Assignment 3

Assignment Stage 3:


Ratio Analysis & Capital Budgeting


These are links to my draft assignment 3:


https://drive.google.com/open?id=0BxUlBOjxfrqALTR1Tzc5aGl1WWM&authuser=0


https://drive.google.com/file/d/0BxUlBOjxfrqATnNZcnBidGJYRU0/view?usp=sharing


Unfortunately my word document is far from complete due to work commitments but I appreciate any feedback that anyone is willing to give.


thanks


Marty

Assignment Two - Draft

Hi everyone,


Please find below my draft work for assignment two. Still a bit of tinkering to be done, so please be gentle!

Step 1

Chapter 4: Analysing Financial Statements

 

I found this chapter to be quite technical and a bit harder to read than some of the others chapters that I have read so far on the course. On numerous occasions I found myself having to stop what I was reading and re-read what I had just read to try and make sense of it. I kept asking myself why we have to restate our firm’s financial statements. What is the point? As the author states, ‘the reason will be restating our firm’s financial statements is to help us focus and understand each item in our firm’s financial statements’.  This will aid our learning of financial statements. So that became my focus as I read the whole chapter.

 

With the concept of free cash flow are we saying the less cash the better? As long it has been invested into operating assets that will give a company future earnings. I had to keep thinking about this as I had always thought the more cash the better, but not necessarily! Don’t give all your cash to the shareholders as dividends, invest in the future of your company, future growth will make the company wealthier and bring in even more cash to invest!  I wondered how many CEO or Managing Directors think along these lines or do they get pressured or bullied by shareholder interest in dividends payments or does that come into their thinking? I suspect not. A lot of companies will be looking at opportunities to invest and grow their business; many may have 5 or 10 year plans which will include strategies for growth, whether it is by acquisition or building more retirement homes or biodiesel refineries. They will just be waiting for the right opportunity to come along. Yes I think I get and understand free cash flow, mind I did read the chapter 5 times….

 

What are operating and financial activities? I had never compared these two activities to a Kinder Surprise before. But I guess it is a little bit like that, I am not sure it as much fun as the author makes out however! Operating activities are the core activities of a firm; its products and services and interaction with customers, suppliers and employees. That is what is really interesting for me. Financial activities are less exciting for me, but a necessity; banks, loans and interest. I accept most companies need to borrow some money at some point and the stronger the operating performance (and profit) the more attractive the company will be to investors.

The section on statement of changes in equity made sense to me, but did raise some questions. It was interesting to learn that companies sometimes don’t include all income in the income statement, they sometimes put directly into equity in the balance sheet, but why? Is it because they can? And why are firms allowed to hide debt in equity and not show in the balance sheet as a liability? Maybe it’s just not a big deal?

 

Reading about the balance sheet was straightforward and logical. Although for me, after 15 years of printing balance sheets at work, it was a bit difficult for me to think of them as operating and financial liabilities instead of just current and non-current assets and liabilities. However, I had never thought about the balance sheet from an investor’s point of view, only a liquidity point of view! It did raise one question for me though, how do we know the benchmark for NFO (Net Financial Obligations) + Equity? Is it just giving information to people outside a firm or is it telling us something more? I wasn’t too sure…

 

Restating the income statement was a surprisingly engaging read, particularly the section on allocating tax to the operating and financial components of the income statement. I know from my work experience that companies like to avoid paying any tax or certainly as little as possible! However, I had never thought about the concept of increasing borrowings as a way to reduce tax expense (by reducing profit, as a company is paying interest expense). I wonder how many companies do this on purpose. For example, does a company purchase a fixed asset with borrowings from the bank knowing it will gain future economic benefits, as well as reducing its tax expense? I would say many companies do just that.

 

When reading about the profitability of Ryman Healthcare, my thoughts returned to my days at a UK car dealership where I was the Accountant; when reviewing the management accounts, the focus was always on the contribution margin. The managers had to hit their budgeted figures or they would be under pressure and would get a grilling. Hence each year a manager would do enough just to get the budgeted figures but try not to sell too many cars as they knew next year’s budget would be raised a lot more!

          

 Step 2

The restated financial statements for Mission New Energy have been entered into the spreadsheet as required.

Issues and discussions with others

 

The restating of Mission New Energy’s financial statements took some significant time. I had queries with every financial statement except the balance sheet when trying to identify operating and financial activities. I found reading the footnotes useful in giving more information on certain entries in the financial statements.

 

 Specifically I had to research ‘gain on settlement & restructure of convertible notes’ as I had no idea what a convertible note was! I posted a couple of questions on Facebook and Moodle although I got very little response, suggesting no one else at that time (or who read my posts) had any idea what a convertible note was. I found out some information on convertible notes from the Australian Taxation Office and ASX websites and I also emailed Maria Tyler to confirm my thinking was along the right lines. It turns out convertible notes are investments in companies that must be repaid by the company (or converted to acquire new shares or units) at a specific date after paying interest. They are a form of debt which is then able to be converted into equity if the option is taken. This lead to my finance income being higher than my finance expense, which I thought was unusual, therefore I queried this with Maria to confirm this was correct, which it was.

 

I also had a little trouble with other comprehensive income, getting confused with the statement of equity amounts and what was shown in the income statement. Again, I didn’t get too much assistance from others but I think I finally worked it out for myself!

 

I think I spent far too long on the statement of changes in equity, especially after Maria Tyler suggested it shouldn’t change much if at all! When I finally got this to balance it was certainly a yahoo moment!

 

For the whole restating process I found it very useful to check out Kirsten Williams and Anna Towan’s exemplars. This was more to give me confidence with my layout and overall just to confirm I was on the right lines with my selection of operating or financial. I did change my mind several times on items but I think that was just me getting confused from overthinking some items. Also, reading other peoples thoughts and suggestions often clouded the issue even more!

 

 

Step 3

Three products or services of Mission New Energy

 

 

 

Mission New Energy has now discontinued its operations involving power generation and biological assets. However, in FY2013 and FY2012 the company was still producing power and growing plants so I have included these products.

 

I have emailed them asking for more information on these products, however I am still awaiting a response.

 

Contribution Margin is the amount each dollar of sales contributes to covering a firms fixed costs and generates a profit. The contribution margin equals sales minus variable costs. The contribution margins for my firm differ as the market dictates individual selling prices and their individual variable costs. The production of biodiesel fuel is a different process to generating power and the growing of plants. For example, the biodiesel is processed in Malaysia and the plants are grown in India. Biodiesel costs are heavily influence by the price of feed stocks such as canola, palm oil and soy beans. Each country has its own labour costs and the number of hours needed to produce each product will be unique too which affects the production cost and therefore the contribution margin. If costs increase, it is not certain that Mission New Energy can pass those costs on as the fuel market is complicated and can be volatile.  Factors such as demand, the weather and even acts of war impact the price of fuel. A business cannot always predict which of its products will have the highest contribution margin. It is possible a firm may have a product with the highest contribution margin one year that might be the lowest the next, especially when a firm does not sell many products. Firms often look for opportunities to sell other products with high contribution margins so they do not have all their eggs in one basket should the market price drop on a product that previously generated a high contribution margin.

 

Constraints impact businesses as they can limit or restrict production or sales of a good or service. Mission New Energy could face constraints due to the capacity of its refinery. If the refinery is constantly full, there is no potential to increase production and increase contribution margin and operating profit. Biodiesel is made from vegetable oils and other feed stocks. If Biodiesel is over-produced, there might not be enough land left to produce the food and fuel that makes the various oils for biodiesel. Mission New energy would have to choose very carefully which country it sources the feedstock to produce biodiesel so that it is sustainable and is not affected by laws that could restrict supply, which would harm the company financially.

Mission New Energy at this moment in time is not producing any products at all. Decisions have already been made it seems that the contribution margins for generating power and producing biological assets were either too low or too risky. It is my understanding that only product they will be producing in the near future is biodiesel under its new agreement with Felda
Global Venture and Benefuels Inc.

 

 

Step 4

Feedback with others

To be completed….

 

Assignment One (Draft)

Hi all, please see where I am up to on assignment one, not quite where I'd hoped to be but unfortunately not enough hours in the day in my life at the moment! I am open to any feedback on any part of what I have written so far, I hope you find it interesting!

Step 1

The description box in moodle contains a few words about me with a photo, and a link to my newly created blog. I also added a link to my blog in the Blog Links Forum. The link to my blog is http://martystephenson.blogspot.com.au/

 

Step 2

The company I have been assigned is Mission NewEnergy Limited. I have attached the link to their latest Annual Report for the year ended 30 June 2014 from their website.

http://www.asx.com.au/asxpdf/20140925/pdf/42sg4s2nkjjg81.pdf

 

Background information on Mission NewEnergy Limited

Mission NewEnergy Ltd is a renewable energy company based in Western Australia. The company is listed on the Australian Securities Exchange (ASX). The share price is currently $0.15, whilst it was $13.00 in 2010 according to the annual report. According to the ASX website, the highest price reached in the last 12 months is $0.315, whilst the lowest is $0.006.

The company concentrates on producing biodiesel in the markets of Malaysia and the US.  The company owns a 20% interest in one of the largest biodiesel refineries in Malaysia. It has two joint venture partners who are Felda Global Venture and Benefuels Inc. According to their website Felda are the largest producer of crude palm oil in the world and they have operation in more than 10 countries worldwide. Benefuel is a US company that have produced the technology to improve the biodiesel process. Biodiesel is produced from renewable plant or animal feedstock’s and is an environmentally friendly replacement for diesel.  It can also be used as an additive in diesel engines. According to the Mission NewEnergy website, governments around the world have mandated the use of biodiesel in an effort to reduce global warming.

 

Thoughts & concerns at this stage

Initially I was disappointed with the company I was given, especially when I looked at the list of companies that were distributed. I hoped to get a world brand name or perhaps a company similar to any of the companies I have been employed at throughout my career. However, now I have had a couple of weeks to read and learn about my company I am now feeling comfortable. One of things that disappointed me initially was viewing the company website. I have looked at a lot of websites in my career and to me Mission’s website is ticking a box. There has been very little effort in making the website attractive and informative. When I viewed the websites of the joint venture companies (Felda Global Venture and Benefuels) this confirmed my initial thoughts as these two companies gave so much more information about their history, vision and mission. It made me want to find out more about them!

 

KCQ’s after viewing the 2014 Annual Report

The report itself is 100 pages, which is not as bad as some others which are over 200 pages. I have looked over several annual reports before so although I don’t know what everything means I am familiar with the layout and presentation of the financial reports. The report stated that the company had continued its ongoing restructure that began in 2012 which was due to negative market conditions. This made sense when I reviewed the balance sheet ($11.3 million deficit in net assets) and cash flow statement (outflow of $2.9 million from operating activities). I must point out here I learnt about how to read a cash flow statement from a previous course run by Maria Tyler.  One of the first questions I had was from the CEO report. The company had to sell refineries and restructure its convertible notes liability of $25 million. I had no idea what convertible notes were until I checked on the ATO website and discovered that they are some sort of investment in companies which have to be repaid with interest.  Another thing to catch my eye was the deficit in net assets of over $11 million as noted above. The report states that this is due to the policy of impairment of its refineries. I am trying to find out whether that is normal practise or not. Finally, I didn’t particularly understand the statement of changes in equity. At this stage I still do not know what a lot of those entries actually meant, but hope to gain more knowledge as this course progresses.

After reading the annual report my concern with this company was raising cash and the area of the business that seems the most critical to me is the joint venture relationships with Felda Global Venture and Benefuel. This looked to me like the last noteworthy asset the company had from my understanding of reading the report. At this stage I was thinking, this company has had to sell its refinery (whilst retaining a 20% stake) to raise cash to meet its liabilities (such as the convertible notes). This deal has to go through or this company is in serious trouble. On page 33 of the report the company also commented that if the sale did not go through there was significant doubt as to whether the company could continue as a going concern. A few days later I read through the recent announcements on the company website and found that in February of 2015, Mission NewEnergy had announced to the ASX that they had successfully completed the restructuring plan that commenced in 2012. This was due to the sale of the refinery and the cash this raised. All convertibles note debt has now been settled and the company has enough working capital to utilise for the next two years. This is good news as the company can now concentrate on its strategy of managing the joint venture interests and pursuing new opportunities. It will be interesting to see how the rest of 2015 pans out for the company. However 2016 will be more exciting as that is when the biodiesel refinery is expected to start production.

 

Other people’s blogs

My favourite blogs in no particular order are below:

http://rianajp.blogspot.com.au

I think Riana’s blog is presented very well and is easy to follow. The layout of the blog is attractive to me; I think it must be the colour schemes Riana has used combined with the width of the reading pane. Another attraction for me as that Riana’s company is Mastermyne who are one of our competitors in my current employment. It’s very interesting to me to see their financial reports and to understand their positioning in the mining arena. I was also impressed with the layout of their annual report for 2014. This made the report brighter and easier to read. I am keen to follow Riana and see what else she uncovers about Mastermyne and mining in general.

http://theaccountingdream.blogspot.com.au/

I picked Ian’s blog as this was exactly the format I was looking to create for my blog, but I failed miserably! I like the colours of the blog and the use of the calculator and pen in the background. I might try and update the layout of my blog if I get time. I think for a first time blog creator Ian has done very well.

 

http://yasmineschultenkamp.blogspot.com.au

I think the layout of Yasmine’s blog is eye catching and very funky! She has a talent there I believe. The use of colours make the blog attractive to read. As I am from the UK the British telephone boxes bring back memories from my youth! Also, from reading the blog it is clear Yasmine has put a lot of effort into understanding her company and its business. I think she has the balance just right so far in making her blog interesting to read and informative.

 

I have had some interaction with others on facebook and through blogs. This was useful for me to get some feedback on my blog and also others would have found the feedback I gave as being useful too. I had to email Dr Maria Tyler and Martin Turner a couple of time so far just to help me understand what was required with regards to step 3. I found that my company had changed its presentation of is financial figures from 2013 to 2014.  Thus I have not yet completed steps 3 and 4 as yet.

 

More Views on Mission NewEnergy

Hi, Im back again to share more views and news on what I have discovered about my company Mission NewEnergy, a renewable energy company that produces or is trying to produce Biodiesel. I say that, as at this point in time I am actually confused as to whether they are producing anything at all at present! My understanding (so far) is that they have entered into joint venture arrangements with other companies that either haven't worked out or are still in the progress stage.


To explain further, I will summarise what I have picked up from the 2014 Annual Report and a couple of articles I have found. My impression is that the company is struggling and is frantically trying to find some way of making serious money.


Of course, the annual report is a big report and a lot of it went straight over my head. But I had a fair understanding of the financial reports as I have been a Financial Accountant for a while now.


2014 was a year of restructure for the company, which has been ongoing since 2012, due to negative market conditions. The company has had to sell refineries and restructure its convertibles notes. What are convertible notes?! I struggled with this as I had no idea so a look on the ATO website states (https://www.ato.gov.au/general/capital-gains-tax/in-detail/shares,-units-and-similar-investments/convertible-notes/) they are some sort of investment made in companies which they have to repay with interest if I understood correctly. Mission NewEnergy owes a significant $25m in convertible notes. The good news is they have managed to move the payment due date to 2018, so they have more time to start generating some profit.


Although total revenue was up to $9.7 million from $8.2 in 2013, the company made a loss of $1.09 million in 2014, compared to a profit of $10 million a year earlier. Looking at the balance sheet, net assets are currently a deficit of $11.4 million.  I found this quite odd, however the report states this is due to the impairment of its refineries. I'm not sure whether that is normal practise or not. No dividends were paid which must be to do with the financial position of the company and the need for cash. After all, cash is king! Cash flow wasn't great as there is a very significant deficit in cash used in operating activities of $2.9 million. The bank balance at the end of the year was $451k. That doesn't seem a lot to me, especially with $25 million in convertible notes to repay!


So what is Mission NewEnergy doing to manoeuvre itself out of its current position? What is it's strategy?


The group has decided to sell its 250,000 tpa biodiesel refinery for an expected US$22.5 million (approx. A$25 million) http://www.reuters.com/finance/stocks/MBT.AX/key-developments/article/3060676 and ASX announcement here http://www.asx.com.au/asxpdf/20140901/pdf/42rxhxqr1h71cs.pdf
The group expects the sale to have a positive impact on its balance sheet and shareholder earnings. This will allow it to focus on its joint venture relationships and other opportunities that may arise.


In my view this sale had to happen for the company to remain a going concern. It will be interesting to find out what's been happening since the 2014 annual reports were published. I will endeavour to update the blog soon. I hope I didn't waffle too much!

My Company is......... Mission New Energy!!

Who I hear you say? Exactly. Ok, its not Qantas, Aurizon, or Adidas, or even one of my employers competitors in the mining game, wouldn't that of been interesting? Yes it would, but I have been lumbered with a company that has the most boring website ever and tells me virtually nothing about their business!! I get 2 tiny photos! 2! What kind of company does that? Well, apparently a renewable energy company does!

OK, so my challenge IS to make it interesting and worthwhile so here I go!

Mission New Energy Ltd are listed on the Australian Securities Exchange (ASX) and are a renewable energy company with biodiesel refining. They have offices in Subiaco (WA) and Malaysia. They are a joint venture company who are concentrating on the Malaysian and United States markets. I have no idea how many employees they have which is a shame as I like to know that sort of thing.

According to their website, in an effort to reduce greenhouse gas emissions to combat global warming, governments around the world have mandated the use of biodiesel. Ah, now that is interesting! The website goes on to state that biodiesel produces approximately 80% less carbon dioxide than pure petroleum-based biodiesel, and almost 100% less sulfur dioxide. Biodiesel is also safer to store, handle, transport and use than pure petroleum-based biodiesel. Well, that's great news!

So, there we have it, biodiesel is an environmentally friendly alternative to diesel fuel, the world's largest transportation fuel.

So now I know what Mission New Energy does, how successful are they at it?

I look forward to sharing that information with you in my next blog.......!!

Welcome to my blog!

My name is Martin Stephenson and I live in Mackay, Central Queensland.
I am originally from the UK, but have lived in Australia for almost 7 years now.
I am a married, mature student who has realised that I should of done this years ago when I was younger and had so much more energy!
Majoring in Accounting, I am looking froward to meeting some new people and sharing knowledge and idea to successfully complete the course!