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Assessment Stage 2 (ASS#2): Restated Financial Statement and RatiosStep 7 - 10: Ratios and Feedback My Blog: AMAC BlogMoodle Profile: Aldrex’s BlogTo be honest, I thought this section of the assessment would be easy and straightforward as we are only calculating the ratios. To some extent, this was true, but as I got to calculating my ratios as Maria have instructed on her videos, I quickly found how challenging this section of the assessment. The most challenging section is unpacking the economic realities of my firm and trying to the reason or answers from the ratios I have calculated. Overall, I found this section very challenging and rewarding at the same time. Trying to unpack the economic realities of my firm, DataDot Technology, allowed me to fully understand the reasons why understanding accounting in a business is significant. Step 7 Datadot’s product offering ranges from theft deference kits for personal valuables, car kits, heavy machinery, house kit and other related accessories. I’ve chosen three different products from the range they have on offer. These include DataDotDNA Personal Kit, DataDotDNA Home Kit, DataDotDNA Heavy Plant Kit. The selling price for each product were listed on their website and these are the figures I have used. To estimate the percentage of variable sales, I have divided the cost of goods over the sales of goods per year. The figures where between 46% - 49% as can be seen below. From these figures, I have calculated the average for the past 4 years, which is 47.85%. The average percentage is what I have used to calculate my variable cost for each product, as can be seen below. ProductSelling PriceEstimated variable costContribution MarginDataDotDNA Personal Kit$34.95$34.95 x 47.85% = $16.72$34.95 - $16.72 =$18.23DataDotDNA Home Kit$74.95$74.95 x 47.85% = $35.86$74.95 - $35.86 =$39.09DataDotDNA Heavy Plant Kit$199.95$199.95 x 47.85% = $95.68$199.95 - $95.68 =$104.27The contribution margins for each of my product are different because they are all different products offered and the microdots needed to cover a personal item such as a phone is less in comparison to microdots needed for heavy machinery item. Furthermore, the level of complexity for each microdot may be different from a personal kit in comparison to heavy machinery. For example, the heavy machinery micro dots might be more complex as it needs to withstand extreme conditions such as the heat and rain conditions. Whereas, the personal kit might not need the same level of complexity. It would not be best for a business to only produce one product which has the highest contribution margin. In today’s society, it is about providing customers with choices for this reason businesses produce a variety of products. Additionally, the reason for DataDot producing a range of products is to widen their target market to ultimately boost more revenue for the business.One constraint that the business faces is balancing the amount of their inventory levels to the amount that is sold. The business needs to carefully examine and adjust the production of their goods according to their markets demand. It would not good for the business to produce products that do not sell or have a low demand as they would only end up being stored in inventory and ultimately leads to loss of potential profits for the business. So, it is best for the DataDot to produce products based on the current and future demands of their consumers. Another constraint of Datadot is the conditions of the Australian economy. Based on the annual report of Datadot, they do trade on other parts of the world. This means, the amount of revenues they can earn is also dependent on the exchange rate, where it can either have a positive or negative impact on the business revenues, especially if the majority of their goods are sold overseas.Ultimately, the constraints above determines the number of products Datadot produces over a given period. As mentioned earlier, Datadot needs to closely monitor the demand for their products to ensure they are not overproducing stock and leaving it stuck in inventory. Keeping track of the firm’s inventory levels is a critical factor to monitor, especially in the technology sector as products are continually evolving at a higher pace within these environments. Step 8 Profitability RatiosUpon calculating my profitability ratios, it made me question why I have a negative figure in comparison to Maria. My initial thought was that I must have done something wrong. So, I went back to my calculations and rechecked my formulas, I have come to the conclusion that the calculations I made were correct. It could be possible that my profitability figures are negative because DataDot Technology have continued to make a loss every year. The return on net assets was also displaying rather high negative figures, which made me hypothesize that my company are not utilizing their assets well enough to make a profit and is continually making an increasing loss each year. Having a negative ratio year after year, does not look good for the business and investors can hesitate to invest in a business that cannot use their assets well and generate income.Efficiency RatiosThe Days of Inventory ratio shows us the average amount of days a company is holding onto their goods before selling them. Base on the ratio my company have, it was up and down between the four years, roughly between 107 days to 115 days. I’m not sure if this is the average amount of days technology-based sector are holding onto their goods. I could not really find any information about industry bench mark, but I did find information that technology sector does hold on to their stock longer than other industry sector such as retail, where they only hold onto their stocks between 30 days – 45 days. This seems plausible, as retail goods, especially food is bought at a faster rate than any other products. On the positive side, the turnover ratio of Datadot looks good, as they are generating more sales for every dollar of assets used. From 0.61 cents in 2015 to $1.42 in 2018. Although the turnover ratio is increasing, it makes me question, why they are making an increasing loss in their Return on assets ratio. So, despite Datadot utilizing their assets well, it is not enough to make a return for the year? I could not find any information about the industry benchmark for the turnover ratio but led me to the conclusion that my company's turnover ratio is below the average benchmark, as they continue to make a loss every year and not make any profit. Liquidity RatiosThe current ratio shows us the ratio of a company’s total asset over its total liabilities. The current ratio is a great indicator of a company’s ability to pay for its short-term debts. As Maria suggested, a 1:1 ratio is accepted, but many banks want at least a 2:1 ratio before lending any money to business, to ensure they are able to pay for their short-term debts. As can be seen on my company’s ratio, they are well above the 2:1 ratio. This might suggest that DataDot have a lot of cash on hand during the past 4 years. Upon checking my income statements, they do have a huge amount of cash of well above $1 million. Although, they are above the ratio requirement, the ratio decreased from 4.67 in 2015 to 2.51 in 2018. If this trend continues, they might not be able to pay for their short-term debts. Financial Structure RatiosThe debt/equity ratio is a ratio that indicates the proportion of shareholder’s equity and debt to fund the firm’s assets. Moreover, the debt/equity ratio indicates the percentage that is financed by a bank for every dollar of shareholders equity. DataDot’s debt/equity ratio have continued to increase between 2015 to 2018, amounting to 52.7% from 20.7%, which suggest that the business have increased their borrowings. This is true as per the directors’ report in 2018, where they have worked on new opportunities such the launch of DataTraceID cloud, which ultimately needs funding. This is also true as the equity ratio have decreased over time, where it shows that they have decreased their funding from shareholders equity’s. I have also calculated DataDot’s debt ratio to check if they have increased their borrowings as can be seen below. I found that the percentage of their borrowings have increased. Market RatiosThe Earnings Per Ratio (EPS) shows how much were earned per share. Looking at DataDots EPS, automatically triggered red flags for me, as they have continued to make a loss every year, because of the negative ratios. Initially, I thought I have must made a mistake during calculation, but upon checking the companies calculated ratios, I found that my calculations are right, as can be seen below. I could not calculate the Dividends Per Share (DPS) ratio for my company as they have not given out dividends for the last four years stated on the director’s report as seen below. This seems logical as they continue to make a loss every year, so I do not expect DataDot to give out any dividends any time soon. The Price earnings ratio indicates the amount of dollars an investor has to invest to gain $1 from that investment or years it takes for the initial investment to paid back to the investor. DataDot’s figures shows negative figures, which does not surprise me as they continue to make a loss every year, which is only expected for technology companies who invest huge amounts of money on R&D. Based on my figures, I do not think the investors of DataDot would not get their money back any time soon and should maybe look at investing elsewhere. Ratios Based on Reformulated Financial StatementsReturn on Equity ratio compares the comprehensive income and shareholder’s equity. Additionally, this ratio also shows the percentage the investors are getting in return. Based on DataDot’s figures, there is a continuous negative returns the shareholders are getting, which is quite true as the business continually made an increasing loss every year and failed to give any returns to shareholder. Although this is the case, there is an opportunity for growth from new product development as stated by the director of Datadot. It would be really interesting how Datadot would generate profits for their shareholders. RNOA is comparing the businesses operating income and operating assets. Clearly with the separation of the operating section of the business from the financing side, it can be clearly seen that Datadot is making more loss in comparison to its ROA ratio. The RNOA figure more than doubled for all the years studied compared to ROA. This suggest that the business is not in a good position where they are able to make returns for their assets. The profit margin shows how much operating income a business is getting per dollar of sales. When comparing profit margin to net profit margin, my company are making a few percentages of loss when separating the financial and operating side of the business. There is not really much of a difference between the two ratios, as both ratios still show a loss. Its highest loss was made in 2018 at around -56.45%. If this trend continues, the business will likely lead to continually make a loss and not generate any profit for the business. The Asset Turnover (ATO) ratio compares the sales to the businesses operating assets. This also shows how efficient a business is with using their operating assets. Based on DataDot’s ATO rato, there is an increasing trend overtime which suggest that they are using their assets more efficiently. Economic ProfitUpon calculating my economic profit, I was not surprised when I saw that they were negative figures for the last four years. But what did surprise me was the fluctuations of my figures, as can be seen on the highlighted section on the figure below. When I saw these fluctuations, I wanted to know the reasons why? But first I needed to understand the definition of economic profit. According to Martin’s study guide economic profit is the difference between the revenue received from sales and the opportunity cost of capital. In simpler terms, the economic profit shows whether a business made a profit or loss on its cost of capital. The economic profit is driven by 3 factors which are RNOA, cost of capital (WACC) and the amount of net operating assets (NOA). My firms RNOA is well below the cost of capital (WACC), which is 10% as suggested by Martin. This was one of my red flags where I knew my firm’s economic profit will not be good. By looking at my firms NOA, I found that it was decreasing overtime from $5.6 million in 2015 to $1.1 million in 2018. This was because my operating assets have also decreased significantly in 2018 due to the impairment of their intangible assets (approximately $2 million), whereas the operating liabilities remains steady and constant over the years. Furthermore, the negative RNOA figures of DataDot have really influence the result of their economic profit. I believe that there are many reasons why my company are making a loss every year. The first reason is that their operating assets are decreasing overtime while the operating liabilities remains steady as previously mentioned. Furthermore, upon restudying my restated financial statements, I found that the operating income are decreasing over time and are not sufficient enough to cover their operating expenses which remains steady the past four years. Ultimately, the business needs to find other opportunity to increase their assets over time to cover their liabilities, and if they want to continue trading.Step 9DataDot was given two opportunities for a project starting somewhere in 2019 – 2020 financial year. The first option focuses on joining forces with one of their biggest competitors which is HP. The joint venture will continue to operate together as long as they are profitable. The second option focuses on setting up a new branch in the Philippines with Datadot having full ownership of the business. This is an opportunity for Datadot to branch out to the Philippines, as there is a huge percentage of demand for their products. Currently, Datadots competitors do not operate in this country as of yet. The business will continue to operate as long as it is profitable. Option 1: Joint venture with HPOption 2: Greenfield operation in the PhilippinesOriginal cost - $80 million- $120 millionEstimated useful life10 years10 yearsResidual Value 00Estimated Future Cash flow2020-$20 million - $45 million2021$15 million-$30 million2022$15 million$35 million2023$15 million$35 million2024$15 million$35 million2025$25 million$40 million2026$25 million$45 million2027$30 million$25 million2028$22 million$25 million2029$17 million$15 millionAfter calculating the Net Present Value (NPV), Internal Rate of Return (IRR) and the Payback Period (PP) for the two options, it can be seen that Joint venture with HP is the best option and it is recommended that DataDot chooses this project. The NPV for option 1 is quite small which only amounts to $1.86 million, it is still a better NPV compared to option 2’s NPV which is -$40.05. Option 1’s IRR is 10.37% which is higher than the discount rate and is also desirable for Datadot. On the other hand, option 2’s IRR is below the discount rate, only amounting to 5.05%. The initial investment for option 1 will be paid back in approximately 6 years and 219 days, whereas option 2 will be paid back in approximately 7 years and 73 days. Overall, the best option is the joint-venture with HP, as the dominating factor is the NPV rate, which is on the positive side in comparison to option 2. Moreover, the payback period for option 1 is shorter than option 2. Step 10 (3 marks)This section of the assignment is what I find very useful when finding the mistakes, I have made in my assignment. It also allows me to reiterate and fully understand what I have learned when giving comments to other students and vice versa. Feedback given Feedback from Aldrex Mae CondinoFeedback given to Sabina ShresthaMy Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary I think you identified the 3 products of your company well considering that it is a service type of business, in comparison to my company, which focuses on producing goods to the consumer. The way you went about estimating your variable cost is reasonable, as the majority of your variable cost depends on the number of customers you get over the course of the year. These costs could include housekeeping for each room, electricity used to power each room and water used for showering etc.I believe you have calculated your contribution margin correctly. The way you went about identifying your constraints also looked reasonable. Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Upon checking your calculations, I believe that you have calculated your ratios correctly. Your company’s ratio looked good too, as they are all on the positive side. Well done on the comments you have about your ratios! I think you have analysed your ratios in great detail, and it clearly shows on the explanations you have made.You have correctly calculated your economic profit. I think you have provided sufficient reason on why your company made a loss in 2016 and 2017. I think, you only need to re-read your comments again and add the correct punctations, where it needs it. Otherwise, great job! I have provided a screen shot as an example, where a comma may be needed. Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussion I believe you have calculated your PP, NPV and IRR correctly. Your recommendations is sufficiently backed up by the results you have on your excel. Overall, great job!Step 10 Individual feedback with other students N/AOverall ASS#3 Overall, I believe you have made a strong effort towards finishing the last four steps of this assessment. Great job! You deserve it! Feedback from Aldrex Mae CondinoFeedback given to Sanoj FernandoMy Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussion Step 10 Individual feedback with other students N/AOverall ASS#3 My Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussion Step 10 Individual feedback with other students N/AOverall ASS#3 ................
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