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Assignment 2 Step 7-9:-723900508000Alisha Hart:Student: 121254570Alisha Hart:Student: 12125457Contribution Margins:This stage of the assignment is focused on contribution margins. Contribution margins are how much from a business’s sales are going towards paying for fixed costs. If the sales reach the breakeven point, where the level of activity is equal to cost, then contribution margin also describes the amount going into profit. The contribution margin has high focus on the equity investors in a firm and is used in management accounting to analyse the risk of an investment. My Company:My company is Keller UK, they are a geotechnical company which focuses in ground improvement methods. For this assignment I was going to select only the solutions Keller offered, such as Soil Nails and Grouting. However, after talking to the company I found out that the prices varied not just depending on the size, but on the ground condition. I knew that we were not supposed to spend too much time on this part and I did not want to research what different ground conditions there were. Instead I decided to select three projects Keller has already conducted and sent their head office and email detailing who I was and if I could please have their prices. This is because Keller did not disclose any prices in their overview of the products. However, then in a PASS session I learnt that it would be best to include services of my firm so I decided to choose three services. These are seen below:Calculation of Contribution Margin:388620028892500Jet Grouting:This project was a form of the companies’ Jet Grouting Service. Jet grouting from , uses fluid jets to construct cemented soil. Thus, process is used to control unstable soil through proving the cemented soil support. In the instance of the Victorian Station upgrade, , this allowed pedestrian tunnels to be formed in the railway to progress and improve the flow of passengers in one of London’s biggest interchanges. I decided that Jet Grouting would have a price of ?123 an hour. 4909820000Precast Piles: From, , it was found the Hansford Park upgrade Keller installed 275 220mm precast piles to strengthen the ground which once had been farmland. Precast piles are installed by vibration hammers. Precast piles are used when construction is wanted to take place in poor soil types.I have decided that the price for this service is ?150 an hour due to the machine cost and also the cost of the piles. 49053753302000Dry Soil Mixing:Dry Soil Mixing is a ground improvement method that improves soft and high moisture clay through mixing them with a dry binder. This is where a high-speed drill advances a drill rod with mixing paddles. Then a binder is pumped into the holes making the soil more stable.I estimate that this price would be ?200 an hour. This is due to the cost if the binder and the machine. Contribution Margin:Variable Costs:Variable costs are costs which varying depending on the operation and level of activity present in a business. Keller UK’s varying costs would include electricity and fuel, electricity and fuel are variable costs due to the cost of electricity and fuel being dependent on how long the machinery is operating. These costs can be predicted; however, these costs cannot be completely known until the work has been completed/ the costs bills been come.Other variable costs may include how much raw material is used, this varies depending on the work trying to be done and will also vary of any mistakes are made in the process. The cost of raw material again can be budgeted, however until the work has been completed the cost cannot be known.For this reason, I guesstimate the variable costs to be:Jet Grouting: 30%Precast Piles: 45%Dry soil Mixing: 55%Calculating Contribution Margin:Jet Grouting:Variable costs 30%.Variable costs = .30x?123VC= ?36.9Contribution Margin = Sales- Variable CostsContribution Margin = 123-36.9Contribution Margin = ?86.1 Precast Piles:Variable costs 45%Variable costs= 0.45×?150=?67.5Contribution Margin = Sales- Variable CostsContribution Margin = 150-67.5Contribution Margin =?82.5 Dry soil Mixing:Variable costs 55%Variable costs = .55×200=?110Contribution Margin = Sales- Variable CostsContribution Margin = 200-110Contribution Margin =?90ServiceSale Price% Variable CostsContribution MarginJet Grouting:?12330%?86.1Precast Piles:?15045%?67.5Dry Soil Mixing:?20055%?110The contribution margins of each service do differ and have similarities. The main differences occur through the outliner dry soil mixing, this difference is due to the higher sales price. This is due to the contribution margin being directly proportional to the sales price, hence the higher the sales price, the higher the contribution margin may be. However, it is not just the sale price in which effects the contribution margin, also effecting the contribution margin is the % of variable costs. The higher this percentage, the less the contribution margin will be. Jet grouting has a smaller sale price than the precast piles however due to the lower variable cost it has a higher contribution margin.Looking at this data, one may ask why my firms should not just produce the service with the highest contribution margin, which is dry soil mixing. It is important to understand that a range of people have interest in Keller. A business which only focused on the contribution margins may see improved equity. However, this business is also only focusing on the interests of the equity owners, something Keller understands if it did would lose interest from the range of other groups. Through proving a range of products this also gives the company a buffer approach. Because what happens if a competitor takes away Keller’s soil improvement customer base, if Keller is only providing this one service it will go out of business. Discussion on Constraints:Constraints in a business describe any aspect that may impact the company’s ability to provide a certain product or service. In my company Keller, UK, these constraints occur from resource, market and employee constraints. One of Keller’s constraints may include the constraint of raw material demand. Keller needs to not only look at ways of which they can best carry out the project. For instance, the clay is a material used in all the above services. The clay is a cheaper alternative for Keller, but Keller may only have so much of that clay and cannot use it all on one project. Another restraint of the raw materials is if they are of a high enough standard to complete the job. The clay may not be strong enough for the job leaving companies unable to complete the job. This resource constraint is highly relevant when Keller is deciding which contracts it wants to be a part of. For instance, if two contracts are at relatively equal prices, however one requires Keller to import a different material due to the ground quality. If there is poor ground quality and additional; resources are required to improve the ground quality before undertaking this project. If Keller does not have the required resources to improve the ground quality, they cannot undertake the project.The other main constraint is staff. Where I live, we have a lot of windfarms, they brought in a lot of Irish people. However, the local electricity store was in charge of suppling elections to maintain the windmills from the company. This electricity company does provide a lot of traineeships and basically, they get students my age in year 11. Then they train them and they work for a few years after completing their traineeship and then take over the farm. When the windfarms supplied their contract the electricity company had to pull in all of their previous trainees whom know where still in town but doing something different whilst they tried to hire. Getting staff is the constraint also in the construction company. Keller when they take on contracts need to ensure they have enough and qualified staff to complete their contract. Unlike the electricity store they cannot call easily on past staff and so if they do not have enough staff simply cannot take on the job.Another constraint is through the market constraint. The main market restrained which I learnt from Assignment one was the Brexit and the effects of a no-deal Brexit. The issue if a no-deal Brexit occurs, my company will have to pay additional taxes to complete contracts internationally. Keller may have to decide not to take on contracts internationally in the European Union due to the additional taxes. Even now, with a no-deal Brexit being looked into, many are not investing in the United Kingdom, though not have equity investors Keller may decide that some international contracts be too risky. This is because from their financials, I know that Keller cannot lose money on contracts. The no-deal Brexit has a major effect on the contracts that my company choses to complete. Ratio Analysis:I was both excited and very worried about this step. This step is the second biggest part of this course, so I really wanted to do this well. As always, I have tried to use as many different mediums to complete this analysis, which includes Tuesday PASS sessions, Facebook, the forums and the provided information from the videos and the Study Guide. I decided to begin some initial discussion with peers on my blog, that can be found here, . After finding Maria’s videos I decided to begin my journey, so off I go. Original Financials Ratios:Initial to-do list:Initially I had a few chores, the first was to try and find my share capital. I searched through my financials statements of Keller and was unsuccessful in trying to find the share capital, which I found to be ?7.4m, I decided that I would use the 10% and compare the difference later on. My next chore was to find the number of ordinary shares issued by Keller. From their financials, I found that Keller UK has 73,099,735 shares, in 2018-2015. I found this interesting that over the four years the number of shares in Keller did not changed. I wondered whether this may make a notable difference in Keller’s ratios, well I guess we will have to see. After this I decided to find the price of market shares, which was an effort. After briefly flicking through my spreadsheet I tried to use some of the sites Mrs Tyler suggested in her video. However, this did not prove successful, again I decided to have one last look in my financial statements and there it was. Gleaming right in front of me in size 10 writing was the price of shares, which I managed to find and record from 2018-2015, this can be seen in my spreadsheet.I did have to change the price from pence to euro. This changed my figures from the hundred back to the figure that I had. I also knew that I would have to compare with others in my course. I decided to send out message and see if anyone whom had completed their ratios wanted to compare. I was lucky enough that Louise and her utility company Iberdrola was able to compare ratios with myself. Discussion on Ratios:Profitability Ratios:-414020874395Figure 1Keller’s Profitability RatiosFigure 1Keller’s Profitability RatiosBefore I even began these ratios, I knew they were not going to be considerably high for the year of 2018. This is because during the initial research of assignment 1 I learnt that my company made massive losses in this year and that 2018 was one of the worst years for my profit Margin: Profit After tax (NPAT)SalesAs seen in the equation above the net profit margin is the ratio explaining how much, after tax of revenue becomes profit in a firm. Of course, we want this to be of a high value, as it expresses a high amount of profit occurring through revenue. However, as seen in figure 1, my company has had quite a spread of net profit margin ratios. The main reason that all of my financials are going to be spread out and vary throughout the years is the type of business my firm is. My company is in construction which complete large projects which can take many months to complete. Therefore, I do not expect these profit margins to be consistent due to the projects not being consistent through the years. It is notable that 2016 was Keller’s most profitability year with the company being able to convert 6.5% of revenue to profit. Whilst, as expected, 2018 is a (–) figure which is important as it showcases my company is not making any profit through revenue for the year. Another interesting figure was 2015 where again the company did not have a high ratio and therefore a high profit margin through revenue. This could be due to my company not completing many ‘big’ projects throughout the year. 38544567627500-2381251343025I noticed that revenue was lower in 2016 year, whilst the profit after tax was the highest. This may mean Keller should not focus on increasing its sales, instead decreasing the cost of its operations. I know my company is completing this at the moment and downsizing many sectors of its company. -2476502944495I then compared my net profit margin ratios with Louise. The first notable aspect was the vast difference between Net Profit margin of my own company to Louise’s company. I understood that Keller’s figures for net profit margins were low, however when I saw Louise’s figures, I understood how terrible the figures were. I do understand that my company had significantly lower figure for net profit after tax, this is seen below. This figure is based on the relatively low value of comprehensive income in my company. center383540Keller Net Profit after tax400000Keller Net Profit after tax-3143257454901838325633095Iberdrola’s Net Profit after tax400000Iberdrola’s Net Profit after taxThis is interesting that the sales were that the lowest throughout the years, and I wondered whether my efficiency ratios would reflect this difference. Return on Assets: Profit margin = NPATTotal assetsThe next profitability ratio was the return on assets. This ratio expresses for how many units ($ or ?) of assets we have how many units of profit ($ or ?) are we creating. This ratio measures the profitability of a company is using assets to generate profit. For this reason, this ratio is both useful towards management and investors. I found this ratio interesting as it could be used to assess the worth of an asset in a company. For instance, Keller in 2018 has a negative return on assets of -.3%. Meaning they are losing money on their assets. Only focusing on the immediate future, Keller needs to decrease assets. As this is not only affecting their finances but is also an in-favourable factor with the investors. However, this figure again was .5% in 2015, however grew to 4.4% in 2017, which is very good because for every unit of asset Keller are gaining 4.4 units of revenue. This may just reflect another reality of my company; Keller may have low return on assets that build throughout the years to create high values of return on assets in the future. However, to truly understand these ratios I had to compare my own to Iberdrola’s. I was highly surprised to find that in the years 2017,2016 and 2015 Keller had a higher return on assets than Iberdrola. However, I did notice that the 2018 figure was lower and an outliner to the growing trend seen in the 2015-2017 years. This brings me back to something which I learnt in the first assignment, the Brexit. I know that in 2018 my company needed to begin making plans for a no-deal Brexit and hence that may have meant selling off assets or trying to preserve their assets through not using them. I did find that in the 2018 year that the figure for assets increased, and again the net profit after tax figure was at its lowest in comparison to the 2017-2015 years, this is seen below. -2190762527290-219075-444500Overall these two ratios have a few explanations. To begin with the trends of the figures in rows portrayed that Keller will have significant losses in profit for the first year, which will significantly improve in the second year and then decrease in the third year before creating losses again in the fourth. I believe my company has a three-year pattern which they may purchase assets once every three years and instead of having the cost effect three years of profitability, they allow the cost to significantly affect one year of profitability and increase through the next two years.Efficiency Ratios:The efficiency ratio of my firm I also expected to be less than impressive but only due to the nature of business my company is in. My company does not have high turn-around times of their inventory or assets. -56197598425Figure 2,Keller’s Efficiency RatiosFigure 2,Keller’s Efficiency Ratios-95250483870Figure 2,Keller’s Efficiency Ratios00Figure 2,Keller’s Efficiency RatiosDays of Inventory: InventoryAverage Daily Cost of Goods SoldThe Day of Inventory ratio expresses and measures the amount of days it will take Keller to sell its inventories. This ratio explains how long it will take for a company to sell/ use its inventories. This would be an important factor again for investors. This is because this ratio indirectly shows the liquidity of the inventory, or how fast it can be converted to cash for my company. This is important because if a company goes into debt or begins losing cash it relays how quickly cash can be formed. As if a company has no cash it cannot operate. I was not surprised when I saw how big my figures where, I was actually surprised they were not higher, I guess though this is only an average for the year. This is because my company does not sell their inventories, however use their inventories in projects. My company needs to have a set amount of inventory to ensure it does not encounter resource constraints during Keller’s projects. However, this also means that Keller’s inventories do not have a high liquidity as they cannot be easily nor quickly converted into cash for my company.I was surprised by how consistent these figures were. The 2017 and 2018 figures where similar whilst the 2016 and 2015 figures were also very similar. However, the 207 and 2016 were also similar and acted as that bridge to connect all the figures. I was unsure about how “good” or “bad” these ratios where so I decided to communicate on Facebook to discuss with others:-2571755133975Figure 2,Keller’s Efficiency Ratios00Figure 2,Keller’s Efficiency Ratios0304800So, then I decided to compare my ratio with Iberdrola’s. 762001420495Iberdrola’s Efficiency RatiosIberdrola’s Efficiency RatiosFrom these figures I see a great difference. I know that Iberdrola’s are a utility company and alike to my company do not sell products in the traditional terms. Therefore, it was of great interest of myself to see the difference in days of inventory turn around. I guess because Iberdrola is a utility company it would have little inventories ad my company has a lot of inventories that will only be ‘sold’ when a contract is incurred.Total Assets Turnover: SalesTotal AssetsThe total asset turnover ratio is used to explain how well a company is using their assets to generate profit. For management, the ratio highlights ways in which a company could use its assets overall more effectively. For investors, the ratio indicates how effectively the company is using its cash to generate value. We want to therefore see a high figure in-which should have been present due to my company’s low profit margin. This would indicate that my company was effectively using the assets that I know it has paid high amounts for.I was again surprised to see that throughout the years the figures were consistent, especially the 2015 and 2018 years which had notable small figures for return on assets. I was also supposed that the lowest figure had occurred in 2016, which had been Keller’s most successful year profitability wise. This is due to the revenue for the year being the lowest, so although Keller had high profitability through its assets it had low efficiency in using its assets. I believe this is a major flaw in Keller’s operation and the reason my company is so inconsistent with profitability. I also noticed that both sets of efficiency ratios where completely different numbers throughout the columns and had different trends. For instance, although 2018 had the highest figure for Days of inventory its figure for Total Assets Turnover was the second smallest. -142875330835Figure 2,Keller’s Efficiency Ratios00Figure 2,Keller’s Efficiency RatiosI also decided to compare with Iberdrola’s total assets turnover. 01513840Iberdrola’s Efficiency RatiosIberdrola’s Efficiency RatiosI was also surprised by Iberdrola’s low asset turnover. I can see that Keller are using their assets on a more effective way than Iberdrola. However, Iberdrola has higher profitability ratios and hence it is interesting to note Keller is the most efficient company however Iberdrola has the highest profitability ratios. Liquidity Ratios:-49530046164500Current Ratio: Current AssetsLiabilities LiabilitiesThe current ratio is the expression of for every current liability, how many current assets does my company have to pay the liability. For instance, due to every figure being a negative, my company has no assets to pay for its liabilities. This is terrible for my company; Keller is in a lot of trouble if it cannot improve these ratios.This ratio expresses also how safely a company is running. If a company has a high figure than it is running in a secure way, where it can easily pay off current liabilities. This would be favourable mostly for investors, but also those whom work in the company. Because, usually, when companies shut down with high levels of debt due to liabilities staff are the ones whom lose.I can see that the figures for each year are consistently worsening. Which is terrible, these are terrible figures. I did want to see others company so I decided to compare with others:I then decided to compare Iberdrola’s ratio to Keller’s:1981200702310Keller’s Current Ratios400000Keller’s Current Ratios-38798528511500-53149585472000202882559055Iberdrola’s Current Ratios400000Iberdrola’s Current RatiosLooking at these ratio’s I can see that both companies do not have a $1 of current assets for each $1 of current liabilities. Although, Iberdrola’s ratios are not to the same level as Keller’s I can see a trend. I can see that maybe companies that are not in the ‘product’ market may not have the same levels of liquidity as a company which sells products such as Coles and Woolworths which have high inventories that can be quickly turned into cash. Hence these companies have high liquidity. Financial Structure Ratio:-47625302260Debt/ Equity Ratio: askThe debt to equity ratio expresses for every unit ($1) of equity how much has someone else ‘put in’. For instance, how much of the equity figure has a loan injected. For this reason, not a high figure is wanted as it portrays that a high amount of the equity figure is occurring through debt. For the reason that my company is not new and has been around many years I would expect a low figure. However, due to the low net profit after tax figure I understand that my company would need external funding to run operations. I found that throughout the years the figure has remained relatively constant. However, the highest figure occurred in 2017, even though it had the second 040005000lowest figure for loans and borrowings for both current and noncurrent, see below. I also decided to compare Keller’s figures with Iberdrola’s, see below. 14668501273810Keller’s Debt to Equity RatioKeller’s Debt to Equity Ratio0005384801228725176530Iberdrola’s Debt to Equity RatioIberdrola’s Debt to Equity RatioThrough these figures I did see that Iberdrola’s equity is significantly less composed of loans and outside debts. This portrays to myself that Iberdrola is a lot more independent in running their business than Keller. -142875252095Equity Ratio:The equity ratio portrays how much of the assets that Keller owns is actually owned by the investors. In this way this figure also portrays how much of the assets is financed by debt. Hence a large figure is not wanted to be seen as it portrays that Keller does not have the ability to finance its own assets. Which in a company is not something we want to see.Nonetheless though, we did. Keller’s figures were constant and in the 30 range throughout the years. It was notable that these figures were increasing and decreasing in not set trend. However, the 2018 year which had the least profitability had the lowest number which portrays that this may be the reason Keller had such low ratios in profitability. These figures portray that Keller are gaining control of many aspect of their business. This I feel is an important part of doing all these ratios as I can really begin to see the bigger picture of Keller’s operations.I then compared these figures to IIberdrola’s0-635 I understand that Keller’s figures were not as significant and hence owned more assets than Iberdrola. However, Keller still had a high figure. I am seeing a trend though, as Iberdrola had a larger profit ratio than Keller. However, Keller finance more of their assets than Iberdrola. Hence, a single ratio cannot tell anyone interested in company how the company is going, we need to see the big picture. Although Keller was terrible profitability ratios, they are financing more of their assets than companies with higher profitability ratios. Market Ratios:-57150241935Earnings per Share: -1397029886950Earnings per Share is the amount that a shareholder could get from the company. This figure takes the net profit of a company and the number of shares on issue on the balance date. The main limitation to my figure is that I did only use the number of shares on the balance date, instead of the weighted average of shares throughout the year. I was expecting the 2018 and 2015 figures to be low due to the net profit for the year being low, see below. I also expected that the 2016 ratio for earnings per share would be greatest due to the net profit being the highest and the number of shares being equal (73.10) throughout the 2015-2018 years. I decided to compare these figures with Iberdrola’s. 0-635I found that Iberdrola’s average earning per share ratio was a little more improved than Keller’s. However, I was interested to see how many each company actually gave to shareholders.Dividends per Share:The dividends per share is the figure which expresses how much a company is actually paying to shareholders. Dividends are payments which a company will make to shareholders. A company does not have to pay dividends to shareholders, as rarely does the figure found for dividends per share equals or exceed the earnings per share figures. This figure is most important to shareholders, however as Maria mentioned in the video, this also effects people whom work in a company. As many employees and managers can buy shares for reduced prices there are usually many staff whom are also shareholders in the company. Keller does this as I learnt from looking into my company’s annual report.-5334001304290Keller UK DPSKeller UK DPSThis reminds me of when we had an author whom had travelled to France come to our school. He talked about how different the social order was in those sorts of countries compared to Australia, the United States of America and the United Kingdom. He said the main difference in social order was that the line between customer and waiter, hat the person you could be serving one day could be serving you the next. Alike, whilst highly wealthy people can own shares, so can the employees. Shares have value and high importance to many people. I was surprised to see that whilst in the 2017- and 2016-year Keller could have paid more in shares to their shareholders, they have seemed to stayed constant and paid more to shareholders in the 2018 and 2015 year than what they should have. This is great for their shareholders as Keller actually paid the highest dividends in the 2018 year which had the smallest EPS figure. This may have been a way for my company to keep shareholders happy in an overall poor year for the company.However, this is not good for my company as it does mean my firm is losing money. The reason that firms don’t pay EPS to all shares because a company needs the money to invest and achieve a goal. Hence, through paying a higher DPS than the EPS the company does not have the money to invest into their future operations. -371475313690Iberdrola’s DPS00Iberdrola’s DPSI decided to compare my figures with Iberdrola’s. The first thing I noticed was that Iberdrola payed significantly less to shareholders than Keller. However, I do notice a trend that companies base DPS on more than just the net profit after tax. I draw this conclusion because the figures only vary by .01 for the 2018 year, nonetheless the EPS varying continually throughout the years by much greater amounts.I have deduced that Keller figures are in the appropriate manner to keep their shareholders happy and in-turn many whom work in their company. However, this is not a sustainable way to continue due to the significant different in their EPS figure compared to their DPS figure.-20066031369000Price Earnings Ratio:I was excited to do this set of ratios if I am honest. This is because, as emphasised in the video, the figures are ‘good’ or ‘bad’ depending on which point of view we are looking at. I was excited because I was going to be able to look into these figures through these various perspectives with my ‘Jodie Picoult eye’. Where one minute I was the run of a mill employee whom had chased her Christmas bonus on a share, then I was the big city CEO whom had no idea of where her money went just as long as it was working as hard as her. I guess coming from a country town I could do both, I could fall into the small-town cycle where people moved slowly or I could break that cycle for myself and be one of ‘those kids’ whom ‘abandoned the community whom has given them so many opportunities. But I was ready to calculate this share, see below.This ratio can be seen as a way to find how long it will take to get your money back for a share and hence a low figure is wanted. However, for Keller they want to see high figures as it portrays that the company is expecting to see growth in value of its shares and business. For this reason, I want to see high figures. I can see that in 20187 and 2016 these figures were not high, however rapidly grew in 2018. This shows to myself that Keller is expecting to see its future operations grow.I decided to compare this figure with Iberdrola, see below. 0-1270The first thing I notice is that from 2016, the figures decrease and then increase for 2018. This portrays to myself that the growth and decay seen in Keller’s figures are a norm. This also portrays to myself that Keller had a good set of figures for a company’s point of view as it portrays future value. Ratios Based on Restated Financials:-342900204470Return on Equity: ROE The return on equity figure expresses for every unit ($1) of the owner’s money how much is being made into profit. This figure essentially expresses how effectively a company is using the owner’s money to fund operations and produce income. It is notable and expected that for the 2017-2016 years Keller had high efficiency when using the owner’s money to create profit in the company. Also as expected the worst year is 2018, followed by the 2015 year due to the lower levels of comprehensive income. The 2016 figure is especially impressive; however, the 2018 figure shows that for every unit of owner’s equity, create .97 units of debt. However, the 2015 figure was also poor and then in 2016 significantly heightened. I noticed that these figures especially varied and did not stay constant throughout the year. This tells me that the owner does not have a safe amount of knowledge of how much of his investment will create value in a firm. -457200352425Iberdrola’s ROEIberdrola’s ROEI decided to compare Keller’s figures with Iberdrola’s. The most significantly item I found was that ROE figure was zero, this is because the comprehensive income figure was 0, see below. 00I guess this means that the owner gets noting back for the equity. I may contact Louise just to ensure she is using the correct figure.Return on Net Operating Assets: RNOA-476254889500-308113687788RNOA figure expresses for how many units ($1) of operating assets how much profit was being generated. I found that the OI 2016 figure was the highest and the 2018 OI figure was the lowest, see below:-188698467343Through analysing the NOA figures as seen below I decided that the main drivers of RNOA was Keller’s Operating Income.33337580772000Another trend that I noticed with the RNOA was that the figures were not consistent throughout the year, instead alike to the return on assets figure it changed. Through taking away the financial assets it is noticeable that the operating assets create more value for a firm. This would be the reason that Keller had more NOA then assets.To decide compare Keller’s figures with Iberdrola’s to sew how ‘good’ or ‘bad’ these figures really are for the company. 2133600216535Iberdrola’s RNOAIberdrola’s RNOA0-63500I did notice that on average Iberdrola had a higher RNOA and hence used their operating assets more efficiently to create value in a firm. I also notice that Iberdrola’s RNOA was more efficient than their ROA, hence again the operating assets have more efficiency in creating value in a firm than financial assets. Net Borrowing Costs (NBC):Net Borrowing costs relays the interest that is paid on a loan. If a loan is for ?400, Keller may pay ?440 and therefore would have borrowing cost of ?40. The lower this figure is the better for the company, not only as it portrays the company is paying less for the loans, but also because it portrays that the company does not have as many loans. The figures for Keller’s NBC are seen below:-571500The main trend that I see is that Keller was paying the most in borrowing costs in 2017,2015 and 2018. The 2017 figure surprised myself as overall it had been one of the best years for my company in many other ratios. These figures tell myself that my company are paying significant amounts in the loans it does need to fund its operations. However, to really understand these figures I compared them to Iberdrola’s NBC, see below.2343150236855Iberdrola’s NBCIberdrola’s NBC0-1270 The first difference that I notice between the two ratios are that Iberdrola is paying significantly less in NBC to Keller. This is of course better for this company as it expresses that Iberdrola is paying less for its loans than Keller. However, this is expected due to Iberdrola’s figures in profitability being significantly more improved to Keller.Profit Margin:The profit margin is a driver of economic income. The profit margin relays that amount left by the sales after a business has paid the expense. It is the profit formed by every $1 of sales and hence we want this to be at the lest 1:1 ratio. I noticed as expected that the 2016 figure was the highest whilst the 2018 figure was the lowest. However, I did notice that these figures were significantly improved to the net profit margin. Where 2018 figure was -.2% in NPM, the PM figure was .37%. The main reason for this is through taking out the financial income from the operating income. -247650431800I also noticed that these figures were not constant throughout the years. Another thing I noticed was that the figures have been decreasing from 2016, however did jump significantly from 2015-2016.In comparing to Iberdrola’s PM figures, see below, -24765071755It was found that Keller was making significantly lower profit margin than Iberdrola, even with the operating income and finical income separated. This changes my perspectives on how ‘good’ these figures where. However, I have to remember that the companies are in different industries and countries, which is a main driver in many of these figures. Assets Turnover ATO:0116205This figure separates the operating assets from the financial assets to find for how many units () of operating assets there are is profit formed. It is essentially through every $1 of operating assets how many $1’s of profit is being generated. However, I really wanted to see the effected that separating the operating assets from the financial assets had on this figure, so I decided to compare this figure to the total asset’s turnover, see below.00 It is notable that there is not a notable difference between the ratios. This is due to Keller only having one financial asset of cash and cash equivalents. However, I was a little disappointed there was not a great difference. The ATO main trends where that the figures were constant, growing from 2016-2018 however did decrease from 2015-2016. I also noticed that 2018, which had been the worse year in profitability had the highest ATO figure. This portrays to myself that Keller may have more long-term plans than focusing on short-term figures.I then compared Keller’s figures with Iberdrola ‘s, see below.00 I noticed that unlike Keller’s figures, Iberdrola ‘s is much lower indicating that they are making less from their operating assets than Keller. This shows that although Iberdrola has a higher Profitability ratio, Keller is generating more from assets. Portraying that Keller have more operating assets to Iberdrola which are generating more profit, however Keller’s cost is much greater to Iberdrola ‘s. Economic Profit:0-3810The main reason that Economic Profit is Higley useful is that it covers the opportunity cost. The opportunity cost is the, should have, could have cost. This covers the cost of the second-best option a company did not take. It is like the cost of buying a Kit-Kat instead of a Cadbury bar. The main drivers of Economic profit are RNOA, NOA and cost of capital. This means to try and figure out what these figures are telling myself I need to first analyses these three main sectors. RNOA: Please look above to see the description of RNOA-390525-16192500 As stated above Keller’s RNOA was high in the 2017-2016 years, as 2018 year had the lowest RNOA and 2015 had the second lowest RNOA. I noticed that RNOA is not consistent. I wanted to know why, if RNOA is the ratio between OI and NOA I had to begin there.00-60007550101500When I analyzed OI, I noticed the pattern was consistent. In 2017 and 2016 the highest figures were found, the lowest figure was in 2018, and the second lowest was in 2015. I then had to analyses NOA, net operating assets. However, the same pattern was not prevalent, instead 2018 had the highest NOA figure. However, I believe that this is a pattern because it makes sense that the year with the lowest OI and highest NOA would create the lowest RNOA. The other main trend was how constant the 2016-2018 figures were, but the outliner was the 2015 year.From analyzing the RNOA I drew some conclusions about the data. The data varies due to the OI and NOA figures varying. I am still unsure about the negative figures. However, the 2018 figure is the lowest due to the OI figure having the lower figure and the NOA figure being the highest, hence since RNOA=OINOA. 2017 is the second highest number, due to The OI figure being the second highest and the NOA figure being the second to lowest. Notice the pattern that a higher OI figure and a lower NOA figure creates a high RNOA figure and a low OI figure with a high NOA figure creates a low RNOA figure. 2016 is the highest figure, due to OI being the highest figure and the NOA being the second highest figures. Whilst the 2015 figure is the second lowest due to having the second lowest OI figure and the lowest NOA figure. Net Operating Asset:00Due to economic profit being the product of RNOA-cost of capital / Asset Turnover. Therefore, I would think that a higher NOA creates a higher figure for economic profit. This made me begin to think about the negative figures. Now basic math is a positive is timed by a negative than that negative figure will grow. Therefore, it made sense that since both 2018 and 2015 were high NOA figures, the negative figure created by the RNOA-cost of capital would make these figures large negatives. These are why the negative numbers for economic profit are so high. -52387528384500Conclusions on Figures: 2018:The 2018 figure is the lowest due to having the lowest RNOA, a main driver of economic profit. The low RNOA figure is due to having the lowest Operating Income figure and the highest NOA figure. This taken by the 10% cost of capital figure (which was found in Keller’s annual reports to be 7.8 million) creates a negative number. This negative number is high due to 2018 having the highest NOA figure, another driver of economic profit. All these forms the low economic profit figure. This tells myself that my firm have a negative ability to create value above the cost of its capital. Through prior research I understand that this is due to Keller losing on a prior project. This tells myself that Keller needs to focus on creating strong capital budgeting projects that ensure Keller are only making investment decisions that create value for their firm. 2017:The figure for 2017 was relatively low, however was still the second highest figure present in the series. This is the second highest figure due to the RNOA being the second highest figure. Whilst the NOA figure is the second lowest. This creates the second highest Economic Profit figure. This figure tells myself that the firm’s economic profit has been decreasing from 2016. This also tells myself that Keller should have seen the 2017 year as a flag to try and increase it’s RNOA. This relays back to the idea that ratios can be used as warning signals.2016:The figure for 2016 was the highest. This was expected through 2016 being the most profitable year for Keller. This figure is due to the figure for RNOA being the highest due to OI being the highest and NOA being the second highest. Although the NOA figure was higher in the 2018 year this makes sense because it was only making the negative number higher. Even though the NOA figure for 2016 being the lowest the main driver of economic profit is that the company was able to add value in an investment above the cost of capital. Due to the high RNOA figure Keller was able to do this and hence create a high amount of economic profit. 2015:The 2015 figure is the second lowest. This is due to 2015 having the lowest RNOA figure. This low RNOA figure means that Keller can not create more value than the cost of capital and hence forms a negative number. This negative number is increased through 2015 having the second highest NOA figure. Due to this number growing in 2016 I know that Keller used the low 2015 economic profit ratio as a flag to increase their economic ratio. This would have been done though smart investment decisions. These decisions would have been made through capital investment plans which added significant value to the firm. 42056057556500I Decided to Communicate with My Peers About the Drivers:-285750200025I communicated with ash lea about the ROA driver of economic profit.I also decided to compare my ratios of economic profit with Iberdrola’s. 2124075304800Keller Economic Profit400000Keller Economic Profit-345440000-580390213360002124075238125Iberdrola’s Economic Profit400000Iberdrola’s Economic ProfitI was surprised that all of the figures were negatives. This tells myself that Iberdrola has not been generating more value from investments than the cost of capital. This tells myself that Keller’s figure for economic profit are more improved to Iberdrola’s. This may be because It did notice that the 2015 figure for Keller acted as a flag and lead to improvement of Keller’s economic profit figures in 2016-2017. The main reason for Iberdrola’s negative figures is due to the RNOA figures which can be seen below:01270These figures are too low to add value over the cost of capital. 00Then due to the high NOA figure which increases what would otherwise be the relatively low figure for the negative difference between RNOA and the cost of capital a high negative economic profit figure. Insights:From breaking the economic profit into bits, I have learnt how the different aspects of the equation effected economic profit. The main insight that I have made throughout calculating economic profit is that to have a high economic profit a high RNOA figure is needed. More so, to have a positive economic profit figure I have to have a positive RNOA figure. This is due to RNOA needing to be higher than the cost of capital to produce a positive economic profit figure. Hence RNOA effected whether economic profit is a positive or negative figure.The NOA figure just dictates how large the number is going to be. It does not impact how high the number is, even if this figure us high a negative will still be negative. Even if this figure is low a positive will still be positive. However, if NOA figure is negative it can change if the economic profit is negative or positive. What I did not learn about economic profit is its limitations. Every method has a limitation, nothing is profit. So, what are the main negatives related to economic profit.For more reflections about this process, please see my post . Keller UK are a leading geo-technical company. Keller is trying to expand their project base through upgrading machinery. They have decided that they want to purchase his machinery on their balance date, 30 December so that the new investment can be portrayed to all interested in the firm.Keller has already mentioned about completing many upgrades of sectors in the 2018 year. However, Keller is deciding between the purchase a fleet of 5 trucks valued at $35,000 each. Keller hopes that by spending $175,000 (5 x 35,000) they will be able to finish projects faster and be able to transport materials from multiple sectors to control the constraints of raw materials. Or Keller could purchase a fleet of 3, $45,000 combat lift forklifted. Keller hopes that through spending a total of $135,000 (3x45,000) in purchasing these machines they will also be able to complete more projects in the North American sector.I assume that both fleets value depreciates significantly after 10 years. Hence the residual value for the trucks is $100,000 and the residual value of the forklifts is $95,000. Keller expects that the truck fleet and the forklift fleet will last them 10 years. The estimated life, original cost, residual value and expected cash flow can be seen below.Fleet of TrucksFleet of ForkliftsOriginal Cost$175,000$135,000Estimated useful life1010Residual Value$5000$5,000Estimated Future Cash Flows $2019 (year 0)2020 (year 1)30,00030,0002021 (year 2)40,00020,0002022 (year 3)30,00030,0002023 (year 4)20,00030,0002024 (year 5)20,00020,0002025 (year 6)30,00020,0002026 (year 7)30,00040,0002027 (year 8)40,00020,0002028 (year 9)10,00015,0002029 (year 10)20,000 -500015,00010,000-50005000After organizing the expected cash flow from each investment, I decided to calculate the payback period. The payback period relays to managers the time it will take for an investment to generate the initial cost. These can be seen below:0-2540The payback period for the truck is around ≈6.83 years (3sf). -1333500The Payback period for the forklifts was around ≈5.65 year (3sf). -133350407670The next main component was to figure out the NPV net present value and the IRR, internal Rate of Return. This is shown below:-85725111760From these three figures I can make the decision for which investment is best for Keller UK. The first component that I looked into was the NPV due to that being the dominant figure. The Net present value is the present value minus the cost of the investment. This figure needs to be positive to be acceptable. The NPV of the trucks was a -$5,037.90 as the figure for the forklifts was around $5345.5. Hence, the only acceptable option is the forklifts. However, let is still consider the other 2 figures.The next main check is the IRR, internal rate of investment. The IRR is the rate of return when NPV is equal to zero. Our required cost of capital and discount rate was 10%. Hence any IRR rate of less than 10% was not acceptable. The trucks returned a 9% figure, making it an unacceptable investment. The forklifts returned a 11% figure, greater than the required 10% and hence and acceptable investment. The secondary method is the payback period and is the time it will take to get the money back from the investment. Let us say Keller want this period to be less than 6 years. The trucks have a payback period of 6.83 years, making them an unacceptable investment. The forklifts have a payback period of 5.75 years making them an acceptable investment.Hence Keller will invest in the fleet of forklifts. Strengths and Weaknesses of Analysis:The main strength in the payback period is it’s easy to use and understand. The main weakness in the payback period is that it does not take into consideration the time value of Monet. Also, this method ignores cash flows after the period the investment has been paid back.The NPV is the strongest method. And most reliable the strength of the NPV is that it considers all cashflow and the time value of money. This method also is adjusted for any future risks. The main negatives are not the method however the accuracy and ability for manipulation of the data. The discount rate can be changed which will change the NPV rate and the future cash flow. The NPV can be easily manipulated. The IRR is based entirely on cashflow estimate. The main weakness is that there is not equation but instead a try and fail method. The IRR main method can produce multiple answers and are unreliable with mutually exclusive projects. Mutually exclusive projects are those which choosing one will mean you cannot choose another. The method of capital investment decision allows for companies to predict whether an investment will be beneficial and add value for a firm. The main strength of my analysis was that in every category did the forklift option prevail. This means I can be assured that in many sectors does the forklift options better suit my company and their financial position. The main negative of this method is that we are not analyzing the factors of my firm outside the creation of value. If Keller need the trucks to transport materials and complete jobs then they must make that investment no matter the figures. Because without trucks they will lose contracts and will not be able to provide most of their services. Also, these trucks could last longer of bring in value for the firm in different ways, such as being able to complete more contracts. The other main weakness of my decision is that although I did research and calculate the price of the trucks, I only made up the expected cash flow. This does not in any way reflect Keller’s cash flow from the machinery. This is a main negative as how can we make any decisions when we do not have the correct figures. This method was great to teach myself the basics of capital investment plans. However, I understand that my decision has low validity. ................
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