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Assignment Stage 2:Maitland BezzinaCQUniversitySteps 7-10:Step 7, Contribution Margins of 3 Products:The 3 products I have decided to choose for this step are from BlueScope Steel’s brand Colorbond. Colorbond sell a variety of products that revolve around housing construction and water storage including fencing, flooring, sheds and garages, water tanks, guttering, formwork steel (which I used for a couple of years when I worked in construction!) and many many other products. What I first noticed when looking for prices of these products on Colorbonds official website was that they actually didn’t share this information! I had to turn my efforts to google and after a little research I found the needed information from review websites about how much these items cost per unit. Now, I’d like to add that the prices I found were from retailer (such as Bunnings) to consumer, so I’m going to assume the price Colorbond sells its products to retailers is a little cheaper than the price the retailer sells them to their consumers. So, I’m going to mention the price that I found online and take away approximately 20% off each product and round it to the nearest 50c. Then from there I will estimate the variable cost and find the contribution margin.center68135500The first product I ended up choosing is the Colorbond Powder-Coated Roofing Sheet. It is the most commonly purchased sheet and would expect to have efficient turnover rates. The price I found online was for $21.50 per sq/m:Therefore, taking out 20% for Colorbonds sale to it’s retailer ($21.5 x 0.8 – $17.2) and then rounding to the nearest 50c, $17.00 is the price I will use for Colorbonds sale price for their Powder-Coated Roofing Sheet.center90424000The second product I have chose is the Colorbond Ultra Fencing Sheet. I chose this product as it is a ‘top of the line’ product, which means it probably sells less, however I will assume it yields a higher contribution margin as a result of this. The price I found online was for $37 per sq/m.Taking out 20% for Colorbonds sale to it’s retailer ($37 x 0.8 – $29.6) and then rounding to the nearest 50c, $29.50 is the price I will use for Colorbonds sale price of their Ultra Fencing Sheet.The final product I have chosen is the 10,000LT CFA Colorbond Aquaplate Steel Water Tank. I chose this one as a personal joke because it triggered a memory of me painting water tanks for work a few years ago while I was pursuing a professional online poker career. I’d spend 13 hours a day, 4 days a week painting water tanks and on my 3 days off would go to the online poker tables, playing 4-8 tables at a time for about 14 hours each of the 3 days whilst learning all the mathematics and odds behind Texas Hold’em Poker. I was lucky enough to make a decent living off poker and, as I was slowly transitioning out of painting water tanks, the Australian Government decided to ban online poker permanently around August 2017 as the players did not require to pay tax on their winnings and all losses would go to the American company PokerStars. I remember winning about $14,000AUD in my last tournament where the entry fee was only $5.50, placing 4th out of almost 70,000 players. It was the highlight winnings of my semi-pro career and it happened 2 weeks before the government banned. It would also be my last game knowing that the ban was soon to come. After they banned online poker, I spent about 3 more months painting water tanks before it got to the point where the sight of another water tank would make me go crazy and I’d eventually move into construction. So, there’s my backstory. I find myself laughing at the idea of a steel water tank as they wouldn’t need painting like the concrete ones I became far too familiar with.center50927000The price I found for the10000LT CFA Colorbond Aquaplate Steel Water Tank was $2,190.Therefore, taking out 20% for Colorbond’s sale to its retailer ($2,190 x 0.8 – $1,752) and then rounding to the nearest 50c will remain at $1,752 and will be the price I use for Colorbond’s sale price for their Powder-Coated Roofing Sheet.After finding the different selling prices I’ve decided to use the profit margin from my Step 8 findings on my ratios only from BlueScope Steels 2018 year, as the previous years are significantly worse than the 2018 year and I believe this will portray a slightly more accurate representation of the contribution margins that may currently be occurring in Colorbond products. This number is seen as 15.65%. For the purpose of learning, I’m going to make 15.65% the average of the 3 products. In my best opinion, I believe the Powder-Coated Roofing Sheet would yield a smaller contribution margin in percentages as it is considered a high turnover product, so I have chosen the percentage of 11.15%. For the Ultra-Fencing Sheet I’ve chosen the percentage of 15.65%. Finally, for what I believe would have a lower turnover and require a higher CM to be a viable product I’ve chosen the 10000LT CFA Aquaplate Steel Water Tank to have a percentage margin of 20.15%.ProductSelling priceEstimated variable costContribution marginPowder-Coated Roofing Sheet$17.00$15.10$1.90Ultra-Fencing Sheet$29.50$24.88$4.6210000LT CFA Colorbond Aquaplate Steel Water Tank $1,752.00$1,398.97$353.03Constraints:One of the main constraints that Colorbond and BlueScope Steel face is the economic condition of the nation. If Australia’s growth rate decreases, this will slow down the development of housing and businesses, which is what BlueScope Steel requires to continue their operations.Currently, there isn’t much regarding competition from BlueScope Steel. They are a massive company and hold a strong position in Australia. I remember when I was working in the mines as a construction worker, all the steel we would receive to build the coal wash plant would be through companies owned by BlueScope. With their presence in the mines I don’t believe they have much to worry about with competition.Another constraint they must keep an eye on is their resources. There’s only so much we can dig up from the ground and as more regulations impede large companies’ abilities to mine resources, BlueScope Steel may find themselves needing to increase their prices to stay afloat. Additionally, they may need to outsource materials from overseas into Australia. I’ve used this regulatory scenario in my Step 9 story.right66230500If these restraints came to reality BlueScope Steel could suffer massive blows. This has happened previously with their company, where they experienced a drop in stock price from almost $50 in 2008 down to prices as low as $1.53 only 4 years later!Step 8, Ratios:Profitability RatiosWith Net Profit Margins I found myself following along with Maria in each of her processes. I also found that my company BlueScope Steel had a small amount if finance income as part of my total revenue and decided to just include the total revenue. After entering the calculation of ‘Net profit after tax/sales’, interestingly I found that BlueScope’s increase in profit margins over the last 4 years has seen an incredible improvement, especially from 2017 to 2018’s results where it jumped from 7.4% to 15.0%. The net profit margin only dropped from 2015 to 2016 where it saw a 0.7% decrease. Additionally, I found that many of the other ratios calculated in my spreadsheet saw small decreases in the year 2016.BlueScope Steel’s Return on Assets ended up showing very similar percentages to the Net Profit Margins where it saw a considerable increase from 2017 to 2018 from 8.1% to 15.8%. From my understanding, this means that in 2018, from every $1 asset BlueScope Steel is generating 15.8c net profit or $1.158AUD from every $1AUD. Comparing this to Maria’s Wesfarmers, it seems like BlueScope Steel is performing much better on their ROI.Efficiency ratiosUpon completing my efficiency ratios, I was instantly alarmed. BlueScope Steel’s days it takes to sell its inventory ranges from 1,386 days up to 1,942 days. What I realised was that BlueScope Steel is currently performing strongly, and with the amount of inventory that would be held within the company, they would have plenty of time to adapt to new policies or changes in the economy due to the fact they would have plenty of inventory held within the company, which they can continue to sell over a long period of time.When I discovered the Total Asset Turnover Ratio, which compares to sales to the total assets, it was extremely low compared to Maria’s Wesfarmers figure. In 2018 it was only 1.05 and worse over, in 2016 it was actually 0.99. I’m under the opinion that because BlueScope Steel would hold an incredible number of assets through their international brand, that perhaps the Total Asset Turnover Ratio isn’t too bad considering the sheer volume of assets they hold.Liquidity RatiosThe Current Ratio in BlueScope Steel’s case is fantastic. In fact, they’ve also made large improvements on this figure over the last 3 years in particular where it rose from 1.40 to 1.72. This figure can improve if a company decreases its liabilities or increases its assets. In the case of BlueScope Steel it seemed to increase it’s liabilities by about $1billion in 2016 but while the liabilities remained the same at around $4billion, the total assets continued to grow into 2017 and 2018 which also had a large effect on BlueScope Steel’s total revenue for both 2017 and 2018. This would imply that BlueScope Steel spent much of their net profits in ’17 and ’18 on acquiring more assets to further aid the company’s future growth.center000Financial Structure RatiosFor the Debt/Equity Ratio, we are looking to see how much money the company contributes as compared to how much is being contributed by equity investors. I’m beginning to see a pattern here with BlueScope Steel’s finances and am beginning to realise that 2016 wasn’t so ‘bad’ after all. What the company has done in 2016 is acquired funds which has increased their liabilities, however by utilising these additional funds granted to them, they have made good use of these funds and have been able to grow the company significantly in 2017 and 2018. What I can see is that 2016 has been almost the pulling back of a slingshot to allow BlueScope Steel to stride forward faster than they may have been able to without finances provided to them by outsiders. In 2016 their Debt/Equity Ratio was up to an astonishing 83.5%, up from 66.2% the previous year, however, now in 2018 we can see this figure has now dropped down to 58.7% which means they’re paying this debt back quite fast.Market Ratios-774704923155This is the section of Ratios which I found extremely easy to understand and very enjoyable to complete as I have a fair amount of experience of trading constantly on the Australian Securities Exchange (ASX). Generally what I have done myself in the past to figure out if I want to purchase a stock is I will look at the Earnings Per Share (EPS) and then work out the Price to Earnings Ratio (or what I call it, the P.E Ratio). From this information I can see whether investor confidence is high or low and make my purchase or selling decision from there. Generally, a high P.E Ratio means one of two things: investors have high confidence in a company and are anticipating high growth rates, or the company is currently over valued and is not worth purchasing. Company’s can end up attaining high P.E Ratio’s after publicly announced news that appears positive. However, if a P.E Ratio becomes to high, it will eventually turn around and will begin to lower, which generally has negative effects on the price of the stock (but not necessarily the company performance itself). More times than not I will purchase a stock with a low P.E Ratio coupled with previous evidence of its current low price rebounding to a higher price. For example, a company with a low P.E Ratio and for example its current price is $10.00 where the previous 3 times the company has dropped down to $10.00 per share, it’s recovered back to $15 within 2 months. I will generally purchase stocks at about $10.50 after the stock has shown signs of another upward trend. This is an extremely simple method however it relies on the P.E Ratio which we have learned here in this unit and a few other factors such as visual resistance levels and some level of human psychology. Sometimes I will make sure there is no negative news from that company before making a purchase however from my experience stock charts are roller coasters by nature, going up and then down, even if the trend is going up, it will still have minor ‘corrections’ here and there which I will add a visual of below to make it easier to see. P.E Ratios are super important for technical traders or ‘tech traders’ who focus on technical analysis rather than traders who focus on news and other methods that are generally up to chance. Day traders use this method and it is how I have consistently generated my 10% profit per month goal within my portfolio.This chart above is from a random company I found and here we can see a long-term upward trend. Despite this, by using the trend line which I have marked in green, it is easy to see that there are goo times and bad times to purchase this stock. Right now I would not buy shares in this stock, however if it were January and I had looked at the trend line at that point, I would have been able to determine from that, and the P.E Ratio which would have been quite low at that time that it would have been a favourable time to purchase stocks of this company around that time. At this point in time I would wait a few months and see if the price drops back down to low-mid $70 range and then wait for signs of a short-term upward trend (like what happened from the beginning of 2019) and then purchase stocks ASAP. My one thought has always been to never purchase stocks above a 6 month average trend line as there is too much chance for a ‘price correction’ where the stock will need to drop in price to be at it’s correct or ‘fair’ value.Dividends Per Share is the amount of money a shareholder can expect to receive from the company they are investing in. Shareholders who own stocks in company who give dividends can generally expect to receive 2 dividend payouts per year, however some company’s only pay out once per year, and some pay dividends more frequently, where I’ve seen some company’s pay 4 lots of dividends per year. To find out how much you will receive per share you own, simply divide the number of issued ordinary shares in the company by the total dividend payout the company will provide for that period. For example, a company has 1 million shares and will be paying out $100,000 for that period. Divide the 2 numbers to find that each share will provide a 10c dividend yield for that period.Lastly, for Earnings Per Share, it is generally accepted that long-term investors prefer to see this number increase unless a company has chosen to issue more ordinary shares to raise capital for a new project in the hopes to increase future revenue, then earnings per share may initially decrease but it would be expected to see the EPS increase rapidly within the first few years after the capital raising took place. Sometimes companies may dilute the total number of ordinary shares to attempt the acquisition of another company. This can be through an aggressive takeover where a company buys another company’s stocks on a large scale until they own the majority of that company, or through an agreement with a company. I experienced this personally last year when one of the company’s I own shares in, Afterpay, bought out the UK based split payment company ClearPay. They issued more shares at a price of around $17.50 and then purchased ClearPay for around $130million. The share price did decrease, as did the EPS for that quarter, however afterwards the company’s profits bounced back quickly and are now performing better than they ever have.Ratios Based on Reformulated Financial Statementsright70358000After entering in the details from my restated financial statement spreadsheet, it is really showing me how well BlueScope Steel are performing as of recent (2018 results on right side).The Return on Equity ratio divides the firm’s comprehensive income and shareholders’ equity to display the percentage of return the shareholders are receiving. From the Return on New Operating Assets it is clear that BlueScope Steels Operating Assets are performing better overall than simply just the NOA. With 26.01% compared to 15.80%. Despite the 15.80% being very attractive, the RNOA shows the company’s operations are performing even better.The main section of the Ratios step that has confused me was when I entered in my Net Borrowing Cost to find that in 2018 BlueScope Steel had an NBC of 173.76%. I hadn’t been able to work out why this has happened, however I did notice that the NFE and NFO figured were very low relative to what BlueScope Steels revenue is, so it wouldn’t do much damage to the company anyhow. Perhaps BlueScope Steel formed an agreement with an equity investor that that will pay back period will be 2 years from 2016-2018, and it could be possible a clause in the contract means that BlueScope must pay heavy NBC if that payback was not met in time. Other than ideas under that nature, I’m still completely stumped!For the Profit Margin (PM) it compares the Operating income after tax (OI) to the revenue of a company. What I found was my totals were similar to Maria’s in the way that each figure from each year was slightly higher than the Net Profit Margin from the top.Finally the Asset Turnover compares the total sales with the NOA to find whether a company is using their assets more efficiently. In the case of BlueScope Steel, this is one of the only negative indicators for 2018, with this figure decreasing, from 1.80 in 2017 to 1.66 in 2018. For some reason, BlueScope Steel is not using their Operating Assets ass efficiently in 2018 which is reflective on their ATO.Economic ProfitThe economic profit calculation of RNOA - cost of capital) x NOA can be used as an indicator to companies of how profitable they are and can provide an insight into management performance. For BlueScope Steel I found a small section in their annual report which states, “A minimum 10% rolling three-year average Underlying Return on Invested Capital (ROIC), which achieves our weighted average cost of capital (WACC).” (page 41) For this reason I chose to use the 10% WACC that Maria also used in the exemplar video. When a company turns a positive economic profit figure it is indicative that they are covering more than their cost of capital whereas a negative number shows that a company or project didn’t make enough to cover the costs. Businesses should be returning more than their cost of capital for their shareholders and the economic profit figure gives us clear insight into whether this is happening (or not).Before I entered in my figures, I had the thought that BlueScope Steel would show me 4 positive figures for the 4 years, however I was surprised to see that only the last 2 years of the company’s performance yielded a positive economic profit. It’s interesting to see (from the image above) how much BlueScope Steel have turned their economic profit around. From realising $-222.8 in 2016 to generating $1,109.6 of economic profit in 2018, many changes must have occurred in the 2 years since 2016. From this final calculation of the Ratios section I can also see how economic profit can be so easily manipulated as the calculation relies heavily on the WACC. Many managers who know about this could use this to their advantage to make their figures appear more favourable to the eyes of their investors. Step 9, NPV & IRR:BlueScope Steel currently hold major manufacturing facilities in Australia in the following locations:Port Kemble, NSWWestern Port, VICBrisbane, QLDAdelaide, SABlueScope Steel has been given two options to choose from for a potential project starting towards the end of the 2019-2020 financial year. Both choices entail the same objective; to construct a manufacturing facility within one of the States currently without a BlueScope Steel facility. The choices are to either expand in Darwin, NT or in Perth, WA. Because the population of Perth is significantly higher than Darwin, BlueScope Steel forecasts the potential for a higher turnover in Perth with the drawback of the initial costs of the larger facility required.The estimated useful life is 15 years as government regulators have stated that in 2034 a pledge to heavily regulate steel manufacturing company’s due to carbon emission rates will take place in that year. The maximum limit of steel manufacturing facilities by a company and its subsidiaries will be 3. At this point, BlueScope Steel will choose to retain it’s 3 most profitable and strategically located facilities, which include the following:Brisbane, QLDAdelaide, SAWestern Port, VICDespite the expected 15-year life, BlueScope Steel requires at least 5 years of profits without payback from either the Perth or Darwin facilities to cover the costs of converting rejected facilities into storage garages for international exporting purposes. Therefore, the accepted payback period is 10 years.Additional information:Based on BlueScope Steels calculations, near-peak production for both facilities will occur at approximately 3.5 years from establishment.The initial costs of facilities were based of some research found online where a gentleman who worked in steel factories for years estimated start-up costs.center000potential locationsPerth, WAdarwin, NTOriginal Cost-175 million-110 millionEstimated Useful Life15 years15 yearsAccepted payback period10 years10 yearsconversion cost-25 million-15 millionEstimated future cashflows61-70 million39-44 million2019-25 million-15 million2020-3 million-1 million202121 million7 million202239 million22 million202359 million32 million202459 million34 million202559 million35 million202660 million36 million202760 million37 million202861 million38 million202961 million39 million 203063 million40 million203165 million41 million203267 million42 million203370 million44 millionAfter calculations have been made of the Payback Period (PP), Net Present Value (NPV) and Internal Rate of Return (IRR) it is conclusive that the Perth, WA project will meet BlueScope Steel’s accepted payback period and will be further investigated by the board before a final decision has been made. The Darwin results have shown an IRR of 9.998%, not meeting the required 10% as requested by BlueScope Steel. The IRR of the Perth project is promising, showing an IRR of 11.606%. The initial investment of the Perth project is expected to be paid back in approximately 6 years, 5 months whereas the Darwin project will not be paid within the required minimum 10 years.With the Perth project being paid back in 6 years, 5 months, this will allow for approximately 8 years and 7 months of net profits to be utilised in conversion of the rejected steel manufacturing facilities in 2034 allowing for a larger budget for each facility. In turn, this will provide an opportunity for larger storing spaces, allowing for more variety to be held in storing locations and creating opportunities for larger overseas shipments when required.Step 10, Feedback: ................
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