Step 1: KCQs on Chapter 5 &6



Assignment 2Contents TOC \o "1-3" \h \z \u Step 1: KCQs on Chapter 5 &6 PAGEREF _Toc20384410 \h 2Step 2: KCQs on Chapter 7 & 8 PAGEREF _Toc20384411 \h 6Step 3: Ratios and Accounting drivers – commentary PAGEREF _Toc20384412 \h 9Step 4: Economic & business drivers PAGEREF _Toc20384413 \h 16Step 5: Forecasting & valuation – analysis & report, reflections PAGEREF _Toc20384414 \h 19Step 6: Individual feedback with other students PAGEREF _Toc20384415 \h 26Step 1: KCQs on Chapter 5 &6 Chapter 5: RNOA and NOAThe first take away from reading this chapter is that we are going to be doing a lot of forecasting of economic and business drivers to estimate future effects of the return net operating assets. I was kind of relieved to find out that we won’t be forecasting a firm’s leverage since this is still a topic I am struggling to understand. However, we will be looking at profitability and efficiency which are two things I have a good sense of understanding about. I remember Martin’s example of his son taking this apart to understand them better. This is something I plan on taking with me throughout the rest of this subject. We need to do this with a firm’s financials, for the purpose of dissecting and making connections for understanding RNOA. While reading this chapter, I needed to keep in mind that we are not concerned with the past but we are concerned with the future or as Martin describes it, the trip we might take with a firm. Before beginning this chapter, I did make some judgements of my own. These judgements were that I wouldn’t just be able to make a verbal judgement about the economic and business drivers of RNOA and NOA. For my verbal judgements to be more creditable there would have to be some sort of math involved. However, through reading this chapter I did realise that I couldn’t just pull the judgements about my firm from nowhere, they have to be from within the financial statements to then from these judgements go on and forecast the drivers of Aeroflot’s RNOA. I am grateful for Martin’s examples. I will easily admit that I was having a hard time wrapping my head around all of this but when seeing the examples things started to become clearer. As I went on, my assumption that we don’t focus on the past was not entirely true. This is because the past is still somewhat relevant especially when it comes to considering the past accounting drivers of net operating assets. A key take away from this chapter is the economic profit calculation which is the RNOA, with its time period, minus the excess of WACC multiplied by NOA that has been invested in the business earnings of RNOA. That might end up being the easiest thing about forecasting. To see what the economic and business drivers of my firm are I am going to need to do some research into my firm’s economic and business drivers based on key accounting drivers. This is going to be quite the task but I believe if I use some of my past knowledge and Martin’s examples I will be able to figure out what some of these are and then be able actually forecast NOA. It is all about making connections. I decided to put things mentioned about forecasting NOA in steps to help me understand it better.Step 1: Forecast economic and business drivers of a firm’s NOAThis includes some estimating of future effects in relation to economic and business drivers in relation to NOA.This is where I will use the identification of accounting drivers of NOA to help me gather a somewhat creditable assessment of the firm’s economic and business realities. Step 2: Connecting the key accounting driver of a firm’s NOAAsset turnover is important in this step mainly the part where parts of a firm’s economic and business realities will affect it along with sales. I will need to be making some judgements around what is expected in the future from economic and business drivers of a firm’s sales. This is also where I need to start doing some converting from a written judgement to some numbers which will, hopefully, lead to future accounting drivers for NOA and then be a well thought out creditable forecast of NOA.Step 3: Expected future sales growth Need to focus on expected future sales growth and the amount of NOA that is expected to support sales growth. This is the formula of 1/ATO.Once again I will need to make sure that I understand what economic and business realties have been driving my firm, more specifically their sales in the past and then from this into the future.When forecasting the future we will once again need to convert the economic and business relating into numbers.Step 4: Forecast the accounting drivers, NOA and economic profitI have a feeling this may be the hardest step but if I follow the other steps it might not be as bad as I think.Martin’s tables for Ryman Healthcare basically map out how these should all be done but it is up to me to put in the work to make sure that all my research in regards to the economic and business realties and accounting drivers is done to my best ability. Meaning they need to be well thought out and somewhat accurate judgements to be made in order to have the most accurate forecasting. This is the step where I will use some of those formulas that were mentioned earlier or ones that I have seen throughout the term. Overall, I think this will be a challenging task for me but I think if I follow the steps above and ask myself ‘what do you think will happen in the future from the past information?’ I will be able to complete my forecasting for Aeroflot Airlines. Chapter 6: Focus on the Enterprise First off, I loved seeing a review from chapter three about how the economic profit framework can be expressed. For me, it is important to take time to review things that I have done in the past to make sure that I am retaining this information. It was a good feeling to see something I knew and already understood. However, this time we look at a firm’s balance sheet to find all items at market value, then at what the book value could expect to earn at the rate of return. This is a bit confusing but seeing it as, V0E = BV of Equity made it make more sense as this implies that the forecasted AE is equalled to zero. Since some assets and liabilities may have a zero expected abnormal earnings since they’re measured at market value, we can use the formula mentioned earlier but add PV of AE from net assets and not at market value. There being many different types of abnormal earning measures which was scary at first but taking my pervious knowledge from past chapters helped me put together the pieces of what the formula’s entailed. I decided that with the amount of formulas there are and how they all have different meanings it would be more beneficial for me if they were all in a table. It is also important to note that there is now three different measures of the cost of capital: cost of equity capital (ρE); cost of capital for operations (WACC); and cost of capital for debt (ρD). Now back to the formulas for abnormal earrings. Abnormal Net Financial Expenses (NFE)Abnormal OIt = OIt – (WACC - 1) x NOAt-1 Abnormal NFEt = NFEt – (ρD - 1) x NFOt-1Abnormal Earnings from NFO (can be expected to be either at zero or close to)V0NFO = NFO0 + PV of Abnormal NFEV0NFO = NFO0 (where PV of Abnormal NFE equals zero.)Abnormal Earrings from NOA (expected to be either positive or negative)V0NOA = NOA0 + PV of Abnormal OIValue of a firm’s equity by deducting the value of a firm’s NFO from NOAV0E = V0NOA - V0NFORestated as:V0E = (NOA0 + PV of Abnormal OI) - NFO0 = (NOA0 - NFO0) + PV of Abnormal OI = BV of Equity + PV of Abnormal OIRestated Abnormal operating incomeAbnormal OIt = [RNOAt – (WACC-1)] x NOAt-1The next part with the WACC formula was familiar since I studied finance last year. It was great to refresh on the past. This formula can be expressed in two different ways but will still set out the relationship between WACC, ρE and ρD. These ways are:ρE = V0F WACC/ V0E - V0D ρD /V0E Or as: ρD = V0F WACC/ V0D - V0E ρE /V0DThere is always risk in accounting and it comes in all shapes and sizes. For this chapter we have equity risk and the equity of cost of capital. These have two components which are operational risk (WACC) and financial risk, comprising leverage and spread. Martin has a great example for getting a grasp on the effect of leverage through calculating the equity cost of capital. One key point from it is that as the firm increases in leverage the required rate of return on equity will be increased. However, this only happens if the required rate of return on operations is greater than the required rate of return on debt and that this doesn’t change if the leverage is increased. There are two types of earnings growth, just like most things in life. There is a good and a bad earnings growth. Their definitions are pretty straight forward. Good earnings growth means that earnings growth that adds value to equity investors. Good earnings is the result of changes in the economic and business drivers of the firm’s operations. Meanwhile, bad earnings growth does not have the same effect. There are some places, when looking at a firm that has high earnings growth, which we need to be wary about. These include financial leverage, investment and changes in accounting methods. This chapter contains a magnitude of information and quite frankly it is overwhelming. By the time I had finished reading it I think I was more confused than when I started. Trying to take notes didn’t help me since my notes basically turned into me writing the exact same thing as the study guide. I did understand that this chapter focused on financial statement analysis by excluding how a firm has financed its operations. Luckily, it also included some concepts I already understood such as NFO, WACC, ROE and leverage. I think I might take some time, if have some free, to re-read this chapter to hopefully make it more manageable. I wish I was feeling better about all of this information since I know it will be important in the future during this assignment. Step 2: KCQs on Chapter 7 & 8Chapter 7: How to Predict the Future to Eternity Finally, we have reached the chapter that might just answer the burning question I have had all semester surrounding how to predict the future. Right off the bat, Martin mentions that “none of us can do this mathematically”. This is intriguing but it also makes sense since nobody truly knows what the future holds. The main theory that depicts finance is that a majority of things within finance are based on assumption and expectations among many markets. This is something I remember from business finance. On the other hand, it is important to realise that assumptions are not always accurate. We can forecast a firm’s Abnormal OI but this is only for a limited amount of time. We can forecast economic and business drivers all we want but all of this won’t predict the future. So the only option there really is from this is to take a guess. A chance. We must guess even if we will be wrong. A margin of safety isn’t something I had heard of before but am glad to know that a margin of safety is the difference between our estimate of the value of a firm and amount that we will pay to purchase an equity interest in a firm. There will always be risk involved no matter what so having the safety margin is incredibly important when it comes to our guess work. It was quite interesting to learn that we can forecast the horizon. This is shown as: PV of Abnormal OI=Abnormal OI1WACC+Abnormal OI2WACC2+Abnormal OI3WACC3+…This calculation is showing the present value of Abnormal OI being discounted by what we can expect the future Abnormal OI to be for eternity by WACC. As mentioned earlier, these types of calculations are only useful when it comes to forecasting for a short time period. Risk is something that is also involved when it comes to our prediction of the future. Risk is different to everyone. Some people not knowing if their card with accept are taking a risk even though it’s avoidable. Others take risks like starting a business for the first time. No situations are the same when it comes to risk. When it comes to the future there is so many possibilities that will vary. We need to make an effort to balance the risk and return of the equity within a firm. We have mentioned the future a lot but what we need to focus on when we deal with the future is expected returns. To analysis risk, we must consider the risk of the alternatives in the future. To forecast and analysis risk we need to pull everything a part to get a better look into the business and accounting drivers. This chapter taught me that our judgements for predicting the future need to have some sort of evidence behind them because judgements and guesses aren’t accurate. It was great to learn that some of the formula’s we have used throughout the term can be used to help us make our judgements more accurate. It also opened me up to the concepts of safety margins and risks. Overall, it was great to get an insight into how we should go about predicting the future. Chapter 8: Going ForwardWe have finally made it to the last chapter of the semester. All of these study guides have told me any different stories, have given me a multitude of information and plenty of examples to help me out when needed. One of the most important things we learnt in this unit is to do with the two frameworks, DCF and economic profit. They have made me understand financial ratios of a frim better than I had before. These are all to help us when it comes to summarising our opinions, assessments and information about a firm’s economic and business realities. This was a huge thing throughout the term that I spent time understanding. It was great to relook at some things like the value added theory and how it tells us that the value of an assets is the PV of the cash flows that we can expect from that particular asset. This subject has really helped me to begin remembering things from previous units including simple things like how dividends are the cash flows an equity investor can expect to earn from their investments. A lot of things helped me remember what I had done in Accounting, learning and online communication. For example, assets = liabilities + equity. The re-expressing of the discounted dividend approach as our economic profit model was very interesting to me. It is now expressed asVE=BV0+PV of AE. So what does this mean? This means that we have an insight into knowing what adds value for equity investors and in this formula BV0 is equalled to the book value of equity and AE is abnormal earnings like usual. I enjoyed how Martin described the process of economic profit framework as the value of a firm’s equity that is based on the book value of the net assets within a firm plus any positive present value from the expected or perceived growth options that the firm has in the future. It is important for me to remember that both the economic profit and DCF approaches have challenges when it comes to using them in real life. The main challenge being that there needs to be a detailed forecasts prepared that include profitability, growth and the cost of capital for the future. I have learnt that forecasting a firm’s Abnormal OI or cash flow is not exactly the easiest thing in the world. I know it will take me time and some skills to help me figure this out. Price multiples is a newer concept to me but it is very easily understood. Price multiples forms part of knowing what adds values and is practical in use. I agreed with Martin that we can rely a good amount on the share market to do some of the work for us and to carry out the task of forecasting the future profitability, growth and cost of capital for our firms. We can also use comparables as a ‘market check’ for our analysis of the value of a firm. We all need a ‘reality check’ sometimes especially when it comes to forecasting. Martin points out that we can use something else which is simpler. To do this we need to simplify the DCF and economic profit approaches to value a firm. We have to make some guess about what to expect when forecasting a firm’s future Abnormal OI. Thankfully, there are a couple of ways to express this. They’re expressed as Forecast Abnormal OI1 = Abnormal OI0 and Forecast Abnormal OI2 = Forecast Abnormal OI1, etc. This approach would mean our economic profit model would be VE = BV0 + PV of Abnormal OI = BV0 + Abnormal OI0 / (WACC – 1). Once again, I am a bit concerned about the amount of variations of formulas. However, these will help me be more successful when it comes to forecasting a firm’s economic and business realities. I found it beneficial to see Martin give an example of using the simplified economic profit model for Ryman Healthcare. This showed me how to set it all out and to eventually do a sensitivity analysis from that. It reminded me that I need to estimate a future growth rate based on the trends seen in past years. As most things in life begin to change and decay over time so will our firms and this will mean Abnormal OI will reduce. The formula for that is Forecast Abnormal OI1 = β Abnormal OI0 (β representing the rate at which Abnormal OI is estimated to decay). This was very interesting to me. The key point with forecasting economic and business drivers of a firm is that if we can’t do that we can’t forecast the Abnormal OI. I need to remember that my judgments are part of forecasting the expected economic and business drivers but I need to trust what I know in order for it to be as accurate as possible. Overall, I have enjoyed reading this chapter as it helped me gather all of my finale thoughts to finalise my assessment two. Step 3: Ratios and Accounting drivers – commentary Ratio CommentaryProfitability RatiosThe Net Profit Margin percentage, which is how much profit a company is making for every dollar of revenue they receive, has been fluctuating over the past four years. In 2015, it was a negative 13.6% and then increased to 6.3% in 2016 but has been dropping since then and is now at -1.9% in 2018. A negative net profit margin occurs when a firm spends more than it is earning during the financial year. I assume that this is because they are beginning their journey of expansion and growth. The Return on Asset ratio has also been fluctuating. It follows the same trend as the net profit margin. The 2018 return on asset was -3.6%. A negative return on assets means that the business is making a loss for as long as this negative return on asset continues. Hopefully, with the growth of the firm, they will be able to negate this in the coming years. Efficiency (or Asset Management) RatiosThe Total Asset Turnover Ratio is a way of measuring the value of a company’s sales or revenues in relation to their assets. Aeroflot, to me, has a very high level of total asset turnover but the higher the total asset turnover, the more efficient the company is. The Current Asset Turnover Ratio helps indicate how efficiently a firm is using its current assets to help generate revenue. They seem to have a steady trend over the past four years and hopefully this trend continues in the future. Liquidity RatiosThe Quick ratios measure the dollar amount of liquid assets that are available to the firm against the dollar amount of the firm’s current dollar amount of current liabilities. A result of one for a quick ratio indicates that they are fully equipped with enough assets to pay off its current liabilities. All of the quick ratios for Aeroflot are under one and this means they may not be able to fully pay off all of their current liabilities. Current ratio measures if a firm can pay short term loans on time. The current ratio has fluctuated but the 2018 result is a good standing and indicates that they should be capable of paying their obligations. Financial Structure RatioThe Debt to equity ratio is rather high for Aeroflot. Typically when this ratio is a high as it is for Aeroflot it usually indicates that they may not be able to generate enough cash to meet their debt obligations. This is something that they should try to improve. The equity ratio is neither high nor low which is good and most likely means that they are on an upwards trend to a high equity ratio which would mean that it would be more favourable. The times interest earned ratio is used to indicate if the firm could pay the interest with it’s before tax income. This amount for Aeroflot isn’t looking too great as it the past three years it has been a negative number and typically a ratio of four means that they would have enough income to pay the interest income expense. Market RatiosThe Book to market ratio is pretty simple as it is used to find a company’s value through the comparison of their book value and its market value. Aeroflot seems to have a steady trend. The dividend yield ratio focuses on the annual dividends compare to share price. From their financial statements I did notice that they don’t have a large amount of dividends paid. Aeroflot has a relatively low dividend yield ratio which is often the case for firms who are wanting to be more stable since dividend stock is equal to less than the income of the firm. When it comes to Earnings per share ratio and Price-earnings ratio you can’t have one without the other. EPS is a measurement of a firm’s profitability and usually the higher the EPS the more money there is the more willing investors will be to pay higher profits. Aeroflot in 2015 had a relatively high EPS but this amount has been slowly decreasing over time and is now at an unsettling low result of (10.19). This, to me, is seen as the firm losing money. The price-earnings ratio indicates the amount an investor can expect to invest in a company. To calculate the price/earnings we need to use EPS. The 2018 P/E ratio is also (10) and also means that the firm is losing money. Ratios Based on Reformulated Financial Statements I have chosen the ones that stood out the most to me for the reformulated ratios. The return on equity was 150% in 2015 but has decreased to (25%) in 2018. A negative ROE, isn’t good for shareholders which was pretty easy to guess from the previous negative ratios. The RNOA ratio results stood out to me since in 2015 it was a negative of 27.8 % but was reasonable during 2016 and 2017. However, it is now a negative again in 2018 but only of 7.7%. Hopefully they can turn that into a positive in the future since investors are usually looking for companies with a higher RNOA. Yes, a negative margin profit isn’t very favourable but it is worth noting that it is only (1.4%). This is something that with the growth of the firm will become a positive. The results for growth in operating income are concerning to me but this is because I don’t exactly know what is “normal” for this industry. I am assuming that a negative isn’t great for a firm but in 2018 they had a negative of 144.5%. This is something I would like to understand better. Accounting DriversIt is important to remember that accounting drivers aren’t really driving the performance of firms but they are passengers coming along for the journey. There are key drivers of Aeroflot’s past economic are the RNOA, cost of capital and NOA. The key accounting drivers of RNOA are profit margin and asset turnover. Lastly, the key accounting drivers for free cash flow are operating income and net operating assets. What is driving or causing Aeroflot’s economic profit and free cash flow to be the levels they are now? What is causing free cash flow to be negative and then positive? What is causing economic profit to fluctuate from negative to positive for two years than back to negative? Economic Profit The economic profit is one of the most important ratios in the Ratios Based on Reformulated Financial Statements. The economic profit is the differences between the revenue that is coming into the company from sales and the opportunity cost of the resources used. By calculating the economic profit ratio, the opportunity costs are subtracted from revenues that have been earned over a period of time. In 2015, Aeroflot had a negative amount of 56 622. I assume that this is because during 2014 and 2015 they suffered from a number of aircraft incidents but it is also important to note that they closed a subsidiary airline called Transaero due to it failing. This negative became a positive of 9 881 in 2016 and 9 426 in 2017. In 2016, Rossiya Airlines became part of the group creating more revenue for the group. It remained fairly steady going on to 2017. This seemed like a better standing point for Aeroflot compared to the 2015 results. However, this was short lived as in 2018 they were back at a negative but of 16 933. A negative economic profit, usually means that there is incentive to leave the market. Being aware that Aeroflot wants to expand and grow in comparison to their economic profit says that they really need to focus on improving this so that their performance within in the market won’t be threated. Free cash flowFree cash flow represents the cash Aeroflot generates after cash outflows to support operations and maintain their capital assets. A more simple way to define this is that FCF is the leftover cash after a company pays for its operating expenses and capital expenditures. In 2016, the FCF was at a negative 1.63. A negative FCF indicates that during this year and evidently the next year, Aeroflot wasn’t able to generate sufficient cash to support the business. This could easily be related to the large investments that they were making around that time. To investors, a higher ratio is preferred. A higher ratio being greater than 1.0. In 2018, the free cash flow was at 0.99. This is great when it comes to getting to that 1.0 that investors are interested in. They have changed a lot over the past four years, why has this happened? There can be a lot of reasons for the changes over the past four years. Some would be directly related to the changes in the economy such as higher jet fuel prices and the effects of negative exchange rates. Jet fuel prices were up by 33.1% in 2018 and had been a financial risk to Aeroflot for the three years prior. The effects of the negative exchange rates is an unavoidable financial risk. Aeroflot has reported that it has been effecting them and fluctuating since 2016. The fluctuation has impact each part of the company in different ways which has effect the economic profit and free cash flow over the past four years. What is driving Aeroflot’s economic profit and free cash flow?There are main things that are driving Aeroflot’s economic profit and free cash flow. The drivers of economic profit include net operating assets, weighted average cost of capital, and RNOA.NOA, net operating assets, have been rather stable with slight decreases every year since 2015. The decrease each year is evident in the results found in the economic profit. This being that by the NOA from 2017 to 2018 decreasing by $11 429 also shows a decrease of a more significant amount for the economic profit. The weighted average cost of capital, WACC, takes some time to understand how it works and effects the economic. The key thing to note is that the lower the WACC rate gets the greater the economic profit would be if all of the other figures stay the same. The WACC was given for this part but without we cannot make an accurate assessment of the average rate of return expected for investors and this also helps with capital structure of a firm. The RNOA part of the economic profit is made up of profit margin and asset turnover. These are accounting drivers within the economic profit for RNOA. There has been a dramatic change through the four years for the PM. It has fluctuated from negatives to positives. To me, the changes in PM have a significant input with it comes to the economic profit. The ATO for Aeroflot has been increasing over the past four years. This is a good thing since the higher the ATO the more efficient a company will be. Overall, through the things mentioned and strong growths seen in sales and NOA growth all come together to help create strong drivers for economic profit.Meanwhile, the free cash flow is made up of drivers that include cash flow from operations, capital expenditures and operating expenses. The cash flow from operations ultimately is a way to show the amount of money the business is bringing in from regular business. The cash flow from operating expenses has been decreasing over the past four years and I believe this is related to the fact that Aeroflot has been bringing on more assets and when assets increase, cash flow from operations decrease. They are currently at 19 495 in 2018 which is a 59% difference from 2017 mainly to do with the growth of the company. Their main capital expenditure that would greatly effect free cash flow is the leasing of new assets which include aircrafts. Aircrafts are the main reason Aeroflot is running and it is important that they are acquiring and maintaining these in order to keep the business running as well as possible. Their net capital expenditure includes a large amount of property, plant and equipment. They have some owned aircrafts and a large amount of leased. The leased planes are decreasing year to year and this is to do with the disposal of some of these assets. Meanwhile, the owned planes has been increasing over the past four years which is mainly to do with more capital expenditure being added. LeasedOwned2015106 7774 4942016112 9428 1472017107 17612 583201889 94516 484When it comes to the operating assets there are some things to be consider when it comes to what is impact operating assets which then impacts the FCF. The cost for operating assets has been increasing at a steady pace over the past four years. From 304 214 in 2015 to 496 337. An increase in operating assets means that there is most likely going to be a decrease in profit. Which one of these is most important or critical?Free cash flow is the most important and critical to a business due to many reasons. One of these reason is because cash is what makes the business run. Without cash, it is nearly impossible to develop and grow a company and their services. They also couldn’t make acquisitions, such as leasing aircrafts, without cash. FCF is important since it allows a large company, life Aeroflot, reach their goals that ultimately will increase their shareholder value. Overall, free cash flow is a great measure of a company’s financial performance, this is due to free cash flow being more difficult to manipulate compared to economic profit. I have gained many insights from breaking down my firm’s financial statements and this has helped me learn and get to know Aeroflot even better. Step 4: Economic & business driversEconomic and business drivers are important to help us forecast the future for our firms. There are key economic and business drivers that will be used in the forecasting of the future of Aeroflot. Return on Net Operating Asset, RNOA, forecasting requires the use of the past to help predict the future and is an economic driver. To do this we need to use the profit margin and asset turnover (PM*ATO). The average for profit margin is -0.01% which isn’t favourable but is due to the higher jet fuel prices that caused Aeroflot’s profits to fall by 90%. The asset turnover is important when it comes to the efficiency of the use of assets to generate sales. The average of ATO is 3.9 which could possibly mean that they are generating more revenue per dollar for assets. This means that the RNOA is negative 4.4%, the main reason it is a negative percentage is due to the profit margin being the main driver of RNOA. Profit margin includes a huge part of what is in a firm financially hence being important. A massive business driver for Aeroflot is the demand for their airlines to fly to and from more locations not only in Russia but around the world. During 2018, they saw an increase in passengers which lead to an increase in revenue from their scheduled operations of 24.5%. This change saw an increase in yields for both international and domestic flights. This ultimately leads to a growth in sales. It is expected that the average increase in sales for the coming years will be 16%, this is predicted that it will continue to grow yearly. It is important to recall that there is good and bad sales growth. Good sales growth means that the growth will leave asset turnover unchanged while a bad sales growth reduces asset turnover through having more inventories and accounts receivable. Mentioned earlier, the average of ATO will generate more revenue therefore leaves an assumption that the sales growth will be good. The change in net operating assets is driven by sales and how well sales is growing. Since it was mentioned that sales will be increasing, it can be forecasted that the NOA will also continue to grow. Investments into NOA will also contribute to aid in its growth and these investments include inventory and property, plant and equipment. There are some external factors that will impact both business and economic drivers. Some of the things mentioned will only be applicable if one of their sources of income, flights, doesn’t increase in price. Aeroflot and all of their subsidiaries are going to need to stay consistent with their prices over the coming years but this may become difficult when it comes to Aeroflot wanting to grow even bigger which may mean bringing in more planes and maybe even more subsidiaries. It has become clear from analysing their financials and knowing their goal that they will have growth in their fleet in the near future. It has been a trend that they lease their biggest assets and it can be assumed that this is how they will continue to do it for new aircrafts and upgrading older ones. There, of course, is a major risk with airlines and even more so with Aeroflot looking at their history. This is the external risk of crashes. Aeroflot needs to focus on making safety a priority especially when it is forecasted for them to continue to grow in many ways and there is a trend that every time an incident happens they suffer in some form. Hopefully, they will tighten their safety and not have any more issues while they expand and grow. I realised while I was discovering what my business and economic drivers were that there was going to be some cross overs with accounting drivers. I found this helpful to gain a better understanding and I find that it is important to always look at things from a different perspective. I will admit, I found it difficult to wrap my head around what could possibly be Aeroflot’s drivers. I found that after conversations with Maria and us working together to get a better understanding about what it all meant was super beneficial to my learning process. To figure out what the drivers were I took a look at the annual reports, the financials and news articles. It became clear what was helping drive not just accounting but business and economic aspects of Aeroflot. As already mentioned, I do think it is possible to connect Aeroflot’s accounting drivers to their business and economic drivers. This is because I can see a clear connection with things that overlap or are related. For example, the components that make up economic profit and free cash flow are also key drivers for economic and business drivers. It did show that there are issues with the firm but these were already known from previous tasks or reading. I understand that Aeroflot is in a multibillion dollar industry and this is scary when it comes to making decisions. However, I hope what I found from my personal analysis is on the right track. I currently believe everything mentioned are drivers of Aeroflot but who knows. Ask me again at the end of the term and I may have a different view of what is driving Aeroflot. I am still learning and with this I am growing and will begin to make more accurate analyses on what is driving a firm. At this point I am feel okay with my analysis. In other words, I am feeling good about some aspects but am worried about others which is to be expected when doing something like forecasting. I feel that I have a fairly good understanding of what is going on with Aeroflot. What I couldn’t find in their annual reports, I could find in news articles which broke things down and really pointed out that certain things were happening. For example, this loses they were making due to wanting further growth and air crashes. I would have to say that Aeroflot is a successful firm despite making loses. This isn’t just because in 2017 they were named the most powerful airline brand in the world but because of their strategies for the future. An unsuccessful company wouldn’t have a goal to have 100 million passengers by 2025. It is clear what they want and how they want to do it. They also have begun implementing more sustainable practices. Step 5: Forecasting & valuation – analysis & report, reflectionsBackgroundWhen working out how to forecast Aeroflot’s future, I took some steps to think about what would be a somewhat accurate approach for this task. I decided that a way I could do this is through using the average. What I can expect to be the incremental change for Aeroflot has been shown through the use of finding what the average of the past four years is. To me, this gives a good indication of where they will be or will be tracking towards in the future. I wouldn’t say I am 100% confident in the results from my analysis and this is mainly due to seeing how Aeroflot has been performing in the past couple of years. They haven’t been doing the greatest and in some ways, my analysis reflects this but could also be way off track due to how unpredictable the airline industry can be especially with the external elements that may affect them. From my analysis, I most likely would not invest. I think this is mainly because looking at the forecast for the future it may be consistent but as mentioned airlines can be unpredictable and during the term, I realised many things about Aeroflot. One of the main things being that they currently don’t appear to be doing that well since they have been making losses constantly and don’t have a great track record when it comes to crashes. HighlightsThere are some highlights I found interesting from the forecasts and made me ask the question ‘how effective is the DCF and economic profit approaches to be in valuing a firm?’ But before I get into that the highlights that stood out to me were sales, economic profit, and free cash flow. Sales, from the financial statements, told one story while the sales from the forecasting show another. However, I did expect it to be an increase due to not only how popular they are but also how they are wanting to grow. It is crazy to see how large their sales will be in 2023 even though in other areas they currently aren’t doing the best. It was great for me from my analysis to see that, from the forecast, that they are well on their way to reaching their goal.Economic profit was one of the things that I spent some time looking at during this assessment. It was quite exciting to see it forecasted after seeing what it was in the past and currently. It was concerning for me to see the economic profit as a negative from 2018 onwards which overall is not great for a firm. However, due to the size of Aeroflot, it may not be an issue but most firms that have a negative economic profit over many consecutive years are in the position to leave the market. So if this is to happen in the future, I am interested to see what they do if this is to continue. FCF is also following the same path as economic profit. It is forecasted to be a negative amount which is fairly concerning. Negative free cash flow means that the company is making large investments but usually also means that the company doesn’t have sufficient cash to support the business. I guess other factors would contribute to this since it can be assumed that Aeroflot is going to continue business even though their performance says otherwise due to the scope of how large they are. Now it’s time to answer the question ‘how effective is the DCF and economic profit approaches to be in valuing a firm?’ I believe that they are both effective mechanisms when it comes to valuing a firm. The economic profit summarises where a firm gets its wealth and how much they have. Overall, it is effective when it comes to finding out how profitable a firm and, in Aeroflot’s case, how profitable their subsidiaries are. DCF is also important since it determines what a business is worth when it comes to its cash yields for the future. Therefore, they are both effective methods in my opinion when it comes to valuing a firm from different angles. Key Aspects of ForecastsThere are some key aspects of what was forecasted that I found interesting and wanted to dissect what I had found from the analysis. These are sales growth, profit margin, asset turnover, and RINOA. Sales growth is important to Aeroflot since, as mention, they want to grow substantially in the years to come. I have their sales growth forecasted at 16.3% for the coming years. This is key when it comes to getting to their goal, without sales this is impossible. However, I feel like sales growth is a key aspect but is subject to change due to the future market growth which will impact the sales growth. I have a feeling when it comes to market share being something that will impact sales that due to Aeroflot being such a big name and group throughout Russia and the world. Since they are a dominant player in the airline industry there is only so much room for growth via market shares. I had one question from my findings in regards to sales growth and that was, what is considered to be a good rate for sales growth? After some research, I found that anywhere from 5% to 10% is considered to be a good sales growth for large companies. This is great news for Aeroflot since they are above this rate meaning that their sales growth is looking promising for the future and for completing their goals. The forecast for profit margin has its concerns since the profit margin is a good indicator of how much Aeroflot is making. In the coming years, it has been forecasted as a -1.1% which does raise some alarms since this usually means that the cost of the product is exceeding the total sales made. Essentially this means that Aeroflot will be making a net loss for the future. So my question is, how bad is a profit margin of -1.1%? Turns out it’s not as bad as I originally thought. When a profit margin is a negative, the close it is to zero, the better. This means that the smaller the negative amount, the less money that is being lost in relation to sales. This, for me, explains how Aeroflot can have a positive sales growth and a negative profit margin. The market may change an affect the profit margin in the future but otherwise with the forecast made this isn’t the best but it also isn’t the worst. The asset turnover is key to measure how efficient a company is being when it comes to the use of assets in generating sales revenue or sales. It appears that the asset turnover time of 3.91 is a good thing for Aeroflot as this means that for every dollar of assets generated, $3.91 of revenue is also generated. This is a good current standing but asset turnover is one of those things that if it’s higher the better it is. RINOA is something I didn’t know the meaning of until watching the video on forecasting which explained what it is. Return on incremental net operating assets is an estimate of the return that can be expected from NOA within a firms operating activities after the forecasting period. RINOA is the same as RNOA but the increments, additional assets a firm invests in each year, are just isolated to get a better look at what they mean. The main thing is if they, for example, add two more assets in the form of aircraft there will be an increment of two. The question then is what is the return expected from the two extra assets? This is where the RINOA comes in. Therefore, what does a RINOA of -0.012 actually mean in relation to Aeroflot? This means that even though Aeroflot is adding assets, planes and so on to their company, they are not making a positive return on these assets. This was seen throughout their financial statements as they have made losses over the past couple of years. ValuationFrom the valuation, I learned a lot about where Aeroflot will be standing in terms of enterprise value in the coming years. From my judgments, the value of -$659,738.76 significantly diverges from when the current share price is multiplied by the number of shares issued in 2019 resulting in $118,502.76. So why do these differ so much? There is a lot of reason why the enterprise value and share price don’t match and these don’t really have anything to do with accounting drivers nor business and economic drivers. One of the key reason why drivers aren’t always relevant to the share price and its relation to the enterprise value is supply vs demand. This means that if more buyers are moving into the market, the demand grows and therefore the share prices go up. Demand can grow for various reasons and these reasons may not even have anything to do with the economic and business realities of a firm.The number of shares is determined by a company and its management. This strongly relates to the supply part of supply and demand. Aeroflot is consistent with issued shares of 1, 111 mm for the past four years and this might indicate that there is no reason to issue more shares for money, etc. The economy also plays a big part in driving share prices. This is due to the fluctuations in the economy. In good economic conditions, share prices tend to be at their peak. Something I did consider as a factor that impacts share prices is the political climate especially with Aeroflot having ties with the Russian government. Just like the economy, the political climate is unpredictable. One thing I did learn from the valuation, is that by comparing share prices with other companies is not conclusive for determining the value of a company through shares and this is why we have calculated it the way we have. Another factor that can drive the share price of a company is the hype or the buzz that can be caused by things like press coverage, rumours, speculation, in Aeroflot’s case crashes or the fact they are planning significant growth. Another thing that ties in with hype is well-publicised Initial public offerings (IPOs). However, it is important to note that IPOs will only be relevant to Aeroflot if, in the future, they were to release more shares to raise capital. Overall, as mentioned, business and economic drivers aren’t always relevant and someone purchasing shares may be doing so for various reasons that aren’t related to these drivers. When it comes to how volatile shares can be, the most important factor is the market’s influence on the supply and demand of shares. RecommendationI believe that, at this point of time, while Aeroflot is on their journey of continuous growth there are three options for equity investors and these are buy, sell or hold. At the end of the day, it is also impossible to say what investor should do due to constant inflation in the market. At the time I’m writing this, Aeroflot’s share price has fallen and it is recommended investors sell. This makes it hard to say if they should sell in four years or maybe hold it while they’re growing and undergoing changes. Holding may be the best for investors currently because if they are to sell now they will be making a loss. Unit ReflectionsThis unit was a new experience compared to the things I had done in the past year. Therefore, how I learned things in this unit was basically me re-learning the thought process and learning patterns from the first subject I did with Martin. Overall, I found the way I learned things okay. I feel like there are some factors that prevented me from learning to the best of my ability. However, this feels like something I can improve on with other subjects in my last year next year. I, unfortunately, didn’t get much out of interactions with others mainly due to being by myself in the lecture. However, it was great to hear insights from others and how they understood things. I did find the feedback very helpful but I do think I should have engaged more with other students while doing this task and after it. I did not contribute a lot to others in this unit and this is due to the fear of not being right so hopefully in the future I will not have an issue with this. This subject opened me up the many new topics that I had never heard of or considered before. The three main things I learned in this subject that had a great impact on my learning process and understanding of financial statement analysis are understanding the past, predicting the future and focusing on the enterprise. Understanding the past was first seen in chapter 4. Understanding the past of a firm gives an insight so we can better predict a firm’s future. We looked at a firm’s financial statements to help gain a better understanding of the past. The restatement of financial statements is essential when understanding the past. The next thing is predicting the future. This is something that scared me at first because ultimately the future is scary. To find out what is happening in the future I needed to find the economic and business drivers. From this forecasting begins. Focusing on the enterprise is a firm’s operations, the activities of a firm that add value without regard to how the firm is financed. Even though I did learn this and find it important but I did struggle with understanding it the way it was taught and need to look into to be able to talk about in the future. In the coming year, I would mostly not be up to being a co-teacher or helping out teach new students. This is mainly because I am not confident in this subject like I hoped I would be. Plus I am about to start a part-time job in accounting and feel that I will be splitting all of my time between work and focuses on graduating at the end of next year. I had a realisation pretty early on that I had no clue what this subject would include and what I would have to do. I think the thing I realised to be concerning was how was I going to forecast the future for Aeroflot. This was important because it is all a part of the learning process and the analysis of Aeroflot so I could understand what they are all about. It is super important for me to remember how to analyse firms since this is something I may need to do in the future working in the accounting and business sector. This is significant because of all of the different parts that are in an analysis from restating financials to forecasting the future. I found all of this great for something who is about to enter into the industry. Students who study this subject in the future should consider doing some study from past subjects like economics, business finance and accounting, learning and online communication to get them refreshed on what they will be learning in this capstone unit. I wish I had known that this subject was going to require a lot of attention in regards to reading the study guide weekly. I would recommend that students plan out when they’re going to do this or, in some cases, read multiple chapters at once if they are strict on time like I was. The best way to survive this subject is to plan. Try to get things like the KCQs done as soon as you feel appropriate because in my opinion, these are time-consuming but straight forward tasks. Plan out what needs to be done and write notes to yourself when planning it all out. Also if you ever get stuck, do the thing I didn’t do and go on the Facebook group and ask your peers. I saw some great interactions between students where they were helping each other out to get their assignments done. Overall, I hope the future students find this subject worthwhile and I wish them all the best. Step 6: Individual feedback with other studentsPEER FEEDBACK SHEET: ASS#2Feedback From: Feedback To: . My CommentsStep 3Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business driversStep 5Forecasting & valuationOverall ASS#2 (Steps 3-5)PEER FEEDBACK SHEET: ASS#2Feedback From: Feedback To: . My CommentsStep 3Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business driversStep 5Forecasting & valuationOverall ASS#2 (Steps 3-5)PEER FEEDBACK SHEET: ASS#2Feedback From: Feedback To: . My CommentsStep 3Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business driversStep 5Forecasting & valuationOverall ASS#2 (Steps 3-5)References Aeroflot Group losses increased by 51 per cent in the first quarter of 2019. (2019). Retrieved 23 September 2019, from ’s 2018 profits slump by 90 per cent after soaring fuel prices. (2019). Retrieved 23 September 2019, from hype and IPOs. (2019). Retrieved 23 September 2019, from Basics- Factors that Influence Share Prices - Wall Street. (2019). Retrieved 23 September 2019, from causes share prices to change?. (2019). Retrieved 23 September 2019, from Causes Stock Prices to Change? | Desjardins Online Brokerage. (2019). Retrieved 23 September 2019, from ................
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