Honest Tea
Jessica Lillquist
Honest Tea Case Study
2/4/15
Financial Analysis of Honest Tea Through Honest Tea’s three years of business, their business shows some positive signs of a promising company. Since Honest Tea is a start-up company, it is understandable that their net income is in the negatives since their expenses will outweigh their sales, but as the three years have gone on, their net income has improved, and even increased by 74% from 1999 to 2000 from -$882,359 to -$228,879, which shows a positive sign of growth. Honest Tea is also very capable to pay back their short term liabilities since their current ratio is a high 5.92. Their profit margin has also increased over the three year period from -71.7% to -36.3% showing positive signs of profit and ability to grow. Honest Tea is able to generate $0.50 for every dollar of assets they have, which isn’t a huge amount, but being in the positive for a start-up company is important. Unfortunately, Honest Tea isn’t very efficient in turning over its inventory since this turnover ratio is less than one, but, for a start up, they are doing well. Revenues increased tremendously from 1998 to 1999, but fell by almost 50% in 2000, so that is worrisome. The debt to equity ratio in 1999 was .241 and it decreased in 2000 to .142. A lower debt to equity ratio usually implies a more financially stable business, so it’s great that the debt to equity decreased from 1999 to 2000. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender and requires debt servicing or regular interest payments. In other words, debt can be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to make the payments. Creditors view a higher debt to equity ratio as risky because it shows that the investors haven't funded the operations as much as
Honest Tea Case Study
2/4/15
Financial Analysis of Honest Tea Through Honest Tea’s three years of business, their business shows some positive signs of a promising company. Since Honest Tea is a start-up company, it is understandable that their net income is in the negatives since their expenses will outweigh their sales, but as the three years have gone on, their net income has improved, and even increased by 74% from 1999 to 2000 from -$882,359 to -$228,879, which shows a positive sign of growth. Honest Tea is also very capable to pay back their short term liabilities since their current ratio is a high 5.92. Their profit margin has also increased over the three year period from -71.7% to -36.3% showing positive signs of profit and ability to grow. Honest Tea is able to generate $0.50 for every dollar of assets they have, which isn’t a huge amount, but being in the positive for a start-up company is important. Unfortunately, Honest Tea isn’t very efficient in turning over its inventory since this turnover ratio is less than one, but, for a start up, they are doing well. Revenues increased tremendously from 1998 to 1999, but fell by almost 50% in 2000, so that is worrisome. The debt to equity ratio in 1999 was .241 and it decreased in 2000 to .142. A lower debt to equity ratio usually implies a more financially stable business, so it’s great that the debt to equity decreased from 1999 to 2000. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender and requires debt servicing or regular interest payments. In other words, debt can be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to make the payments. Creditors view a higher debt to equity ratio as risky because it shows that the investors haven't funded the operations as much as