Thomas Fine Teas is the subject of CIMA's August 2018 Operational Case Study. Thomas Fine Teas (TF Teas from now on) is a tea manufacturer based in Deeland, a market with favourable demand conditions given the popularity of tea in the country. Overall, TF Teas does not have much to worry about from a financial perspective: they have low gearing, the company is liquid, solvent and generating good revenue and profit growth. There are signs of conservatism though, which is unsurprising perhaps for a family-run firm, and I believe the company could do more to take advantage of the favourable environment in its home market. 


The statement of profit or loss to March 31st 2018 shows a positive performance over the last year, with revenue growing 5.4%. This growth is in line with the general industry growth in the increasingly popular green tea and infusion segments. The fact that TF Teas has achieved this growth in spite of the fact that they are still reliant on their black tea blends (which are stagnant in terms of popularity), is impressive and points to the company's ability to price their products highly given their excellent reputation for producing premium tea blends. TF Teas is also to be praised for demonstrating cost discipline which contributes to even higher net profit growth of 20% between 2017 and 2018. Their cost of sales figure rose by just 3.6% in 2018 for example. I believe they could secure an even lower cost of sales figure should they sign exclusive direct agreements with their suppliers - in this way they could secure more favourable terms. All of the companies profit margins showed improvement in 2018 compared to 2017, and overall the company should be pleased with their performance. 


The first thing to note on the statement of financial position is that TF Teas is not an especially capital-intensive business. The manufacture of tea requires skill and expertise but does not require the very latest high-tech machinery. It's unsurprising that receivable days is so high at 103 days, given the size and bargaining power of TF Teas' main buyers (supermarkets, wholesalers etc). The company is slightly conservative with its finances, as they are opting to hold cash rather than invest it (cash has doubled in the last year). I think TF Teas needs to be bolder in investing in its asset base to ensure future revenue and profit growth. At the moment internal funding is being used to finance the small investments the company has made in its asset base over the last year. Most of the net profit is paid out to the shareholders, with the dividend in the last year representing 71% of the net profit. This represents an opportunity cost, as the company has opted to satisfy shareholders instead of seeking out profitable investment opportunities. Gearing (long-term debt/equity) is very low currently, standing at just 3.6%. This gives TF Teas flexibility in being able to seek out debt capital should they need it. 


The statement of cash flows for 2018 shows the negative cash effects of the company's working capital approach. Receivables were high in 2017 and have increased and TF Teas is paying off its own suppliers more quickly which also eats into cash. We also see in the cash flow statement the low amount spent on PPE in the last year, which I believe to be a missed opportunity. Market demand conditions are very favourable in Deeland, and there is scope to ramp up production of new green tea blends and infusions to take advantage of this environment. There are of course advantages to holding more cash (better ability to react to surprises, ability to avail of early settlement discounts etc), but I think the time may be right for TF Teas to a be a little more in terms of investment.

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