Sharon's Accounting Decision
Tuesday, 22 October 2019
Draft ACCT13017 ASS#2 Steps 3-5
Please find the following links to my draft work and complete the feedback sheet:
Feedback Sheets for ASS#2 Steps 3-5
PEER FEEDBACK SHEET:
ASS#2
Feedback
From: Sharon Field
Feedback
To: Iris Onvlee
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My
Comments
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Step 3
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I
researched the industry norms (this is the linkhttps://csimarket.com/Industry/industry_Efficiency.php?ind=1301) for retail apparel and found the norm ATO
ratio is between 1.71 – 2.19 but you have used percentages. It’s my understanding
that ratios differ from industry to industry. According to the ratios in your
spreadsheet, the ATO shows an inefficiency to generate sales. I agree the
liquidity ratios look strong and above industry norm. Although debt ratios
have significantly dropped, they are still within industry norms. I would
expect the PPE ratio to be way off since no dividend paid and that’s all
investors are entitled too. The ROE and ROOA is up and down almost like a
response mechanism to the downturn with an increase following. The NBC is
concerning with a negative result. The recent PM seems to be way above
industry norm, I can’t help but think if this attempt to regain profit will
be damaging in the future by putting off customers. It seems growth in all areas
in the industry is crawling, as well as FCF which is not unusual to have
negative results. You have made a thorough analysis, but I feel the future
might be overly optimistic.
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Ratios - commentary
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Accounting drivers - commentary
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Step
4
Economic
& business drivers
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I agree with your assessment of
economic drivers. Brands are very important with fashion, I choose brand over
price with many purchases. Logistics are also very important, especially with
fashion when time is of the essence. It’s my opinion that the US trade war
with China may eventually fizzle out, price is still important and if they
can secure brands, they might be okay. You have a firm grasp on understanding
your company and relate well to Martin’s examples. I love your sense of
humour with row, row, your boat, it’s so fitting to your company’s future.
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Step
5
Forecasting
& valuation
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Such a clever way to explain the company
background and relate to GDP. It explains the peaks and troughs of the
country and the industry too. I think you justify the change in WACC
convincingly and I agree, there are some great risks involved. Therefore, I
would not be convinced as an investor to invest.
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Overall ASS#2 (Steps 3-5)
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What
a journey this has been for you. I love your never give up attitude. Your
learnings have been bolstered by your approach to discussion and openness to
comment. Your willingness to have a go without fear of ‘getting it wrong’ is
commendable, inspiring too. You have produced a well thought out assessment.
I wish you all the very best for the future.
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PEER FEEDBACK SHEET:
ASS#2
Feedback From: Sharon Field
Feedback
To: Shalika King .
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My
Comments
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Step 3
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PM
seems to be much higher than industry norms according to this link.
I think that may indicate their product is high end/luxury.
Debt/equity ratio is spot on in terms of industry and according to investopedia
is a key indicator to investors and lenders. The current ratio sits higher
than industry norms indicating a possible inefficiency in asset management,
although difficult to assess in the automotive industry because it also might
reflect a recent employment of capital for R&D. I agree their asset
turnover reflects steady sales, inline with norms. The slight decline might
be due to the slight decrease in general demand by customers across the
industry. ROE is well below norm and concerning for investors, however, debt
management is cost-effective and shows signs of improvement. I agree the most
critical accounting drivers involve asset management as opposed to capital
employment.
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Ratios - commentary
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Accounting drivers - commentary
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Step
4
Economic
& business drivers
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Competition is fierce in the luxury
car industry, are there new comers to the industry? Does Audi’s R&D give
them an edge over competitors? What else might consumers be looking for in a
luxury car? Would Audi consider catering to the mid-class or economy car
markets?
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Step
5
Forecasting
& valuation
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Investopedia suggests the automotive industry is
a key indicator of economic health and consumer demand. It might be worth
looking at GDP in Germany and China. I am concerned that the 8%WACC may be
too low for your company as high amounts of capital is needed for R&D
which may be slow to show returns. In my opinion, the cost of capital might
be higher over the forecasted years long before any ROI. The estimated growth
rate might be slightly inflated also, given the creeping growth and previous
years decreases in revenue for the industry. You may want to consider
apportioning with a decimal figure for accuracy.
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Overall ASS#2 (Steps 3-5)
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Your
approach and layout of the assessment is logical and thorough. The amount of
research and connections with learning outcomes are obvious. I have enjoyed
your interactions and with others and this reflects well in your learnings
also. This has been a significant assessment to tackle and you have risen to
the challenge. It has been a pleasure to work with you. I wish you all the
very best for all your future endeavours.
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ACCT13017
Financial Statement Analysis ASS#2
PEER
FEEDBACK SHEET: ASS#2
Feedback
From: Sharon Field
Feedback To: Sarah
Goodchild
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My
Comments
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Step 3
Ratios - commentary
Accounting drivers - commentary
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Compared
to industry norms, PM seems low although
it has been decreasing steadily across the board. Investopedia suggests
seasonality to be a factor as well as fluctuating energy prices and economic
downturn. The debt/equity
ratio
seems extraordinary compared to China Southern Air but not unrealistic
considering the industry, high assets costs, unrealised revenue and the
illusion of capital debt can distort figures as well as tax credits. However, this
is very concerning given the leverage ratios compared to CSA are heavily
reliant on equity and assets means a continued long-term negative ROE. ATO is
well on track with industry norms and could mean
their saving grace.
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Step 4
Economic
& business drivers
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Would
the effect of rising inflation affect passenger numbers if airfares stay the
same? I agree creating more destinations would attract sales. Does this affect
their operating expenses as runway taxi fees, hub and airport fees, tariffs,
hanger and exchange rates would increase?
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Step 5
Forecasting
& valuation
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Trends say
profits are normalising but WACC will still be higher than other industries,
which might be a factor in forecasting calculations. The airline industry is
one of the most unpredictable industries. However, there is little doubt of
the future need for airlines long into the future, which guarantees demand.
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Overall
ASS#2 (Steps 3-5)
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You have
presented a well thought out and thorough analysis. I am not convinced to
invest in an airline as yet. I am compelled to think the existing investors
of Air France may see the realisation of their ROI in the near future and
won’t be disappointed. It has been a pleasure to interact with you and listen
to your insights during class sessions. I wish you all the very best for a
bright and fruitful future.
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Sunday, 6 October 2019
KCQ's Chapters 7 & 8
The
basic principle of learning for me, fundamentally changed when I first decided
to begin this tertiary academic journey. The idea that there was an
alternative, more proficient way of learning than simply regurgitating what we
are told and repetitively pounding that knowledge into our subconscious, was
enlightening. Merely finding a personal connection, something we have already
experienced and latching that new knowledge into where deep-seated erudition
takes place, is a profound concept. Value is a very personal thing and it makes
sense that we need to apply our own values to understand what is happening in
our companies now and into the future. We use our subjective views to take
risks every day, based on intelligent, educated and informative assessment and
we can use the same techniques in our approach for our company’s forecast.
Putting
the Guesswork into Eternity
I
can see how studying Business Finance would have been a great advantage before
tackling Financial Statement Analysis. Not only the familiarity with the
current methods of analysing stocks and shares but also the theory behind the
analysis. None the less, I can understand the concept of useful assumptions,
since economic theory is based on the rational consumer, so it is not a stretch
to understand finance theory assuming homogeneous expectation. My aspirations
include becoming an investor…soon! I can be content earning a safe 9 to 5,
provide my family with all the necessities and the occasional indulgence,
however, I’m thinking my education, experience and ambition would give me an
edge to achieve so much more. I don’t want to get caught up in the bull and
bear of it all, but it would be nice to have financial windfall. In a nutshell,
I want to be better than average and I’m starting to believe I can be. Using
accumulated knowledge and experience to support a formidable margin of safety,
I can also skew fortune to my favour!
Continuing
Values
VOE = BV of
EquityO + Abnormal OI1 + Abnormal OI2
+…+ Abnormal OIt + .
CVt
WACC WACC2 WACCt WACCt
This
is a concept where I lack the confidence in my ability to make accurate
guessimates in order to be convincing. How can I be sure that I’m making the
right connections? What if I miss an important factor out? What do I know about
real economic and business drivers? Well, the only way to get good at
something, is to do a lot of it and this is my first go. I figure even if I get
it wrong, it will still be a valuable learning experience. I have been gaining
confidence in my discussions with others. Long discussions with my fellow
college Chen from China gave so many valuable insights, online discussions with
Iris, Hannah, Daniel and Kaidesha all exploring mutual ideas and making more
sensible, intelligent associations with our company’s business and economic
realities. All this increases my confidence to strengthen a convincing
assessment. Speculations of economic drivers have translated as transactions in
response to past, current and future issues which could be reflected in the accounting
drivers.
CVt = Economic profitt+1
+ OIt+1 (g/RINOA)(RINOA-WACC)
WACC (WACC – g)
It
follows logic that if we can predict the expected rate of return on new net
operating assets and growth in operating income, we can predict the future value
of the company. Taking all the factors involved into account can be time
consuming. We have already used 11 weeks trying to gather and interpret a mere
part of what would be considered an in-depth analysis. Time is money, but money
can’t buy time. Somehow, we need to weed through the abundance of information
and focus on those aspects which are clearly relevant. We can narrow down the
extremes and analyse likelihood of scenarios and involve other people’s
analysis for comparison and validation. Using these sensitivities to form
intelligent judgements and assumptions.
Risk
Risk
is something we face each morning. I’m often asked why I smile so much in the
morning, it’s because I survived the night and happy to be alive! Some
companies are lucky, some increase their luck with intelligent, informed
analysis and good judgment. I err on the safe side but, I increase my
confidence little by little and take risks that more often than not pay off. I
have learnt you can stay in the safe zone but, then you really don’t go
anywhere, you stagnate and that to me is not living efficiently. If I was
running a company, I’d want to grow to full potential and beyond and that means
taking risks. The same when I become an investor, I want my investment to reach
full potential and more. I realise that studying business finance will give me
a more positive balance of probabilities and I look forward to gaining that
knowledge. For now, I can digest the nondiversifiable
risk or the systematic risk of a
firm from investor information to roughly calculate my company’s beta. This takes other people’s opinions
into account. However, we make our own analysis, never rely on other people’s
judgements.
Margin
of Safety
‘A
rational intelligent response to the reality of risk’. This makes the most
sense to me. I have a statistical mind and can visualise the central tendency
and dispersion graphically in a graph. This really helps form a clearer picture
of all these calculations for the future. So, I can understand that the safety
margin is the spread between our best estimate of the value of the company and
the market value and the wider the spread, means the better response to business
risk. I already have so many scenarios relating to my company’s business and
economic realities and the possibilities for the future. I just worry about
piecing them all together to make a useful, convincing analysis. I also worry
that my personal bias and the perceived bias of other investors concerning the
airline industry will somehow distort a rational analysis. There are so many
things that need to be carefully considered.
KCQ’s Chapter 8 - Going Forward
‘I
write the songs’ sung by Barry Manilow was not actually written by him or for
him, it was written by Bruce Johnston for David Cassidy. The point is, although
it sounds good, the contents and intentions are not what they seem. I find this
is similar with financial statements and annual reports. I am learning that
accounting isn’t so much about the numbers but, as much about the stories they
tell that matter most. The average person would find bookkeeping and financial
statements quite boring but, the stories they can tell are quite fascinating.
Two
Frameworks
The
DCF and Economic profit frameworks have shown me the strength of a firm’s
ability to respond to past, current and future economic and business events.
It’s my understanding that they are useful tools in determining the business
performance now and into the future, which entices the equity investor to
invest. It’s all about the value add. How does investing in this particular
firm add value not only to my investment, but to my soul as well? It is possible
to get more than expected returns on an investment, more than just dividends,
for an extended period of time. We can express the material value in the
economic profit model:
VE = BV0 + PV of
AE
If
the firm does not materially add value from their financial activities, it can
be restated as:
VE = BV0 + PV of
Abnormal OI
Therefore,
the two models can show the expected future dividends and expected future cash
flows using the book value, present value and economic profit. This changes our
thinking about value, involving the cost of capital and utilizing assets to
generate return on investment. It is that bit extra that we are most interested
in, the returns above and beyond the expected, there in lies the real value
add. We need to be able to assess this in a timely fashion. Much like my
decision to pursue a tertiary qualification, I had to weigh up factors of time
and earning. Would it be worthwhile gaining the skills to earn the money and
how much time do I have before the pay off before I die? I will always pick
yes, because the education adds more value to me than just the financial reward
and there is the possibility of earning much greater rewards above and beyond
my initial endowment. This journey reaches beyond financial rewards and into my
soul and the soul all that care about me, the stakeholders in my life. That is
the added value of my decision to study.
Price
Multiples
“Price
is what you pay, value is what you get”. I like this analogy; the logic
resonates with me. I don’t like to part with money lightly and when I perceive
the value expected, it is comforting, but it’s when I receive value above my
expectations, such as the extra fries in the bottom of a McDonalds paper bag,
that I experience real joy. That is of course the instant gratification, over
time you realise others receiving the extra fries and the joy wanes, you
compare the fries with the chips from the chip shop and suddenly it does not
seem valuable anymore. Value can be smoke and mirrors. We need to rely less on
other people’s opinions of value to experience the joy. Basing decisions on
grounded theory and incorporating our
own judgements and assumptions will clear the smoke and reflect a truer image.
We could give up; crystal ball theory has no real answers about the future.
Though, I am not a quitter and I want to make informed, intelligent decisions
for the future now. Each step into the future doesn’t have to be so random, we
know where we now and where we want to be in the future.
= BV0 + Abnormal OI0
(WACC -1)
Allowing
for drift:
VE = BV0 + PV of Abnormal OI
= BV0 + Abnormal
OI0
(WACC -1)
– g
The
crystal ball theory can become even more clearer with real engagement of our
company’s business and economic realities. We will never be spot on perfect,
but we can be in the range of useful expectation. The real connection of facing
our fears, intelligently with courage and conviction and take the leap of
faith.
Forecasting
We
know that company’s do not last for eternity. The likelihood of air travel
being replaced with superior technology is still a long way off…or so we
expect. The likelihood of new entries of competition is more likely, rising
fuel prices are inevitable and the increasing population means more passengers
are likely to be buying airfares. There are limitations to forecasting but, we can apply degrees of
probability and include them in our calculations. The beta β of a firm is the
expected erosion of abnormal earnings over time, because nothing lasts forever.
VE = BV0 + β Abnormal OI0
(WACC –
β)
Things
are beginning to fall in place. Why do we need to restate the financial
statements? To save time and redirect our focus on the business realities. Why
do we need to know the accounting drivers of a firm’s performance? Because this
is where the firm is currently deriving value and the ability derive value in
the future. Why do we need to link the accounting drivers with the actual
economic and business drivers? Because
this is the firm’s real value. This is where the prospect of a firm’s future value
is revealed. The real value is in the
forecasting. The real value lies in our ability to convert forecasts into a
practical assessment with an acceptable margin of safety.
It
is Now Up to You
I
know this is just the beginning, but I am excited to use these skills to
practice into the future and possibly ‘get really good at it’! I am concerned
that being my first time, I won’t get it right. I am concerned that my
forecasts will be way off to be considered useful. But I will never give up. I
want to grow and develop, and I want my children to have those skills too.
There are so many more dreams and possibilities that are closer to be a
reality. This has been an incredible journey. I feel more equipped than ever to
handle the future. My mind is open, and the future is a blank canvas but, I have
the paint and equipment to paint a beautiful, stimulating picture and share it
with the world.
∞
Wednesday, 25 September 2019
Reflections on Ratios for China Southern Airlines
Sales:
The first thing I looked at with China Southern Air (CSA) was
what is happening with sales. Sales have been steadily increasing over the past
4 years. To me, this means that customer numbers are growing, more airfares,
more cargo and freight are being sold…and are expected to be increasing. So, it
makes me curious if sales are increasing, why is net profit decreasing? Net
profit after tax was steadily increasing from 2015 to 2017, then there was a
dramatic dip in profits in 2018, from $6,898 mill RMBs to $3,364 mill RMBs.
What happened to cause this drop? What else affects profits besides sales? My
immediate assumption was an increase in expenses, but what expenses and why?
Profit Margin:
I didn’t really understand what profit margin meant or what a
good measure is supposed to be. So, I did a quick Google search and found that it
tells you how well a firm uses its income. In a nutshell, profit margin shows
how much profit is generated per each dollar of sales. A high profit margin is considered
to 20%, or 20cents of profit is made from each dollar of sales, 10% is about
average or ‘good’ and 5% is low. CSA has a terrible profit margin over the past
4 years but, currently it is the worst. In 2015 at a rate of 4.3%, CSA slowly
increased its margin in 2016 at 5.1% and 5.4% in 2017. However, something
triggered a dramatic drop in 2018 to create a profit margin of just 2.3%. Yes,
last year they were only making 2.3cents of profit to each dollar of sales.
Why??? Again, I began thinking about the cost of operations, expensive new
planes, increasing fuel prices and load factors from passengers and cargo.
Looking at the financial statements revealed so many factors that potentially
could be influential.
NOA and ATO:
I then chose to see what’s happening with assets. CSA has progressively
increased NOA over the past 4 years. The most recent increase occurred recently
from $168,478 mill in 2017 to $192,005 mill 2018. The total asset turnover
ratio is high, holding steady at 0.6 over the past 4 years. Their current asset
turnover is even higher, from 8 in 2015 and 2016, slowly declining from 7 in
2017 to 6 in 2018. ATO has ratios from 77% - 80%, I interpret this to mean the
company is good at generating sales from its assets, or in other words, use
their assets very efficiently. But what does that mean in terms of
profitability?
RNOA:
The return on net operating assets (RNOA) reveals very low
percentages, which doesn’t look good for efficiency. Rising
from 4.3% 2015 to 4.9% 2016 to 5.3% 2017 and then another dramatic drop in 2018
to just 3.1%. I will need to compare
other ratios in the airline industry to see if this is normal or not. If anyone reading this has an airline, please leave your comparisons in the comments or feel free to contact me via email. There is
no doubt in my mind that assets are a major factor of the economic and business
drivers for CSA, but I also know that there is more to the story.
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