Wednesday, 3 June 2015

ASSIGNMENT STAGE 3 (ASS#3): RATIO ANALYSIS & CAPITAL BUDGETING



Assessment Title:
ASSIGNMENT STAGE 3 (ASS#3): RATIO ANALYSIS & CAPITAL BUDGETING


Student Name:
Duy Hoang Nguyen

Program
 CU23 – Bachelor of Multimedia Studies


Course Name and Code:
Using Accounting for Decision Making – ACCT11059

Lecturer
 Peter Zhang

___________________________________________
Due Date: 11.00am Monday 8 June 2015        


 

Step 1.2:


Profitability Ratios

Net Profit Margin (NPM)

Personally, net profit margin is quite easy to understand to me. It is the final profit that we would make after deducted all expenses, taxes as well as stock dividends. CTI logistic is experiencing a fall in net profit margin throughout the last 4 years. From 8.6% in 2011, the margin reduced to almost 7.0% in 2014.  Which means they earning less than 0.8 cent of every dollar it make. Despite the fact that their sales was doubled, 73 million in 2011 to 140 million in 2014, they still only increased the profit by 60%. I think this could result from inefficient in management or the declining of the market demand.

Return on Assets (ROA)

This is one of the most important sites on investment for investors. It gives us ideas of how good the firm is performing in generating profit from the invested assets. Considering that the better the ROA, the better the investment. However, in the case of CTI logistic, they are losing their profit margin, which equivalents to the inefficient of Return on Assets.

Efficiency Ratios

Total Asset Turnover Ratio

Sharing similar concept as turn on assets (ROA). Total Asset Turnover Ratio indicates how efficiency a company is in deploy its assets. Looking at my firm’s figures of 1.21 for 2011, 1.33 for 2012, 1.24 for 2013 and 1.27 for 2014, I think they are very competitive numbers. In the first two years, the company made a significant jump from 1.21 to 1.33. But in the next two years, these figures were much lower, 1.24 and 1.27. However, we still can see that there is an increasing in number in the last two years. This could be a good sign for a new climb of the company’s performance.

Liquidity Ratios

Current Ratio

This radio tells us about the ability to pay short-term obligations / debt. As in CTI logistic, they actually doing very good at controlling the financial obligation. It was grounding at 0.24 in both 2014 and 2011 while these numbers increased to 0.28 and 0.29 in 2013 and 2012. Since their margin was reducing as well as ROA, they still managed to keep this figure in control for the last 4 years.



Financial Structure Ratios

Debt/Equity Ratio

Debt is a part of all business and they are a doubled-edged sword. By borrowing financial help, management could make the investor happy as it will generate earning. However, according to Investopia (2014), by performing extensive investment and business activities for the efficient of the debt could out weight the generated earning of the company. Subsequently could lead to bankruptcy. According the CTI logistic financial statement. They are borrowing more in the last 4 years. This could result from losing in profit and they need to get some help to bring them to the track.

Equity Ratio

Equity ratio can be understood as a ratio to measure the amount of assets of the company that financed by the investor. In 2011, investors invested 55.8% on total assets, this number fluctuating in next 4 years. This means the company still need great support from the investor to level up its profit.  

Market Ratios

Earnings per Share (EPS)

A solid number to tell us about the profitability of a company. For CTI logistic, the profit per share was increasing in the last 4 years. It was 1.6 million in 2011; 1.5 million in 2012; 2.07 million in 2013; 2.04 in 2014. This figures actually made me felt very confusing. As if we referring to the above net profit margin, they were performing not so well. I thought this would make investor losing their firm hand on investment to the company. But since I start to look at EPS, the company was actually making good return on shares for investors.

Dividends per Share (DPS)
indicated how much money the company paid for its shareholders through the years based on their shares. Once again, these number in DPS confused me as they are receiving more dividends as -10 in 2011 to -7 in 2014. I think they are doing pretty well on returning to investors as more. Despite the fact, that dividend is not the most important factor in return for the investor but it still contributes good impression on their decisions.

Price Earnings Ratio

Since Price Earnings Ratio is the comparison between market share price and the company’s share price. Based on CTI logistic share’s market price and the market standard share. I can see that they are losing the competitive edge to the market as they are making much less than what the other company proposing.

Ratios Based on Reformulated Financial Statements

Return on Equity (ROE)

This figure demonstrates the amount of net income returned to shareholder equity in percentage. The better the number, the better profit generated from the money that investor invested in (Investopedia, 2011).
Looking at my firm as from previous figures, I think the company is performing not very stable. In 2011, they have 235%; 273% in 2012; 294% in 2013 and 261% in 2014. There was an increased in the first 3 years, but they are starting to show sign of declining as n 2014. From my opinion, since the company is not receiving a good increasing in net profit margin. The management is trying to adjust the efficiency in investing the dollars. Subsequently causing instable in return on equity of the company.

Return on Net Operating Assets (RNOA)

In term of operation activities, I think they are doing not bad at all. In 2011, RNOA was at 144%, but it was increased to 161% in 2012. Yet, it felt down to 155% in 2013 and stay plateau at 153% in 2014. From these figures, we can see that there was a big jump in operation efficiency in 2011 and 2012.     

 

Net Borrowing Cost (NBC)

I could not find any information about net borrowing cost. Therefore, I tried to look at Anna Towan assignment 3 example and found some references. According to her comments, net borrowing cost is a “negative number and a net lending is when It is a positive number”, which is quite confusing at first. But in the next few lines, she explained that it is “the amount of financial assets that needed to finance all expenditure”. It is a much better explanation and I really need to say thanks to Anna Towan for her online research. CTI logistic does not have any net borrowing cost as they do not held financial investment so far. 

Profit Margin (PM)

CTI logistics’ profit margin is quite stable in the 4 years. It remains steady around 108% in 2011 and 107% in 2012, 2013 and 2014. So from my understanding, the profit margin remained stable because they are receiving financial support from their investors to bump up their operation activities. This result in better operation and its outcome – operating income.  

Asset Turnover (ATO)

This figure is being used as a measurement for the asset usages over a period of time. At CTI logistic, these figures demonstrated that the company was effectively operated their assets in 2011 and 2012. This was the reasons for a big jump in profit and expanding of the company in the same years. Declining the ability to make use of the asset in 2013 and 2014 was resulted in decreasing in a profit of CTI logistic.


Economic profit

From the economic profit figures, I have that feeling my calculation was wrong. Since other company’s figures telling me the company is not performing very well and they are experiencing a not very stable stage. However, in the economic profit, they are actually receiving a big raising in figures. It was only 399 mil in 2011 but then doubled in 2013 and reached 1.500 mil in 2014.

Step 1.3:


The key drivers of CTI logistic economic are RNOA, cost of capital and NOA.
Two keys ‘accounting’ drivers of RNOA are PM and ATO.
CTI logistic economic profit are:
Economic Profit
2014
2013
2012
2011
RNOA
153.48%
155.57%
161.31%
144.11%
Cost of Capital
15,698,075
9,187,090
7,292,807
7,292,807
NOA
98,884,281.0
87,835,361.0
64,676,959.0
54,804,141.0
Economic Profit or Loss
-1,552,292,707,6
-806,951,230,044,2
-471,676,475,000
-399,675,944,1

Economic profit = (RNOA – Cost of Capital) * NOA
Two Key Accounting Drivers of RNOA are:
Key Accounting Driver
2014
2013
2012
2011
Profit Margin
7.0%

7.8%

7.6%
8.6%
Total Asset Turnover
1.27

1.24

1.33

1.21


The reason that I think is the cause for the loss in CTI logistic is because of the high percentage of dividend it is paying to their investors. Moreover, the operating income pointed out they there was lack of efficiency in operating activities. These elements could be the contributions to financial loss of the company in the last 3 years since it last big jump in 2012.





Step 2: Capital Budgeting

Develop my own capital investment decision for my firm
This is my calculated Net Present Value (NPV) for CTI logistic:

Project 1

NPV = -$443.28 (Years 1-4) – 1000 (Imaginary Capital Investment)
= -1443
IRR: 21%

Project 2

NPV = $2,438.06 (Year 1-10) - 1000 (Imaginary Capital Investment)
= 1438
IRR: 39%
Spreadsheet with completed calculations attached in the submit documents

Personal recommendation

In the first project, it show a negative NPV. Because the capital investment was not able to out weight the current cost in Net present value. However, with -1443 million lost in the first years, the company could start regain it net present value with internal rate of return (IRR), which is 21% a year.
The second project has a more positive outcome in the net value present result. With the same amount of capital investment, it was able to generate a better number comparing to the first project.  Resulting from a better net present value at the time of the investment.
Considering the above outcomes, project two has a better changes of growth in present value of the company as it has better internal rate of return (IRR).







Strengths and weaknesses analysis


Strengths
NPV
·         The funded capital was measured directly
IRR
·         Unclear amount of returned cash from the invested capital

Weaknesses
NPV
·         I can’t measure payback time
·         The scale of project was not measured
IRR
·         The payback period isn’t measured



Sunday, 10 May 2015

Ass 2 Draft

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Assessment Title:
ASSIGNMENT STAGE 2 (ASS#2): RESTATED FINANCIAL
STATEMENTS


Student Name:
Duy Hoang Nguyen

Program
 CU23 – Bachelor of Multimedia Studies


Course Name and Code:
Using Accounting for Decision Making – ACCT11059

Lecturer
 Peter Zhang

___________________________________________
Due Date: Monday 11 May 2015, 11.00 AM AEST


Requirement 1

Chapter 4
Decision-making or choosing anything is a very stressful and complicated task. And, to make a good decision, we need accurate data to support us. Same as in selling and buying equities of a company, to be able to make the right decision, we need some sort of data as well. And yet, the most accurate among them all is financial statement. A document that records company past’s activities in a very detailed way. By reading the introduction part of this chapter, I got an overall idea of whole chapter and the importance of the financial report to an investor. Also, I really like the quote from Machiavelli  “Whoever wishes to foresee the future must consult the past”. It is a very profound say. A realisable source of past information with an educated approach of analysis could bring out great results.
Free Cash Flow (FCF)
The first important thing that I realized is dividends and cash flow are not the creation of value; they are measure of transfer of value. It only shows transactions between a firm and its equity investor. Furthermore, we understand that the successful of a company is how it allocates its cash from operations (C) and Investment (I). Taking the case between King Enterprises and Mark Inc, I can see how this knowledge effected my decision. As both of them have the same operating income in 4 years. However, King Enterprises take much less investment to achieve the same income as Mark. If I wasn’t have the base understanding of free cash flow, I would be very confusing between the two and subsequently make the wrong decision.
In the next part, economic profit, everything starts to come together and makes more sense. A firm only increase its value when earning return on net operating asset (RNOA). While in the previous part, we understand the concept that the more money invest on operating asset, the more operating income we should get. In this part, I could identify which elements is the one that bring the true value to the investors and how to calculate them based on the Economic Profit equation. Moreover, I am totally agreed with concept that life is a trade and we need to carefully to make the right investment in every day of our life.
Operating and financial activities
Operation is the core of all businesses. Perhaps, being able to see and analysis a business’s operation is the key to understand the present and the future of a business. This section is my favourite in the whole chapter. As the author stated, it is a sweet journey to find the little magic toy inside a chocolate egg. This made me feel very excited about restating my firm’s financial statement. It looks quite hard for the start. I was very confused and unsure which variables are financial and which one are operation. For example in the statement of changes in equity, there were more than just one total equity but also revers, retained profit. Thus, as this exercise is to help students gain a better insight into a firm’s financial position, I tried my best to read the example from the study guide and finally, I could make it through. After restated the changes in equity, I felt like I have just learnt one of the most useful tool in my journey of becoming an equity investor. Not only that, by applying the given equation of RNOA as well as Tax expenses I was also been able to calculate the true profit from the tax shield and apply them into my future business.
In conclusion, the key concept of this chapter is there are two ways a firm could gain its true value, through cash flow and economic profit. This is a profound way of looking at a company and that would define our expectation on return of each investment in equities. Also, by separating firm activities into operating and financial activities, we could clearly see a firm core value in an equity investor’s perspective. I really enjoy this assignment and looking forward to the third assignment for more challenges.

Requirement 2


Spreadsheet has been attached to the assignment

Complimentary and discussion with other

I was very struggled to be able to understand and restate the financial statement. First when I started to work on the financial statement, I though it was very easy and straightforward as have had some understanding from previous chapters. Started with the change in equity, I was very confusing between the term profit for the period and other comprehensive income. Had a good look into the study guide and via the Internet, I have been able to translate them into my company’s term as retained profit. Furthermore, calculating tax benefit is another tough task. The tax percentage of the company has not been displayed in any area near the lost and income field and it also varies from years to years. It took me fair bit of time to look them up on the internet and finally could put them into the equation of tax benefit.

Requirement 3


Three products of CTI logistics:
1.     Courier service:
a.      Estimated fixed cost: $1000
b.     Variable cost: $300
c.      Contribution margins: $700

2.     Taxi Trucks rental:
a.      Estimated fixed cost: $2000
b.     Variable cost: $700
c.      Contribution margins: $1300

3.     Fleet management service:
a.      Estimated fixed cost: $700
b.     Variable cost: $200
c.      Contribution margins: $500

 

Complimentary on contribution margins