Mel’s Blog

Well we know it is calculated by taking the Return of Net Operating Assets from cost of capital then multiplying by the net operating assets, but what exactly does that mean?

This is a ratio which i have had to go back to chapter readings and also a little of my friend google to really get a good understanding, and I still slightly question whether I have it right. How I understand it is that while considering the opportunity cost (which is the cost that is missed out on by making decision to go with one opportunity and not the other), it compares the firms’ profit against its cost of capital. Cost of capital is one aspect I seem to struggle to commit to memory but after more research it is starting to sink in that cost of capital represents the return a firm needs to take on an investment, so the profit they need to cover the cost of the investment. (stay in my mind, NOW!).

We know that if the economic profit is a negative figure then the return of operating assists is greater than the cost of capital and if it is positive then the return of operating assets is lower than the cost of capital, and this is of course what we want.

So what are the drivers to result in this economic profit?

Well for my firm the return of net operating assets (RNOA) for 2017 & 2018, is below the weighted average cost of capital (WACC) so this means I can only expected to get a negative figure for my economic profit. So why is the RNOA below the WACC for these two years, well this is because my firms Comprehensive Operating Income (OI) is substantially low for 2017 & 2018 compared with the 2016 & 2015 years. This combined with a higher Net Operating Assets (NOA) for 2017 & 2018 leaves my firm with a much lower RNOA. As we know RNOA = OI/NOA.

Its interesting to dig deep into the financial statements and really find out how our firms trend over a four year period, imagine if we went over 8-10 years, I wonder the trends we would see then!

I wonder what else I can find out about my firm in the last week of studying this unit and maybe I will find other factors that are driving my economic profit to be so much lower for 2017 and 2018? Any suggestions?

Understanding my firm’s ratios and what they meant was a time consuming but interesting task to complete. I did take me longer than I expected and was suggested but I do believe I have benefited from spending the extra time on it.

For a majority of my ratios they had a very similar trend they followed. I found that 2015 was a pretty good year with by far the best results for Net Profit Margin, Profit Margin and Earnings Per Share. After that the numbers started to decrease with 2016 being lower then 2017 even worse. However the ratios started to then work their way back up in 2018, still not to the figures of 2015 but definitely starting to improve on the two previous years.

For the Net Profit Margin, going from 25.3% to 8.6% seems like a really big decrease for a company to go through so I did some digging and noticed the sales have decrease a little over the 4 years and in combination with this decrease in sales there was an increase in cost of sales, therefore reducing the profits made. Looking at the annual report for 2017 for Select Harvest, they mention how this year has been a challenging year for the firm with many controllable and uncontrollable events (including project delays and currency) which have impacted the results. So, this explains why 2017 has many results from the ratios that are much lower than other years.

Looking at the Earnings Per Share the one reason I can see that the figure is lower in 2018 is because there is almost 24 million more shares than there was in 2015, this would increase the figure to 0.25 if the same number of shares were owned. However, this is still quite a bit lower than 2015, so why is this? Well looking at the net profit for 2018 compared to 2015 and it is below half the amount, hence this would make a substantial difference in the earnings per share. Could there be other reasons for this I wonder?

The Equity ratio was one that was substantially better in 2018 then in previous years, sitting at 73.3%.

Going from 58.9% in 2015 to 73.3% in 2018 shows investors that the firm is worth investing in as there are many investors that are prepared to finance the firm. We can see in 2017 the ratio dropped to its lowest of 57.9% and this would be because this is the year they borrowed that large sum of money so used more debt financing rather than equity financing. To see the great increase into 2018 is great for Select Harvest’s potential shareholders to see.

What do you think? Any other explanations for why my ratios are trending like this? How is your firm trending, similar or the complete opposite?

Thanks for reading

Well thankfully for me today was a public holiday where I live for the local Show. So after spending the morning having some quality time with my 5 year old playing Barbies and Lego and anything else she could come up with, it was time for me to get step 7-9 done.

I actually found step 7 and 9 to be enjoyable as it was fun to work out (purely by estimating of course) the contribution margins for different products and also the potential profits new investments could make for my firm.

Step 8 sure was a big task to complete and I did it over 3 sessions to complete. Doing the ratios was fairly straightforward as I had all the acronyms in my restated spreadsheet, but it was the commentary that was challenging. Explaining what the ratios meant for my firm when I didn’t always have the best understanding of the ratio meant I had to do plenty of research into the definitions. Which all in all was good for me to really get a grasp on all these equations and then be able to understand what that meant for my firm.

I believe I am now ready to receive some feedback on my assignment and I am looking forward to completing step 10 and giving some of my peers feedback. For steps 3 and 4 when we had to exchange feedback I found it very beneficial when I provided feedback to others, so hopefully I get the same experience this time and others get that as well.

I have attached both my word document and my excel spreadsheet if you are willing to have a look for me.

Thanks Mel

Well after spending a few hours on my step 2 I have submitted it off to Studiosity for a check through. In a way, and I don’t know if it was just the lack of sleep this week, but chapter 6 took me a bit to get my head around and understand. But I got there and I may have even made improvements following the feedback from my last KCQ reflection.

No feedback is needed for this step but I have attached it anyway as I found reading someone else’s draft help me a little with my understanding. I’m not sure if mine will help anyone but hey you never know.

I am off to spend some quality time with my husband and daughter this weekend and no studying for 2 whole days, wow 2 days lol. Going away even just for a night is going to just give me that little boost to keep going with work, study and all the other bits in between.

Hope you all have a great long weekend and get to spend some time even just a little doing something you love doing.

Have fun everyone!

Well its week 7 already and we are getting stuck into our second assignment and its a big one. I think having little (well some big) parts due each week it really makes sure we stay on top and work through the tasks each week. This week for me has been a bit of a struggle to spend the time I want and need to spend on the tasks, but hopefully I can catch back up and get step 2 knocked over and then finish off step 3 and 4.

I have attached a copy of my draft for step 3 and my restated statements to hopefully get some good feedback on. Normally I like to submit my draft at the almost completed stage but unfortunately its not quite there. My statements are done, although I need to look into my SOCIE more to see if I have done it correctly. My word document has some areas I want to add in some information but I think a good chunk of what I want is in there.

Feedback would be much appreciated and I am looking forward to looking at some more of my peers work to see if I can help out.

Tonight I finished restating my last statement and its feels good to have done it. I was concerned with the income statement, which was the last one for me to complete, as the video was the longest. Then straight up Maria said that this is the statement people can have the most difficulty with. Oh no!

Fortunately after pausing the video quite a few times I was able to complete the restated statement without the huge problems I was expecting. I believe joining the PASS sessions is a great benefit, as we can discuss different aspects we have problems with.

For example, understanding cash flow hedges was something completely new to me but during the session we had a few explanations and examples talked about to help us all. After the session I still didn’t completely understand hedges but it definitely put me in the right direction and after re-reading my research I finally understand them, well I think I do anyway.

My Income statement didn’t balance to begin with but thankfully I found the problem for mine within a couple minutes. My issue was with the revenue, mine was split into two, unlike Maria’s, so I had a sub-total in my financial statement for when we added in our interest received but when I linked to the restated statement I didn’t add the sub-total, which in turn gave me the incorrect figure. My final figure was over by the amount of the interest received because I had actually in turn added it in twice. Sub-total added and formula updated and voilà fixed. (thanks google for the correct spelling)

Another great tip we received in the PASS session was to make notes of anything we needed to investigate when separating into operating and financial. This definitely makes life much easier when needing to write the brief commentary on any issues or concerns we had when restating our firm’s financial statements.

I found this task to be daunting before I started but the more I went through and completed the better I felt. I believe the task was more enlightening than frustrating once I got stuck in, maybe because I did it in parts and didn’t do it all at once and before I had talked about it with my peers in the PASS sessions. I definitely have learnt more about reading financial statements and understanding what each part of the statement actually means, instead of just words and numbers. Sure there is still a lot of parts I don’t understand but after all this is just the introduction to accounting so there is a lot more to learn and discover. I am hoping now that I have restated my own statements I may be able to help others if they have questions.

Hope everyone is having success with restating their statements

Thanks for reading

Mel