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….