined to a negative that is from 3.53% to -1.47% this was possible due of an increase in operating expenses. The inability of management to maintain low operating expenses has diminished efficiency. The operating expenses ratio has also gone up which shows that running expenditures are not under control.
Every investment is made with the hope of a return yet so far net profit to proprietary is has gone down from 7.47% to a negative of 3.28%. This results in a loss of wealth for the stockholders. The percentage of return on total assets has also gone down from 6.34% to 1.13%. This indicates that the assets are not compensated adequately.
Liquidity Ratios
The company under consideration is facing a liquidity problem. I have evaluated both long-term and short-term liquidity ratios and discovered that the company is in an extremely tight liquidity position. Concerning short-term liquidity ratios, there is an annual drop. The reflection of the current ratio is that the company’s liquidity has ¥ 1.17 for every ¥ 1 liability but it is at decreasing trend. In 2008, it decreased from 1.23 for 1 available liability. After declining from 1.03 for 1 liability to 0.96 for 1 liability, the estimated fast ratio demonstrates a severe downward trend, since it is now extremely risky. This percentage indicates that the corporation lacks the liquidity to meet its current liabilities. Since the quick ratio is less than one in 2009 and is at downward trend then the corporation is suffering liquidity challenges. The company's reliance on cash to offset short-term liabilities is worrisome, and this is reflected in the composition of its current assets.
Solvency indices
In the case of Long-Term Liquidity, the company's debt-to-total-assets ratio reversed in the previous year from 55.06% to 52.86 %, whereas the ideal debt-to-total-assets ratio is less than 50 %, i.e. For each unit of debt, there must be two units of assets. In 2009, the interest time ratio decreased from 2.12:1 to 0.42:1, which is insufficient to obtain a loan facility from the banks. If bank financing is unavailable, management must consider long-term debt such as debentures and must limit the cost of borrowing at a reasonable level so that the profit accessible to shareholders after covering financing costs is maintained in a real manner.
Efficiency Ratios
The return on total assets has decreased by 5.21 percent since 2009, indicating that the company is earning with a negative growth rate of almost 5.21 percent, indicating that the capital used is not performing properly. At the same time assets turnover is at a low rate of 1.05 which means that the average assets are performing 1.05 times for the year 2009. Likewise, the overall operational efficiency is less than 1 because we know that return on total asset is diminished if asset turnover does not follow a similar trend. Consequently, the return on proprietary gets lower down. Inventory turnover has remained relatively constant. In fact, it decreased and is now back to the condition it was in one year ago. The company needs to work on it because higher inventory turnover will mean the goods are moving at a faster rate. The company must improve its techniques of demand forecasting so that only optimal inventory levels may be maintained, resulting in decreased inventory carrying costs.
The company's profits have decreased from the previous year. In comparison to the previous year, not only has the absolute profit reduced, but the profitability and rate of return have as well. As well as the most critical part of the conversion of profit into liquidity has failed as has been indicated by all the liquidity measures. Not only is the current ratio low, but also the acid test ratio is below one, and there is a high reliance on a single source, namely cash, which may incur a substantial cost. Coffee Inventories have a very long holding period – considering the nature of business, blocking the current funds. In addition, there has been a substantial investment in goodwill during the year, while intangible long-term assets have decreased, which suggests that the management has spent short-term capital on long-term assets, resulting in problematic liquidity for the company. T.O of non-current assets is not very impressive and it will take years together to take a turn over from long-term assets. Consequently, there has been a working capital crisis. The Company cannot liquidate its noncurrent assets to meet its current obligations. The bankers have reviewed the same situation and are hesitant to provide further funding. The company is unable to produce cash from additional capital since existing shareholders do not like to dilute their current holding ratios and are unable to inject funds owing to their own business circumstances. If the company wishes to survive and improve its liquidity, management must take the following steps (Palepu, 78):
The corporation should issue reduced interest rate 3-5 years debentures to infuse quick liquidity. Increase the turnover ratio of assets. Inventory turnover must be dramatically increased, carrying costs must be lowered, and a rapid conversion of stockpiles into sales must be adhered to.
Budgeting is required to estimate the income and expenses of a business or a portion of a business over a specified time period. Budgeting plays a crucial role in the success of businesses, and it is essential for a company to have a solid budget because it is useful in a range of situations.
A budget is a detailed strategy and overview of the organization's goals, utilizing numbers and action plans. It is a formalized system of planning, forecasting, monitoring, and controlling the use of resources that managers in both the public and private sectors use to achieve the company's goals, because a manager's primary responsibility is to plan for the future and decide what should be done and how it will be accomplished. After being assigned a task, managers can improve their performance by fulfilling their individual tasks. The 2010 financial performance forecast for the Pudong coffee shop is provided below.
Statement of Income Forecast
For the Pudong Coffee Shop
BUDGET
31-Dec-09
2010
¥
Revenue (beverages/drinks)
485,000
524,528
Revenue (food Sales)
445,000
481,268
Total Revenue (food and beverages)
930,000
1,005,795
Sales expenditure
(420,000)
(441,000)
Gross profit
510,000
564,795
Reduced Operating costs:
Depreciation of tangible assets
(82,000)
(82,000)
Pay and compensation
(130,000)
(135,200)
Rental
(200,000)
(208,000)
Utilities
(48,000)
(49,920)
Garbage collection
(10,000)
(10,400)
Promotions and advertising
(30,000)
(31,200)
Total operating expenses
(500,000)
(516,720)
operational income for the year
10,000
48,075
Interest payable on loans
(23,710)
(23,710)
Earnings (deficit) for the year
(13,710)
24,365
Projected Balance Sheet
For the Pudong Coffee Shop
31-Dec-09
2010
¥
¥
Goodwill
400,000
400,000
Furniture and fittings (net) (net)
246,000
164,000
Inventories
44,000
47,121
Cash at bank
198,000
235,304
Total assets
888,000
846,425
Ownership's equity
418,590
442,955
Bank loan payable
262,410
186,120
Trade payables
207,000
217,350
Combined total of liabilities and equity
888,000
846,425
Projected Cash Flow Statement
Regarding the Pudong Coffeehouse
31-Dec-09
¥
recurring cash flow
Annual operating profit (loss)
10,000
24,365
Add: depreciation
82,000
82,000
92,000
106,365
Variations in operating capital:
Less: Inventory expansion
(44,000)
(3,121)
Add: Increase in trade payables
207,000
10350
255,000
113,594
Investing activities
Nil
Finance operations:
Loan repayment plus interest
(100,000)
(100,000)
=Annual total cash flow (deficit)
155,000
13,594
Add: Opening bank balance
–
198000
Equals: Closing bank balance
155,000
211,594
Assumption
During preparation of the 2010 budget, I made the following assumption:
The unit price is not specified to be 1. Then sales volume equals sales. Both the loan payback amount and the value of the loan's interest stay unchanged. The inaccuracy made in the cash balances of the 2009 unaudited accounts remains uncorrected. Goodwill will not be amortized for the time being; depreciation will remain unchanged. Cost of sales will only be altered based on volumes sales and prices remains the same.
Conclusions and recommendations
The management of the coffee shop in Pudong should analyze the shop's capacity and possibly enlarge it, as well as diversify the items. The capacity selection will have an impact on the ability of Pudong coffee shop to satisfy future needs; capacity essentially restricts the rate of output feasible. Having the capacity to satisfy demand can allow Pudong coffee shop to take advantage of tremendous opportunities. Coffee is a popular beverage, and management may not be able to meet demand during the colder months. Decisions on capacity will also aid in estimating operating expenses. The requirements for capacity and demand will be matched, which will tend to reduce operational expenses. Typically, capacity is a significant driver of the initial cost. In general, the higher the capacity of a productive unit, the higher its price. This does not necessarily imply a one-to-one ratio; larger units typically cost less than smaller units proportionately.
The primary objective of Pudong coffee shops is to serve their clients and grow the wealth of their proprietors. Through effective and efficient satisfaction of the consumer, the Pudong coffee shop’s performance will grow and this may indicate an overall increased market share. To have a competitive advantage in its operating market, Pudong coffee shop must comprehend its customers' preferences. A consumer's decision to frequent a coffee shop in Pudong is based on an exhaustive comparison of similar coffee shops. Consumer decision-making can be reflected by his or her behavior which dictates how he or she view the product or service being offered. Consumer behavior is much influenced by various elements such as personal likes and dislikes or individual perception, social status, cultural taboos among other factors. A marketer must be able to effectively address these issues by providing a product or service that satisfies their requirements or desires.
Pudong coffee shop has applied numerous concepts from consumer behavior to acquire a competitive edge within the broadcasting sector. It has used the notion of market research to determine the present and future needs of consumers. Through market research, they get information on how to improve and deliver their services. They also learn about their consumers' age, gender, social and economic standing, among other characteristics. This enables them on how to maintain their clientele. Pudong coffee shop is aware that the demands and desires of a client now cannot be identical to those of a customer tomorrow; therefore, they are always ahead of customers in terms of service delivery. Consequently, Pudong coffee shops will maintain a substantial market share in the coffee sector (Johnson, Scholes and Whittington, 129).
It may be claimed that the marketing function supports other functions, and makes sure that the organizational goals are fulfilled by giving a complete analysis of chances for growth, and also by supplying a professional strategy to selling in well-defined market segments. The coffee shop in Pudong should develop its plans based on its strengths and market-driven prospects. In order for a company to formulate such strategies, the proper type of planning is necessary. The owners should establish goals that are realistic and consistent with the organization's capabilities. This would indicate the performance and success of the coffee shop in Pudong. It is strongly suggested that the Pudong coffee shop carefully consider their business strategy (Hill and Gareth, 78).
How far the sector will advance will depend on the ever-changing global market. Because of the volatility of the global market, predicting the future performance of an industry is particularly difficult. Because coffee is a popular beverage, the coffee sector will experience tremendous growth. The price does not affect the quantity of coffee consumed, but rather the quality. People with extra people will continue drinking coffee if necessary because they require it. The price of the raw coffee will affect the pricing of the final drink.
References
Charles Hill and Gareth Jones. A Comprehensive Approach to Strategic Management 2007: Houghton Mifflin, New York
Johnson, Gerry, Scholes, Kevin and Whittington, Richard. Text and case study examination of corporate strategies 2008, Prentice Hall, New Delhi
Palepu, Bernard, and Healy. Business Analysis & Valuation. New York: Cengage Learning, 2004.
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