Honest Tea: the United States Market - Essay Example

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. The company is incurring losses which are hurting the profitability of the company. Due to the losses that the company incurred the ROA and ROE of the company are both negatives. The working capital of the firm at the end of the 2nd quarter of 2000 was $811,327. 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 long-term financing options.

Case study analysis question:
How is Honest Tea doing financially and otherwise? Discuss by referencing relevant metrics and other information.
The financial performance of Honest Tea during its first 2.5 years of operations is bad. The firm has not been able to obtain adequate sales to pay for its total expenses. The net income of the company during both 1998 and 1999 was negative. During the first six months of 2000, the firm has accumulated losses of $228,879. 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 break even.

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.

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 were 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.

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 60.60% of total costs during 1999 the firm needs to obtain at least $5.45 million in 2011 and $10.24 million to cover the materials costs to manufacture the Honest Tea drink. This estimate does not include other expenses which imply that the amount the company needs to raise to obtain those sales numbers needs to be substantially higher.

Describe the alternative funding sources that are being considered. Describe the Pros and Cons for each with conclusions.
Honest Tea is considering funding from venture capitalists. Venture capitalists can provide companies with the funds they need for expansion, but this measure has the con of losing equity and control over the operations of the firm. A way for the company to obtain the funds it needs in a fast manner is by converting the company into a public firm through an initial public offering (IPO) process.