cmpepper.files.wordpress.com · Web view2015. 5. 29. · Figure 1 is a Moodle conversation helping Zoe out with how to calculate her company’s ratios. Figure 1: Moodle Comment

ACC11059 ASS#3 Claire-Marie Pepper (s0271678)

Assignment Stage 3 (ASS#3)

Course name: Using Accounting For Decision Making

Course code: ACCT11059

Program: CC11 Agribusiness and Food Security

Name of Lecture: Martin Turner

Student Name: Claire-Marie Pepper

Student Number: s0271678

Due Date: Monday 8th June 2015 11.00am

This assignment is made up of three stages and will give the opportunity to explore what your own company does and what your firm’s financial statements may have to tell you about your firm. Stage three calculating ratios and economic profit for your company’s and identifying a capital investment decision for the company.

Step 1

Step 1Step 1 involves you calculating some ratios for your firm (and also its economic profit) and assessing its business performance


The ratio analysis for Ellex has been entered into the spreadsheet can be found attached the upload of this assessment. The data that has been entered into the spreadsheet has been linked from the other two sheets making it easier to reference the figures. Looking at the data there is a range of ratios including the profit in 2011 to be a negative.

I have tried to reach out to people and see what their company’s ratios are. It would be interesting to find someone who has similar or even just discuss the differences and why with someone else.

Figure 1 is a Moodle conversation helping Zoe out with how to calculate her company’s ratios.

I commented on Aimee’s post in the Accounting Facebook Group, asking about her profit ratios that differ. I commented telling her mine where even different.


Figure 1: Moodle Comment

Figure 2: Facebook Comment

I posted on my blog to see if anyone would can back and comment and discussion what their ratios are what they mean to them, however I received no reply.

Commentary on Ratios

2014 2013 2012 201112 month 12 month 12 month 12 month

The table above shows the years and periods for each ratio.

Profitability Ratio

Net Profit Margin – net profit after tax/sales

2.4% 0.3% 2.2% -2.5%

The net profit margin ratio demonstrates the proportion of sales of every dollar of sales that is left after all expenses have been paid, and remains as net profit (SBDC; 2015). Reading Chapter 4 of the study guide and research, this ratio is useful when comparing companies in similar industries and the industry average for the medical appliances and equipment industry is 9.60%. However this industry average is of 2015, not 2014 when these figures are based off. Looking at the companies under the ‘medical appliances and equipment’, Ellex is listed with a net profit margin calculated of 2.6% which is an increase from 2014, 2.4%. Therefore Ellex may not be converting sales into actual profit efficiently but even with a net profit margin under the average field, Ellex is increasing its sales hopefully in the coming years will be able to top the industry average.

Comparing Ellex’s margin to the industry average and other companies in the field a lot of them are not converting sales into actual profit such as company Cardiovascular Systems. Inc. Their net profit margin is -22.6% demonstrating a huge loss for that company. Where on the other hand comparing


Figure 3: Blog post, asking for a discussion

Table 1: Years and periods for each ratio

Table 2: Net Profit Margin figures.

Ellex’s other competitors, such as Lumis with 8.83% net profit margin and Iridex Corp having a massive 76.36% margins, these margins are either close to the industry average or beyond. Therefore by comparing Ellex’s competitors it can be seen that Ellex may be struggling because of the strong market and opposition thus this could be compromising their potential sales and profit.

Return on Assets (ROA) – net profit after tax/total assets (average)

2.6% 0.3% 2.3% -4.6%

There are two methods when calculating ROA, however this net profit after tax/total assets (average) method has been used which has resulted in very similar ratios to the Net Profit margin figures. ROA or Return on assets indicates the number of cents earned on each dollar of assets, therefore higher values of return on assets show that business is more profitable (AC; 2011). Looking at Ellexs figures calculated they are very low, even when comparing to the industry standard, 9.80%. However companies that are more asset-intensive, ie capital intensive industries, will produce a lower ROA then companies who are low asset-insensitive, ie have minimal assets, resulting in a higher ROA.

Looking at Ellex’s competitors, Lumis has -60.88% ROA showing that the companies isn’t very profitable while Iridex Corp again has a high ROA value of 33.69%, showing that Iridex is very profitable.

Efficiency RatioTotal Asset Turnover Ratio – sales/total assets (average)

1.07 0.93 1.03 1.81 Total Asset Turnover Ration shows the company's sales to its assets. It is an efficiency ratio that tells how successfully the company is using its assets to generate revenue (AC; 2011). However it would be hard to measure or give an accurate figure as what a ‘good’ turnover figure is, therefore for Ellex, their ratio is consistent and steady over the years, thus Ellex must be using their business model efficiently, even though Ellex may not have a high turnover the main principle is the using the best practice for the business and being able to maintain steady figures each year.

Liquidity Ratio

Current Ratio – current assets/current liabilities

2.10 1.69 2.84 1.66The Current Ratio tests the liquidity of the business. This ratio shows the current assets of a business to its current liabilities, with both figures being obtained from the Balance Sheet of the business. The higher the ratio, the more liquid the company, however it works in reverse as well, if the figure is abnormally high could mean the underutilized of resources in the company. However, again what


Table 3: Return on Asset (ROA) figures

Table 4: Total Asset Turnover figures

Table 5: Current Ratio figures

figure is best to indicate the liquidity of the business? Looking at Ellex’s ratio they are relativity low, however aging they are consistent meaning that they have a consistent liquidity in the business.

Financial Structure Ratios

Debt/Equity Ratio– debt/equity

10.9% 7.0% 26.2% 8.0%This ratio measures the company’s financial leverage by calculating in a relative proportion of the firm’s debt and equity used to finance its assets. A higher ratio may indicate that the business may not be generating sufficient cash to satisfy their debt but again too low may indicate the firm’s assets are financed by equity that those of financed by debt.

Equity Ratio – equity/total assets

68.1% 65.1% 71.3% 63.6%The equity ratio measures the assets are financed by the company’s investments by comparing the amount of equity in the total assets of the business. This ratio highlights the important financial concepts of a solvent and sustainable business. Higher ratios shows that the company is paying less interest, therefore has more free cash flow, meaning their businesses is more solvent. While on the other hand, lower equity ratios indicate a larger amount of earnings spent on paying interest and the firm will have relatively higher interest rates.

By looking at Ellex’s equity ratios it can be seen that Ellex has reasonably high ratio indicating that they have more free cash flow accessible for potential growth and dividends.

Market RatiosEarnings per Share (EPS) - net profit after tax/number of ordinary issued shares

121.79 16.49 125.66 (128.02)Earnings per share ratio is an indicator of the company’s profitability. By determining the amount of net income earned per share of stock outstanding. Ellex’s ratio has decreased means that there has been new share issuance invested, however in 2013 the ratio was down to 16.49 compared to the other years which is around 120 mark, this could indicate that -------------

Dividends per Share (DPS) – Dividends/number of issued ordinary shares

Price Earnings Ratio (P/E Ratio) – Market price per share/earnings per share

Ratios Based on Reformulated Financial StatementsReturn on Equity (ROE) – comprehensive income/average shareholders’ equity

0.24% -3.91% 5.90% -16.86%The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates


Table 6: Debt/Equity figures

Table 7: Equity figures

Table 8: Earnings Per share (EPS) figures

Table 9: Dividends per Share (DPS) figures

Table 10: Price Earnings Ratio (P/E ratio) figures

Table 11: Return on Equity (ROE) figures

with the money shareholders have invested (Investopedia; 2015). Having a higher value is more favourable meaning the company is efficient in generating income on new investment. Investors should compare the ROE of different companies and also check the trend in ROE over time (AE; 2011).

However looking Ellex’s values and the industry average of 9.80%, Ellex is not doing too well, where it may be due to the lack of financial income and not using the money from shareholders to generate profits and grow the company efficiently.

Return on Net Operating Assets (RNOA) – operating income after tax (OI)/ net operating assets (NOA)

0.63% -2.71% 5.56% -11.97%Return on New Operating Assets (RNOA) ratio is to generate a longer-term perspective of the company's ability to create value. It is calculated by using the company's current assets minus its current liabilities. In a result that the higher the return, the better the profit performance for the company. Ellex’s figures are very low and in some years in the negatives, this could indicate the business may not be using their assets efficiently and effectively or I have calculated the values incorrectly.

Net Borrowing Cost (NBC) – net financial expenses after tax (NFE)/net financial obligations (NFO)

I have not calculated this ratio due to the fact that Ellex didn’t have any Financial Obligations (NFO) over the four year period, therefore I considered irrelevant to the firm.

Profit Margin (PM) – operating income after tax (OI)/sales

0.46% -2.42% 4.45% -5.20%Profit Margin (PM) ratio shows the relationship between the company’s operating income after tax and sales and the sales, profit of the business. Here, Ellex’s values have fluctuated greatly throughout the years, negatives to strong numbers to 2014 with 0.46%.

Asset Turnover (ATO) – sales/NOA

1.60 1.36 1.53 2.86Asset Turnover (ATO) is the amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets. The higher the ratio, the better, it implies that the company is generating more revenues per dollar of assets. Ellex’s ATO has decreased from 2011, however in saying that, it is very consistent within the years implying that the company is generating a consistent amount of revenue per dollar of its assets.

Commentary on Economic Profit

Four years of economic profit for the firm has been calculated in the attached spreadsheet, using the following formula:

Economic Profit = (RNOA – cost of capital) x NOA


Table 12: Return on Net Operating Assets (RNOA) figures

Table 13: Profit Margin (PM) Figures

Table 14: Asset Turnover (ATO) figures

Economic profit shows the difference between the revenue received from the sale of an output and

the opportunity cost of the inputs used. This is determined through the use of RNOA, cost of capital

and NOA. RNOA is return on net operating assets, Cost of Capital is 10% which is kept consistent and

NOA is net operating.

The following is the figures required to calculate the economic profit for the firm. The spreadsheet

attached has all calculations within the sheet have been linked.

Economic Profit 2014 2013 2012 2011RNOA 39,638 38,174 38,012 18,743Cost of Capital 10% 10% 10% 10%NOA 41,467.8 37,808.1 38,539.0 37,485.4Economic Profit or Loss (3,713.7) (1,035.8) 2,115.3 (2,242.9)

Looking at the economic profit for Ellex, the more I believe I have calculated it incorrectly. However,

if this is the true figures and my calculations are correct, it is suggested that these figures are due to

the fact that the operating income was decreased, which impacts the economic profit. In 2014 the

company had the biggest decrease in value, in turn is caused the increase of the cost of capital.

Overall I believe that operating income directly and enormously effects the results, because of this it

has caused 2012 to have a much higher economic profit than any other year, the only value not in

the negatives.

I put a post out to see if anyone had similar or different findings, as it would be nice to see who

might have similar figures as me as it would reassure me that I have calculated it correctly. I was so

happy when I got a reply! Someone else had found their company’s economic profit to be all

negatives. I was happy to explain why I thought that was caused by and what the next step would be

to take to show and prove why the economic profit was in the negatives. Other people continue to

comment in which I found a pattern with two other student’s figure. They were all negative except in

2013, therefore I suspect that something happened in that year that affect the two companies.


Table 15: Economic Profit calculations

Figure 4: Facebook discussion

Reading through a couple posts on the Accounting Facebook page seeing if anyone had posted about their Economic profits, I found one that caught my eye. The person who posted the question raised a very good question about sating that her company was obviously still afloat but how are they still afloat after a large loss, which occurred in 2014. This is very true as if a company just like the person who commented on my post for the four years was all negative, how is the company still running?

I was curious to see why, what and where is affecting the economic profit to become an economic loss, for three of the four years. But observing and comparing Ellex’s financial statements to the examples I can see that there is a vary in figures for the company’s. However, what are the correct figures a business should be producing. I believe looking at the financial statements, if a company is consistent in their figures they are on the right track. If a business is not, they should consider looking and finding areas they need to improve. For Ellex looking at their financial statements, areas such as reserves and capital have increased for the particular year 2014. This is a factor that has driven the economic profit to increase its negativity as such. Also factors such as the company’s large borrowings may be the ‘killer’ that results in their economic loss throughout the years.

Only in 2012 an economic profit was achieve therefore I investigated to find what was done differently, factors that affected that figure for that particular year. Found it! Looking at Ellex’s balance sheet for 2012 it was the only year with the lowest amount of liabilities. Comparing to 2011’s total liabilities $15,995 there was a subsequence lower total liabilities in 2012 $8,574, this could be causing the economic profit for that year.


Figure 5: Facebook discussion found

Step 2 Step 2 involves you developing a capital investment decision for your firm and completing a simple analysis of this decision using Payback Period, NPV and IRR

Ellex is a leading medical laser company who specialises in diagnosing eye conditions. Ellex undertakes the distribution and marketing of these products including; STL-Tango to 2RT Retinal Rejuvenation. In a company such as Ellex there is a big decision whether it is best to repair/upgrade a certain model or outlay a completely new, better and improved model. Or two models that serve the same purpose but one is more technology advanced. Therefore the capital expenditure proposals for Ellex will consider a type of models of the same purpose to see which is better in value, cost and investment to either repair or invest in a new one. The product of with the Ellex will consider is the Tango-SLT product, which was introduced in the Ass#2, or to repair this product for further use. However after some considerations I decided to do the same product but one an upgrade from the last. In which I am using the Tango SLT/YAG as seen in ASS#2 and a ‘newer’ more technology advanced model, Tango SLT/YAG Elite, ie, I have made up.

I did post on the Moodle Ass#3 Forum to see what other students are doing for their capital investment. I did receive a comment from one student who I discussed ideas with and they helped and suggested a couple of ideas for me for what I could do for my investment.


Figure 6: Moddle conversation about capital decision investment.

Capital Investment Decision

Tango SLT/ YAG Tango SLT/ YAG Elite Original Cost $85, 000 $100, 000

Estimated Life 8years 9years

Estimated Future cash flows

Year 1-2016 10, 000 5,000Year 2-2017 15,000 10,000Year 3-2018 25,000 20,000Year 4-2019 30,000 29,000Year 5-2020 40,000 34,000Year 6-2021 45,000 40,000Year 7-2022 50,000 50,000Year 8-2023 55,000 55,000Year 9-2024 69,000

Payback Period Haven’t got an idea how to calculate the cumulative cash flow, I know how to get the ‘payback period’ at what year the breakeven point is. But I don’t know who to get the other figures. If you know could you please help! THANKS! I Will have to look back at the study guide.

Tango SLT/YAG Investment $85,000Cash Flow $’000 Cumulative Cash Flow $

Year 1 10Year 2 15Year 3 25Year 4 30Year 5 40Year 6 45Year 7 50Year 8 55Year 9

Tango SLT/YAG Elite Investment $85,000Cash Flow $’000 Cumulative Cash Flow $

Year 1 5Year 2 10Year 3 20Year 4 29Year 5 34Year 6 40Year 7 50Year 8 55


Table 16: Capital Investment Decision

Table 17: Payback Period for Investment 1

Table 18: Payback Period for Investment 2

Year 9 69

Discussion on Capital Investment

Payback Period The payback period shows -----------, which has been calculated for both options. This calculation shows how long it is expected to take before both investments return the cost of the initial investment. Owing to the fact cash flow is expected to vary each year, cumulative cash flow has been calculated to show:

1. Tango SLT/YAG Investment- this investment will return ------ sometime in the 8.5 year,

2. Tango SLT/YAG Elite Investment – the investment will return --- sometime in the 20th year(REALLY?? BETTER DO IT AGAIN),

Strengths

Strengths associated with the payback period include:

Clear view of the risk of the investment Shows the investments breakeven point Shows and reduced the losses before they happen

Weaknesses

Strengths associated with the payback period include:

Figures may vary, changing the payback period Nil time value, money can fluctuate Investment may stop but expense for that investment can continue

Net Present value (NPV)Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project (Investopedia; 2014). To calculate this figure for my company the use of cost of capital is needed which is kept at a consistent rate of 10%. Positive NPV’s add value and are considered an investment opportunity, on the other hand, negative figures mean less cost of capital the firm uses and are considered as a bad investment.

For investment 1, the net present value is $77,314.87

For investment 2, the net present value is $71,912.43.

These two figures are very close considering the difference in the original cost.

Strengths

The invested money is calculated accurately and correctly Weaknesses


The payback or time to payback isn’t measured correctly or best to its ability. As factors can change.

The extent of the project investment is not taken into consideration.

Internal Rate of Return (IRR)Internal Rate of Return (IRR), a discount rate, is used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project (Investopedia; 2014). Expressed as a percentage return, the IRR is easy to understand as such Tango SLT/YAG return of 26% is better than 21% on Tango SLT/YAG elite.

Strengths

Shows the amount of return on the/on an investment. Demonstrates the potential growth of a firm or potentially not

Weaknesses

Through the use of the IRR percentage it can calculate the potential payback period when looking at the results, where NPV values can’t.

Conclusion Overall, it is recommended to implement the first product the Tango SLT/YAG, not only does it have the best rate of return but it more well know and reliable and trusted amongst the market. Whereas the new Tango product is not as well know, costs more and doesn’t serve the same original functions as the other.

Looking at the results, investment one had a higher net present value of $77,314.87, compared to investment two’s, $71,912.43. However there is a lot to consider when achieving a capital decision investment, factors such as marketing and advertising campaigns, without these IRR, NPV and payback period will have little effect on the overall management on the company’s investment decisions. If they are not conducted correctly, and to the best of the firm’s ability there is no point in the decision at all. As the decision needs to make sure that it is what the market wants, needs and there is a demand for the investment. Without this, the company will not be able to grow and invest strongly later on into the future.

As Peter Drucker once said, “Making good decisions is a crucial skill at every level.”

Step 3Step 3 involves you providing (and receiving) feedback to three other students in our course on their draft ASS#3. These will (usually) be the same three students you provided feedback to in ASS#1 and ASS#2.

Feedback group 15 with the following people:

Ching Yu Yeung Chloe McTurk Christopher Krebs


Reference List Accounting Explained, 2014, Current Ratio, viewed 25th May 2015, http://accountingexplained.com/financial/ratios/current-ratio

PBR, 2010, Ellex Medical Lasers Limited, viewed 25th May 2015, http://www.pharmaceutical-business-review.com/companies/ellex_medical_lasers_limited

Ellex, 2012, Investor Presentation, viewed 25th May 2015, http://www.ellex.com/downloads/corporate/presentations/ELX_investor_presentationDec12results_Final.pdf

Investopedia, 2015, Business Terms, viewed 25th May 2015, http://www.investopedia.com/dictionary/

Business Gov, 2014, Profit Margin, viewed 26th May 2015, https://www.smallbusiness.wa.gov.au/business-topics/money-tax-and-legal/money-matters/understand-your-accounts/understanding-profit-loss-statements/components-of-a-profit-and-loss-statement/profit-margin-ratio-s-and-break-even-analysis/

Yahoo, 2015, Industry Summary, 26th May 2015, https://biz.yahoo.com/p/sum_conameu.html


https://biz.yahoo.com/p/sum_conameu.html

https://www.smallbusiness.wa.gov.au/business-topics/money-tax-and-legal/money-matters/understand-your-accounts/understanding-profit-loss-statements/components-of-a-profit-and-loss-statement/profit-margin-ratio-s-and-break-even-analysis/



http://www.investopedia.com/dictionary/

http://www.ellex.com/downloads/corporate/presentations/ELX_investor_presentationDec12results_Final.pdf

http://www.ellex.com/downloads/corporate/presentations/ELX_investor_presentationDec12results_Final.pdf

http://www.pharmaceutical-business-review.com/companies/ellex_medical_lasers_limited

http://www.pharmaceutical-business-review.com/companies/ellex_medical_lasers_limited

http://accountingexplained.com/financial/ratios/current-ratio

Documents

cmpepper.files.wordpress.com · Web view2015. 5. 29. · Figure 1 is a Moodle conversation helping Zoe out with how to calculate her company’s ratios. Figure 1: Moodle Comment