Hi all,
Please see attached my draft assignment for feedback. You can also find my firm’s financial statements through the link below.
I look forward to your feedback. Any feedback will of course be reciprocated.
https://www.autoneum.com/investor-relations/financial-reports/
12066074 – Haitham Haddad – Autoneum Financial Statements
Kind regards,
Daniel
Profitability Ratios
The profitability ratios for the years in review are in a bell shape. That is, they increase from 2015 to 2016, remain somewhat steady from 2016 to 2017, and then drop back to 2015 levels in 2018. This is despite revenue increasing steadily throughout 2015 to 2018. This implies costs have increased more than revenue has. A quick glance at the income statements suggests this is true.
Efficiency (or Asset Management) Ratios
These ratios have steadily decreased over the years in review. To me, this means that for every dollar invested in the firm, the firm has been making less sales. Given the firm has been steadily increasing revenue over the years, does this mean the increase in sales has not been value adding?
Liquidity Ratios
There appears to be no consistent trend in these ratios nor any drastic fluctuations, which is good I suppose. The current ratio and quick ratio 1, all show numbers that are greater the one, which means the firm has net assets. The ratios for quick ratio 2, turns all the figures in to under 1, which implies that receivables make up a considerable portion of assets and perhaps that the firm is not sitting on that much cash.
Financial Structure Ratios
The average debt to equity for Autoneum is 1.54. A quick online search suggests this is very high relative to its competitors. The average for Autoneum’s competitors are around 0.50. The same can be said for the equity to assets ratio, it is very low compared with their competitors. The firm’s times interest earned ratio appears to be in good shape, with the lowest being at 6.3 in 2015. This tells me that in 2015, that the firm could meet its interest payments from its EBIT 6.3 times over.
Market Ratios
I found these ratios told me very little about the business of Autoneum. The only real takeaway for me is that I would not be investing in Autoneum for cash flow with a high of 3.1% in 2015 for its dividend yield ratio.
Ratios Based on Reformulated Financial Statements
Dividend Payout Ratio
This ratio fluctuates a lot. It appears Autoneum prefers to keep its dividends in dollar value somewhat consistent, however because CI fluctuates a lot it causes this ratio to fluctuate a lot.
Return on Equity (ROE)
Autoneum’s ROE has a high of 30.0% in 2016, compared with a low of 3.2% in 2018. This is a pretty drastic difference. The 2018 figure of 3.2% looks to be the result of increasing equity and a reduced CI. This suggests management is not using the company’s assets efficiently, in order to generate a profit.
Return on Net Operating Assets (RNOA)
This calculation produces virtually the same results as ROE does, so nothing worth mentioning additionally here.
Net Borrowing Cost (NBC)
These figures end in a low of 5.1% in 2018, from a high of 31.4% in 2016. It appears the firm has increased its NFO, but net financial expenses after tax remained steady.
Profit Margin (PM)
These figures appear virtually the same as the calculations from non-re stated figures.
Operating Liability Leverage (OLLEV)
Autoneum has kept its operating liabilities steady, whilst increasing its NOA, resulting in a decreasing OLLEV.
Financial Leverage (FLEV)
This ratio has remained very low and relatively stable.
Return on Operating Assets (ROOA)
From 2016 to 2018 this ratio has declined, which is consistent with all the other efficiency ratios, which have been suggesting the firm’s efficiency of assets have been decreasing over time.
Operating Liability Leverage Spread (OLSPREAD)
I struggled to fully interpret this one. I went back through the study guides and did some Google and YouTube searches, but this revision did not help much. I can see the calculation is ROOA minus the short-term borrowing rate, which here is 5%. To help me think about, I thought, what if ROOA only equalled 5%? Therefore, OLSPREAD here would be 0%. Thus, I am going to conclude (rightly or wrongly) my understanding of OLSPREAD is the additional income earned from using operating leverage.
Asset Turnover (ATO)
This figure has been steadily declining from 2015 to 2018. This means that for every proceeding year; the firm has made less sales for every dollar of NOA.
Growth in sales, operating income, net operating assets, and shareholders’ equity.
Growth in sales is evident, but the level of growth remains roughly the same and minor. Growth (or decline here) in operating income goes from a high of 189.2% in 2016 to a low of negative 54.9% in 2018. Operating income is down in 2018 due to quite a large increase in quite a few operating expenses. Growth in NOA remains modest, except for in 2017, which appears largely due to an increase in tangible benefits. Shareholders equity was growing rapidly until 2018, when it went from 31.5% in 2017 to 1.2% in 2018. The sudden and large increase in tangible benefits looks to also be to blame here.
Free Cash Flow
Free cash flow is in the negatives for 2017 and 2018. Autoneum’s OI has been sliding and its NOA has been increasing, resulting in the negative free cash flow.
Implicit Interest After Tax
Autoneum’s implicit interest rate after tax has remained steady, which makes sense as the short-term borrowing rate is not changed from 5% and there has not been any drastic changes in its operating liabilities.
Economic profit
Economic profit has been fluctuating pretty drastically, resulting in a high of CHF 104.6 million in 2016 and a low of negative CHF 11.6 million in 2018. This looks to be the result of decreasing OI, a key input of RNOA, which is a key input of economic profit.
Hi all,
Please see attached my draft ass#1 for feedback. You can post your feedback here, on the blog forum in Moodle, or by email @ haitham.haddad@cqumail.com.
Please note, it is only about 70% complete.
I look forward to your comments.
Kind regards,
Daniel
G’day everyone,
Please see a draft version of steps 7 to 11 for your review.
Feedback welcome.
Regards,
Daniel
Hello again everyone,
Please click on the links below to view my firm’s website as well as read some interesting information and news about my firm.
Regards,
Daniel
G’day everyone,
Please see below some info about my firm and the industry within which the firm operates.
What does the firm do and who is Amber Technology?
“Amber Technology is one of Australia’s largest and most respected distributors of technology equipment solutions for the professional media, film, recording, live production and home entertainment marks.” – Amber Tech.
Amber Tech essentially provides both goods and services to a large range of both commercial and retail customers. The firm was formed in 1987 and was ASX listed in 2004. Considering the firms biggest cost is to its suppliers, I deduce that it provides substantially more goods, than it does services.
Amber Tech does not produce the goods that it sells; it purchases them from its producers to which it claims to have exclusive rights. The firm essentially buys products wholesale and then re sells it to its customers at a mark-up. Judging by the firm’s 12 million dollars worth of inventories listed on its balance sheet, I assume that the firm has to hold on to a considerable amount of its products before it moves on.
The firm focuses in five key areas or ‘solutions’:
Random facts about Amber Tech’s 2017 annual report and the company itself:
Click here to watch a video explaining what a management buyout is and why the managers of a firm would decide to initiate and / or partake in a buyout.
What is the industry like?
The firm primarily operates in the technology distribution sector, whist also providing some services that would be considered to be in the technology and media sector. The distribution sector is facing increasing pressure to reduce prices, mainly due to increased competition in the industry and easier access for consumers to go direct to wholesalers via online services such as Amazon. Further, the media and broadcasting sector (which some of the major clients of Amber Tech operate in) are facing a high degree of uncertainly at the moment due to the significant uptake of online streaming services such as Netflix and Stan.
Hi everyone, please see links below to steps 3 to 5 for your review. Please provide feedback without hesitation and comment on area that you wish. Please email your feedback to me at haitham.haddad@cqumail.com
Regards,
Daniel.
Financial statement ratios are something that have always been a little foreign to me however I have always been interested in them as I know having the ability to determine what financial statement ratios mean can significantly assist me when I decide to choose what shares I want to invest in; to feel confident in the growth of the firm in question.
Similarly, managers of a firm (or at least the accountants who advise them) need to be able to review, analyse and interpret data (or ratios in this circumstance) and then make conclusions to assist managers or any other interested party in making decisions in matters related to a firm.
From writing some of the other steps I know there are going to be items that are going to stand out and really influence the ratios for the firm such as; the $13,305,000 gain on extinguishment of debt, the massive loss in 2015 and the mega turnaround in profit for 2016.
Profitability
What is the net profit margin and what can we learn from it? After listening to Maria comment on it in the week 9 lecture and doing a few Google searches I quickly understood it to be the amount of profit per every dollar of sales after all costs all costs are covered expressed as a percentage. In my firms’ case, I understand the results to mean that in 2013 for every $1 of sales the firm made a loss of $0.01.
You do not have to be an expert to understand the importance of this ratio. When looking at the ratios for the past several years you can quickly determine how a firms’ profitability is tracking or if in this case it is even making a profit.
| 15.5% | -15.5% | -3.3% | -1.2% |
The figures above are my firms’ net profit margin for 2016 to 2013 respectively. By looking at these figures you can see that the margin was progressively worse from 2013 to 2014 and then had a significant drop in 2015. What caused such a negative net profit margin? In 2015, my firm had a measly $7,337,000 gross profit. Whilst some people reading this may think that it is quite a bit of profit but when you compare that to total revenue of $75,207,000 it really is not much. The gross profit for the firm is less than 10% of total revenue and this is supposed to cover the remaining costs such as selling and marketing expenses, the selling and marketing costs alone cost over and above the gross profit margin by $2,127,000 not to mention the other costs such as general and administrative expenses and develop costs.
The selling and marketing costs were only marginally above the average for the other three years so it is not solely responsible for such a negative profit margin. Almost every item listed under the costs of sales in the 2015 financial statements was higher than the average of the other years. The cost that stood out as being more than marginally higher than the rest was the cost of subcontractors and subcontracted work. The cost of subcontractors and subcontracted work in 2015 cost $8,760,000 more than 2016. Whilst the total cost was still significantly less than the cost of subcontractors and subcontracted work in 2013 and 2014 the total revenues for those years were much higher. I would argue that this cost is one of the primary drivers for such a high negative net profit margin.
After going back through the 2016 financial statements trying to find other key drivers for such a high negative profit margin in 2015 and then such a large swing in profit for 2016 I found the following comment in the highlights for 2016;
Gross margin increased strongly to 16.4% in 2016 compared with 11.6%** in 2015 – driven by a mix of cost efficiencies and higher margin sales
I discovered the reduced cost efficiencies were mainly due to focusing on three manufacturing locations namely Egypt, Ethiopia and Vietnam and streamlining and improving their product base.
An interesting point to note on the higher margin sales is whilst researching the contribution margins for the previous step I came across a document on the internet that stated the minimum profit margin for each product must be 18% above all direct costs associated with manufacturing the product.
I understand the return on assets ratio measures the ability of a firm to generate profit on its assets. For 2013 to 2015 Bagir Group Ltd continually returned a progressively worse return on assets ratio. For a reason I am yet to realise, for every year the return on assets ratio is almost exactly double the net profit margin. I do not think this is a coincidence so it must be directly linked to sales margins or something similar.
A potential way managers could use this ratio is to calculate the ratio for their competitors and then determine if there is a competitor within the industry who has an above average return on assets. The managers can then study that firm to determine what that company is doing to provide a higher than average return on assets compared to industry and potentially adopt a similar strategy.
Efficiency ratios
I had quite a bit of trouble calculating the days of inventory ratio. Whilst the example in the lecture was quite simple the difficulty I had was that the items required to be used in the calculation were amalgamated amongst other costs in the financial statements so I could not link it directly. To negate this issue I went back to the original financial statements and calculated the costs I had to use as a percentage of the amalgamated total cost and then subbed that in to the equation. My drama then was that there were several calculations to be done within the calculation itself. Fortunately, the other unit I am currently undertaking is essential statistics and I used the lessons learnt from that (and some trial and error) to work out how to do the calculation. After using three brackets to determine the order of operations I came to the answer I was after and confirmed it with my calculator.
As the name suggests, I understand the ratio measures the average time inventory is held on to before it is sold. Bagir Group Ltd days in inventory ratio varies between 100 to 200 days or 3 to 6 months. Due to the firm having production operations across the globe and selling to retailers instead of consumers themselves I believe is the reason for such high amount of days in inventory. Moreover, I assume the firm operates on a periodic basis with transporting its inventory from its manufacturing plants to its customers which might vary by 1 or 2 months depending on demand thus explaining the high days in inventory even when the firm is going quite well like in 2016. I assume in industries that market and sell direct to consumers will have on averages less days in inventory compared to industries that manufacture products and sell to retailers instead.
By way of comparison, if a firm had lower days in inventory compared to the industry average this may reflect high demand for their products but it also may reflect that the firm might not have enough inventory to keep meeting that demand.
I understand the total asset turnover to be quite similar to the return on assets except the total asset turnover measures how much sales are generated from a dollar of assets compared to how much net profit is generated from a dollar of assets. I do not understand why this figure is expressed as a normal number instead of as a $ or %.
Whilst this figure gives an observer a good overview of the revenue generating ability of the firm from its assets it disguises all the other costs, thus providing a limited and potentially masked value.
Liquidity
After typing ‘current ratio explained’ in to Google a long list of websites and videos appeared offering to help explain. There were also lots of forums where people had asked other people to help them explain the ratio. After going through a few of the websites and watching some of the videos I came to the realisation this is a very important ratio, especially for creditors. After watching the lecture I learnt from Maria that creditors often place covenants on debtors that stipulate that if the debtor goes below a certain ratio than certain conditions may take effect.
I understand the ratio illustrates the ability of a firm to repay its short term debts, I also read that it is often referred to as a firms working capital. Fortunately, my firm has had a positive current asset ratio throughout the last four years which suggests that it had and currently has the ability to repay its short term debts. Bagir Group Ltd’s current ratio actually grew higher throughout the last four years culminating at 2.4 for 2016 despite the downturn in profit for 2015. This suggests to me that whilst the firm did have quite a substantial loss in 2015 it was not likely to default on its loans.
I also understand the current ratio can be interpreted as for every dollar of liabilities the firm has how many dollars of assets does the firm have to pay for it.
Some may argue that the current ratio is a good tool to measure a firms’ business performance compared to others in the industry. I would argue that it is actually quite flawed. Consider the following example:
Is Company A really in a better financial position than Company B? Company B has 20 times the amount of cash than Company A. If the current ratio is suppose to assess the financial position of a firm and its ability to repay its debt, does it actually do that effectively if it does not differentiate between cash and inventory within assets. An alternate equation that does include the amount of cash in assets is (cash + receivables / current liabilities). This would give a new current ratio of .5 and 1.1667 for Company A and B respectively. These new results seem more appropriate to assess the financial position of a company and its ability to repay its short term debts.
Financial structure
After calculating the debt/equity ratio for Bagir Group Ltd I initially was not quite sure what it meant. The figures for 2016 to 2013 respectively are as follows:
| 53.2% | 8546.4% | 313.6% | -198.0% |
I went back over the week 9 lecture and learnt that in general what it means is that for every dollar of equity the firm has, is financed by $x. Now looking at the figures for my firm I can see that in 2016 for every dollar the firm has in equity it was financed by $0.53. I think that is pretty good and according to the internet it is. In 2015, it had $85.46 in debt for every $1 of equity, which is not so good. This is a reflection of the poor financial performance of Bagir Group Ltd that year.
I also understand that the result of the debt to equity ratio is used to asses risk in a firm. The level of risk is proportional to the percentage. The higher the percentage the higher the risk, the lower the percentage the lower the risk but what is an acceptable risk? What is considered healthy? Does it vary from industry to industry? The consensus on the internet is a 2:1 ratio is considered healthy, that is for every $1 in equity there should be no more than $0.50 in debt. In my firms’ case 2016 is the closest to the 2:1 ratio it has been in four years.
Another thing I am unsure of is what a negative ratio means in this circumstance? I have calculated the debt/equity ratio for 2013 as follows: Total liabilities $71,507,000 / total equity (36,108,000) x 100 = (198%). A point to note is that the firm did not go public until 2014 so it only had a limited amount of equity to begin with which was mainly sourced from private funding and the boards vested interest. When I remove the negative from the equation I still get 198% but as a positive number instead. After staring at my financial statements and ratios for about 10 minutes trying to understand what it meant to have a negative ratio and not coming to any meaningful conclusion I decided to post a question on the unit Facebook page and scour the internet for an answer whilst waiting and hoping one of my peers or Martin would reply to my post and answer my question.
So, after a solid 30 minutes of research online and no response on Facebook I have all but given up. My understanding for 2013 will now remain that for every $1 in equity the firm does not have, it is financed in debt by $1.98
When I typed in ‘equity/assets ratio explained’ in to YouTube and nothing matching my search came up I knew this was going to be another hard one not even considering I had another negative ratio as well for 2013. Maria made a small comment in the lecture saying that for Wesfarmers in 2016 is funded 56.3% by equity when she was explaining how to calculate the equity ratio. In another words, I understand it to be a measure of how much the firm is financing its assets using equity.
| 65.3% | 1.2% | 24.2% | -102.0% |
Looking at the figures above for Bagir Group Ltd’s equity ratio you can quickly identify that these ratios are consistent with financial performance of the firm reflected in the aforementioned ratios. When I look at the ratio for 2013 I am again confused. If the ratio is suppose to measure the portion of assets that is funded by equity and you think of assets as a pie graph than how is it possible to have a figure over 100% let alone negative 102%? In reality does this just mean a firm’s assets are not funded by equity at all and the ratio is arbitrary? The 2014 ratios illustrates how little equity is actually funding the assets and even more so for 2015 at just 1.2%. If I was a creditor I would be getting quite worried.
Calculating the opposite values of the equity ratio obviously highlighted the portion of assets which is funded by debt or an alternative source of finance other than equity. As you can see for all years except 2016 the firm was highly leveraged. Maria mentions in the lecture that she gets worried when a firms debt is over 40%. As you can see she would be highly stressed if she was looking at my firms ratios. Considering my firm was highly leveraged in 2015 and had a negative net profit for the year I would be highly worried if I was a creditor or investor. Fortunately for them, the firm turned this ratio around for 2016 bringing it fewer than 40% whilst also being quite profitable.
Eventually, Martin and another student did get back to me clarifying the issue I had with a negative debt debt/equity ratio confirming that I initial thoughts were actually correct. Below are screenshots of the conversations;
| 34.73% | 98.84% | 75.82% | 202.00% |
Market ratios
Before I comment on the ratios individually I would like to say that determining the market price per share was a much more arduous and complex process than originally thought. The market share prices are not listed in any of their financial statements so I set out to do some research to find out manually what they were for the past four years. As it turns out Bagir Group Ltd is listed on the London stock exchange but its financial statements are in $USD.
To determine each year’s share price on the 31st December for each year I first found the listed stock on the London stock exchange and wrote down the price for the stock for the 31st December for each year. The stock price was quoted in GBX so I converted it to GBP which was straight forward. Now because my firms financial statements were listed in $USD I had to convert the stock price from GBP on their respective dates to $USD but before I did that I found a graph on Google with the historical exchange rates between GBP and $USD and then wrote down the exchange rates for the last four years on the 31st December. I then converted the share price from GBP to $USD. It was definitely a lot harder than just being told the share price for each year. It took me a while but I felt like I had learnt and accomplished something afterwards. The only year I did not actually do this for is 2013 because it was only privately funded at that point and its share price was listed in NIS, so all I had to do was convert it to $USD using the exchange rate for NIS to USD on the 31st December in 2013.
The first market ratio being earnings per share I think is quite simple to understand. I believe it to be the value added (or subtracted) to the shareholders divided by the amount of shares or ‘pieces’ a firm is broken in to. Earnings per share for Bagir Group Ltd are as follows:
| $ 0.11 | -$ 0.23 | -$ 0.09 | -$ 0.39 |
Considering the average share price for the past four years is 0.11 the earnings (and losses) per share are quite substantial. In the first year the firm went public being 2014 investors lost $0.09 per share, followed by a bigger loss in 2015. The gain of $0.11 in 2016 was marginal compared to the losses already Incurred. Below is a graph of the entire history of BAGR listed on the London stock exchange and illustrates the lack of investor confidence. Even though the firm made a big turnaround in profit for 2016 the stock has continued to decline. If you look just above the vertical line above 2016 below you will notice there was a slight increase in the stock price. I assume this was in anticipation of the release of the interim results for the six months ending 30th June. As you can also see the stock price went down just as quick as it came up.
I understand that the difference between earnings per share and dividends per share is the amount of profit a firm wishes to retain; the balance is paid out in the form of a dividend. In my firms’ case, when it makes a profit it just subtracts that profit entirely from the accumulated deficit and when it makes a loss it adds it to the accumulated deficit. I also understand that some firms when they have a bad year can actually pay more in dividends than they had in earnings per share. Why would a firm do this? I suppose some firms want to remain consistent with their dividend payout as not doing so may cause a lot of investors to sell the shares causing the firms shareholders equity to reduce proportionately.
Bagir Group Ltd’s dividend policy is as follows:
The Board intends to adopt a progressive dividend policy to reflect the expectation of future cash flow generation and the long-term earnings potential of the Company. Based on the above expectations, the Directors intend that the Company will (in accordance with the provisions of the Companies Law) pay dividends annually, made up of an interim dividend and a final dividend to be announced at the time of the interim and final results in approximate proportions of one third and two thirds, respectively, of the total annual dividend. The Board may revise the Company’s dividend policy from time to time in line with the actual results of the Company. Under the terms of the Debt Agreement with Bank Leumi and Discount Bank, the Company has undertaken that, except with the consent of Bank Leumi and Discount Bank, the aggregate amount of dividends which it will distribute in relation to any particular financial year will not exceed 55 per cent. of the annual net profits, save that the figure in relation to the financial year ended 31 December 2014 shall not
exceed 70 per cent. (instead of 55 per cent.).
Whilst this policy seems fair and quite progressive Bagir Group currently has an accumulated deficit to the tune of ($73,204,000) and will not be paying a dividend until this accumulated deficit turns in to retained earnings. This non existence of dividend may be one of the primary reasons the firm has a lack of investors.
The price earnings ratio is a term I have not come across before. In the lecture Maria initially says that the lower figure the better and 120 is way too high for her to invest in. That did not really tell me what it meant though. She then explains that one of her students explained it to her as the amount of years it will take to earn your money back. After listening to that I thought to myself; how on earth does it mean that? I decided to just sit there and think about it for a few minutes. Not long after starting to just sit and think I had a light bulb kind of moment and realised what that student was getting at and I then thought that was actually a perfect way to describe it! Good on that student! I now realise what she meant is that for every year of earnings per share how long will it take to reach market price.
Considering the above I can immediately identify two flaws; the first being that it only considers the earnings ratio for that year alone. To be more accurate, instead of using the earnings ratio for that year it could use the average for the past five years combined with the average forecasted for the next three years and just use the market price you bought it at or the current market price if you have not bought yet. The second flaw is that as discussed earlier the earnings per share ratio is focused on value add rather than actual cash in your pockets like dividends so the price earnings ratios calculated is almost arbitrary unless you calculate the average earnings ratio over a few years or use the dividend ratio instead. It is almost akin to the difference between accounting profits and cash profits.
Bagir Group Ltd’s price earnings ratios are as follows:
| 0.45 | (0.24) | (2.10) | (0.36) |
I guess for my firm that concept does not work as logically as it did for the Wesfarmers example. Looking at the ratios for 2013 to 2015 it is basically saying that if it continues the same earnings ratio each year than it will in reality never earn you back market price per share. The 2016 figure is a lot more hopeful and is actually saying that you if you bought the share at market price you would earn your money back in 164 days. Pretty good return on investment I would say! Maria also mentioned in the lecture that the average price earnings ratio is between 15 and 25 across all industries. As you can see Bagir Group Ltd falls way outside that average.
Ratios Based on Reformulated Financial Statements
The return on equity ratio was explained well by Maria and I understand it to be the profit made in a year compared to the amount of shareholders equity, expressed as a percentage. Maria also said that you can think of it like an interest rate the bank may pay you for depositing money with them. Bagir Group Ltd’s return on equity ratios are as follows:
| 46.96% | -2756.67% | -24.45% | 3.40% |
2013 seems like a pretty low return considering the risk involved in the business. Most banks will probably offer 3.40% guaranteed return in one of their term deposit options and that is essentially with no risk. Why would an investor buy shares in a company that is retuning such a low return on investment? In the following two years you can see that investors actually lose a considerable amount of value in the firm and it is actually costing the investors to have their money deposited with the firm. As with the rest of the ratios I have gone through so far there is light at the end of the tunnel being 2016. A whopping 46.96%! Now that is a good return on investment but as the saying goes if you want big returns than you have to take on big risk. Whilst 46.96% is quite a significant return it is not reflected in the stock price or the dividend payout.
Return on net operating assets I understand to be almost the same as the return on assets ratio mentioned previously the difference being that this ratio uses operating income and net operating assets thus seeing the figures for what they really are. These figures to me are like cutting the fat off steak and just looking at what is left.
The return on assets originally calculated is listed on top and the new return on net operating assets is listed on the bottom:
| 30.5% | -32.1% | -6.4% | -3.4% |
| 14.97% | -62.92% | 1.00% | 17.70% |
As you can see using the new figures, the return on assets was actually worse than originally calculated for 2015 and 2016. There is quite a significant turnaround in 2013 and the return become positive for 2014.
The net borrowing cost seems like a really important ratio to calculate. I guess it is basically expressing the interest rate payable for a firm. When I originally did the calculations I had a few negatives because I had listed my net financial expenses as negatives and I did not really understand how it made sense as a negative so I went back over the lecture and realised that you are supposed to change negative numbers to a positive. My only drama now is that for 2016 I actually had net financial income instead of net financial expenses. What am I supposed to do with that? Let me think about it logically. If the aim of this ratio is to determine the cost of borrowing in percentage and it is like an interest rate than I can understand why it would be a positive number if a firm had net financial expense after tax because that is the interest rate paid. If I actually received money from my debt more than paid (I.e. having NFI instead of NFE after tax) then I want to find out how much I actually earnt from having finance expenses. Considering this concept, I know believe I should have a negative net borrowing ratio for 2016.
Before I changed it to a positive I decided to look up other student’s ratios and financial statements to see if anyone else had the same problem. I looked at the first students I found and went straight to the bottom of their restated financial statements to see if they had NFI for any of their years, they did for two out of four. I clicked on the ratio sheet to see how they calculated it and I noticed that all their net borrowing cost figures were all in negatives and they either forgot or had not realised that they are supposed to be positive numbers if your firm had NFE after tax. I made a note to let this person know of their mistake and continued on looking for another example. At this stage there were only about five already posted on blogs, Facebook and Moodle and none of them had NFI after tax. What about Danielle Bradleys, the exemplar from last terms? I was glad to find out that she did in fact have NFI after tax for three years and calculated them as a negative in her ratios. Surely the exemplar would be correct right? I decided to just go with it and my figures turned out as follows:
|
The 2013 rate seems quite reasonable for an interest rate; it is basically a few percent more than what I am paying on my home loan. I am not sure what the average business loan for firm is but I would assume it is closer to the figures for 2014 and 2015 due to the higher risk a bank has to take on compared to giving a home loan to a regular couple on a decent wage who is less likely to default on their loan then a firm.
As you can see I have listed the 2016 net borrowing cost as a negative for the reasons mentioned earlier. It is quite hard to believe that the bank was paying the firm an interest rate of 99.86% right? What actually happened that caused this is the banks forgave $13,305,000 in debt in return for shares. This is considered finance income for the firm and is the reason for such a high net borrowing cost.
The profit margin appears to have the same relationship with net profit margin as return on net operating assets had with return on assets. The difference is as follows with the net profit margin on top and the new profit margin calculated on the bottom.
| 15.45% | -15.49% | -3.28% | -1.23% |
| 3.08% | -12.50% | 0.26% | 2.70% |
For the years 2013 to 2015 you can see that the profit margin has actually improved. On the contrary 2016 has lost a whopping 12.37% on their profit margin. How can this be? Majority of the firms profit came from finance income most notably the gain on extinguishment of debt as mentioned earlier. So when you only include the operating profit, it actually did not generate that much profit at all.
To compare the newly calculated asset turnover to the previously calculated total asset turnover I have copied the former on top and the latter below:
| 1.97 | 2.07 | 1.96 | 2.81 |
| 4.85 | 5.03 | 3.81 | 6.54 |
As you can quickly see here, the firms’ ability to generate sales from assets is much more efficient overall calculated this way. I am starting to realise the importance of restating financial statements and understanding why you separate finance income and expenses from operating it is like the difference between the fat and the bone on a steak. You need to get rid of the fat and meat so you can really see what is hiding under there for better or worse. (I thought of a much more crude analogy to help describe this concept than this but I think the fat and meat on the bones will do just fine).
Economic profit
An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used.
I found the above definition on the internet and thought it was a really simple yet eloquent way to explain the concept of economic profit.
Now to get in to the crux of it, after all economic profit is really what matters at the end of the day right? In my own words, economic profit is what the firm has generated from its assets after the opportunity cost is accounted for. Fairly important I would argue as we have not considered the opportunity cost up until this point. I have left the opportunity cost at 10% as suggested by Martin because I have not yet found a reason for me to think another figure is more appropriate.
The economic profit for Bagir Group Ltd is as follows:
| 656.4 | (10,898.5) | (2,289.6) | 1,170.8 |
Overall pretty terrible I would say! As you can see the economic profit gets worse and worse from 2013 to 2015 and then has quite a massive turnaround in 2016. What has caused these mega losses and mega turnaround?
First of all, I would like to review the profit margins to see if they are proportional to the economic losses and profit above.
| 3.08% | -12.50% | 0.26% | 2.70% |
I think I have found one of the primary drivers for the economic profit and losses. The profit margins here are directly proportional to the economic profit and losses. The 2016 profit margin is slightly not as proportional as the rest so I will keep an eye out for another driver for the economic profit for 2016, but what drives profit margins? Operating income (OI) and sales; now as I look back over the sales they do fluctuate quite a bit throughout the four years by a total standard deviation of $14,857,000. The OI also fluctuates quite severely as shown in the row second from the top below:
| 64,071 | 75,207 | 96,982 | 99,490 |
| 1,976 | (9,404) | (254) | 2,691 |
| 3.08% | -12.50% | 0.26% | 2.70% |
| 656.4 | (10,898.5) | (2,289) | 1,171 |
If the profit margin is calculated by dividing OI by sales what can we learn here? In 2015 you can see that the economic loss is proportional to the negative profit margin, the same can be said for 2013. Upon first looking at the profit margin of 0.26% for 2014 I thought that it cannot be the only reason as to why it had such a large economic loss, but after careful study of the figures, I realised that 0.26% will be much greater for 2014 compared to 2015 and 2016 due to the large increase in sales revenue for 2014 which is amplifying the percentage. 2016 has a profit margin of 3.08% but an economic profit of only 656.4 so as stated previously there must be something else driving this figure. Considering OI is used in this equation and not CI it does not include financial income. For 2016, financial income made up 80% of the firms CI. I would argue that this finding is one of the primary drivers for such a low economic profit considering that the profit margin was 3.08%.
Net operating assets (NOA) averaged 15M for all years except 2014 were it was 10M above average. This increase in NOA has blown out the economic loss buy a further $939,000 than if the NOA was in line with the average. Considering the NOA was constant throughout the other years I will only consider it a driver for the economic loss in 2014.
The final potential driver is the difference between the RNOA and the weighted average cost of capital (WACC). Considering the WACC remains constant throughout, I will consider the RNOA as the potential culprit. The RNOA is shown below:
| 14.97% | -62.92% | 1.00% | 17.70% |
As you can see the RNOA for 2013 is 7.7% above the opportunity cost reflecting the economic profit incurred. The RNOA is 9% below the opportunity cost in 2014 thus explain the exaggerated economic loss for that year. The RNOA in 2015 is proportional and obviously is a driver (or potentially a reflection) of the significant economic loss. Finally, the mere 4.97% above opportunity cost for 2016 is the additional driver I have been looking for, to push the economic profit down disproportional to the profit margin.
Main drivers of economic loss and profit for the firm:
Overall, the firm has had a bad few years culminating in a mega loss in 2015. Fortunately, the firm made a massive turnaround in 2016 by achieving 10M in net profit by narrowing its product base, increasing profit margins and focusing on three key locations to manufacture its products. Whilst there are numerous news articles out there describing the terrific turnaround the firm made in 2016 it consistently leaves out one crucial fact. Whilst the firm did in fact make some massive positive changes, that fact is that majority of its CI actually came from its gain on extinguishment of debt not from revenue generating assets. Considering this new fact I assume that the firm will still make a profit next year but instead of a 10M profit like last year I think it will make a net profit of around 1 – 2M, which is what it would have made without the gain on extinguishment of debt.
Hi all,
Please see attached draft assignment word document and spreadsheet. Feedback encouraged.
Cheers, Daniel
Welcome 