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This implies that the firm’s current assets exceed its current liabilities. The current ratio and quick acid ratio of the company after the 2nd quarter of 2000 were 5.92 and 3.29. Both ratios are outstanding due to the fact that they exceed the 1.0 threshold (Garrison & Noreen, 2003). Honest Tea is in a good position to pay off its short term debt. During 1999 the firm was able to turn its inventory 2.50 times during the year. The debt ratio and debt to equity ratio of the company demonstrate that the firm has not incurred in long term financing options. Case study analysis questions: 1) Does the Tea market appear to be attractive as of the year 2000? Explain by referencing relevant metrics and information. The Tea market appears to be attractive for the year 2000. Tea is one of the fastest growing drinks in the United States due to its unique attributes. The competition in the tea market is not as severe as the competition in other segments of the drink industry such as in the carbonated soda sector in which Coca Cola and Pepsi dominate. As of 1999 there were 2,595,500 gallons of tea consumed by the American public or 9.5 gallons per capita. 2) How is Honest Tea doing financially and otherwise? Discuss by referencing relevant metrics and other information. ...
Despite the negative income of the company during its first few years of operations the company has done a good job of maintaining liquidity for the firm. The current ratio and quick ratio of the company demonstrate that the company has the ability to pay off its short term debt. The company has done a good job so far of growing its market. The reason that the company has not reached profitability yet is due to the fact that the company does not have sufficient sales to breakeven. 3) What does Honest Tea need to do about its financing to be successful in the future? Discuss. To be successful in the future Honest Tea needs to raise sufficient capital to expand its operations beyond the breakeven point. The firm has to invest money wisely in its marketing initiatives to expand the demand for its product. The company needs to obtain sufficient capital to purchase all the raw materials necessary to produce the projected sales of the company and to purchase the machinery and equipment needed for the expansion plan of the company. 4) Who has the company approached for financing in the past and were they the "right" investors? Explain. In the past the firm approached its customers to become the investors of the company. The decision to involve customers as investors was not very wise because a lot of them did not have financial knowledge which made it hard for the administration of the company to explain the financial results to them. Also the amount of money the firm obtained using this strategy was not sufficient. 5) What amount of financing appears to be needed to support the future sales projections of $9,000,000 in 2001 and $16,900,000 in 2002? Explain. Based on the fact that the cost of goods sold of the company represented ...Show more


A ratio analysis of Honest Tea is illustrated below: 1999 Jun-00 Gross margin 28.46% 36.93% Net margin -71.74% -36.23% Return on assets (ROA) -0.78 -1.70 Return on equity (ROE) -0.97 -0.19 Working capital 742285 811327 Current ratio 4.41 5.92 Quick acid 3.04 3.29 Inventory turnover 2.50 0.83 Debt ratio 0.19 0.12 Debt to equity 0.24 0.14 The gross margin and net margin of the company during 1999 and during the 2nd quarter of 2000 were extremely bad…
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