Roney Chang wasn't always the name behind a flourishing coffee empire. His journey began with a small, passionate dream $$ a dream encapsulated in the aroma of freshly brewed coffee. Starting with a cozy shop in Subang Jaya, Roney poured his heart and soul into creating a welcoming space where people could connect over a cup of exceptional coffee. The aroma, the warmth, the sense of community $$ these were the cornerstones of Roney's vision.

The initial years were a constant struggle. Roney meticulously sourced the finest beans, experimented with brewing techniques, and ensured exceptional customer service. He faced the challenges that plague most new businesses $$ limited capital, long working hours, and the ever$-$present threat of competition from established brands. Yet, Roney persevered. He focused on building a loyal customer base, one satisfied cup at a time. Word of mouth spread, and Aroma Coffee House became a local favorite.

As his business grew, Roney faced new challenges. He needed to streamline operations, manage a growing team, and maintain the quality and consistency that had become Aroma's hallmark. He invested in training his staff, implemented efficient inventory management systems, and negotiated better deals with suppliers. He never lost sight of his core values $$ quality, service, and community. Aroma Coffee House wasn't just about selling coffee; it was about creating an experience.

Now, Aroma Coffee House has reached a turning point. The business was thriving, and Roney was presented with a critical decision $$ expand or consolidate. He envisioned a chain of Aroma coffee shops, replicating the warmth and quality that had made his first store a success.

Roney's financial statements $($Figure $1$ and $2))$ provided valuable insights into the health of his business. These statements would be crucial in determining the best course of action for expansion. He is planning to buy two additional coffeehouses at a total cost of $$1\mathrm{.}5$ million with either a $10$ percent $($annual interest$)$ loan or issuance of new shares. He also expects that these new coffeehouses be able to generate an additional $$1$ million in sales with an additional cost of sales of $$400,000.$ Assume that there are no other change, and the tax rate is $30$ percent $($Ignore the tax credit available for capital investments.$)$ With his plan in mind, he then needs to analyse his financial statements by looking at two crucial metrics that could lead him to make informed decision.

Simplified Statement of Financial Position

Description

Assets $

Long$-$term assets $750,000$

Current assets $250,000$

Total assets $1,000,000$

Liabilities

Long$-$term debt $0$

Current liabilities $300,000$

Total liabilities $300,000$

Share capital & Reserves

Ordinary share capital $600,000$

Retained earnings $100,000$

Total equity $700,000$

Total liabilities and equity $1,000,000$

Figure $1$

Simplified Income Statement

Description $

Sales $500,000$

Cost of Sales and expenses $200,000$

Earnings before interest and tax $300,000$

Interest $0$

Figure $2$

In this case, Roney chose to analyse his current financial health by conducting a thorough analysis of return on capital employed $($ROCE$)$ and net profit margin $($NPM$).$ This is because these two metrics can provide Roney with valuable insights into the financial health and profitability of Aroma Coffee House, which is crucial for making informed decisions about expansion. Henceforth, by referring to Figure $1$ and Figure $2,$ he identified key components for the computation. Below is the list of components he highlighted to assist with his analysis.

Earnings before interest and tax $($EBIT$)$ $ $300,000$

Total Equity $ $700,000$

Sales $ $500,000$

Additional Sales after the acquisition $$1,000,000$

Additional Cost of Sales after the acquisition $ $400,000$

Roney's decision was far$-$reaching. It wasn't just about acquiring new shops; it was about building a legacy. Thus, by carefully analyzing his financial situation, weighing the pros and cons of financing options, and considering the potential economic impact, Roney could make an informed decision. With his passion, dedication, and strategic planning, Aroma Coffee House had the potential to become a symbol of entrepreneurial success, brewing not just coffee, but also opportunity within the community.You, as an Aroma Coffee House Manager, are required to provide a brief report to Roney Chang highlighting the challenges of applying financial ratios to determine the best course of action for expansion.