Annual Financial Analysis – Coffee Roaster
This downsized version of a large publicly traded company roasts coffee and sells it through both wholesale and retail channels. They operate coffee roasting facilities as well as retail outlets for coffee, tea, and food products. On the outside, this company appears to be very successful but, behind the scenes, their finances have been falling apart over the last few years.
This company met the economic downturn with two years of declining gross profit margins due to failure to raise prices, which had previously always been done to maintain gross profit margins. It was not until 2010 that the decline was cured by simply raising prices again.
As a result of the failure to follow their previous model, cash flow tanked unnecessarily for several years and a large amount is lost forever. This loss did this have to happen! The lesson: even apparently successful companies screw up the basics of finance.
The company cash conversion cycle or net trade cycle stays too high for years, suppressing cash flow for no real reason. In 2010 this changes magically – did management finally get their cup of coffee?
The cost of capital for this company has increased over the years for no financial reason other than no one paying attention to the balance sheet assets and liabilities. The cost of capital is going up and net income going down so the return on assets is dropping even while already below the costs of capital. Although great improvement occurred in 2010 wealth has been destroyed by this company over the last four years. Be careful what’s in that cup of coffee!