STEP 3- Ratios and Accounting Drivers Commentary



ASSIGNMENT 2 (ASS#1): KEY VALUE DRIVERS & VALUATION My Blog: 3- Ratios and Accounting Drivers Commentary Ratios Commentary Before I had begun writing this step, while I was doing my assignment, I had written few notes for myself whilst I was watching Maria’s video. First of all, I want to establish my commentary with the notes that I had written myself in the first assignment.-25908001. Dividend declared but not paid. 2. EPS was different If at the end of the year the company reports earnings of $200,000, which number of shares should be used to calculate earnings per share (EPS): 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2—this is quite a large range! To avoid the confusion caused by such a large range, the company must calculate the weighted average of outstanding shares to arrive at a more accurate EPS for the given time period. 3. Price earnings ratio is negative , so what does that mean ? 4. The company does not have inventory 5.No interest on loans for the year 2016.6. No dividend paid. 7.Because the company was founded in 2015, their sales from customer operations is 0.Hence the ratio concerning sales before 2015 cannot be calculated. 001. Dividend declared but not paid. 2. EPS was different If at the end of the year the company reports earnings of $200,000, which number of shares should be used to calculate earnings per share (EPS): 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2—this is quite a large range! To avoid the confusion caused by such a large range, the company must calculate the weighted average of outstanding shares to arrive at a more accurate EPS for the given time period. 3. Price earnings ratio is negative , so what does that mean ? 4. The company does not have inventory 5.No interest on loans for the year 2016.6. No dividend paid. 7.Because the company was founded in 2015, their sales from customer operations is 0.Hence the ratio concerning sales before 2015 cannot be calculated. Consistently, when discussed in class I had told Martin and my peers that my ratios look very bleak and it is all negative and the values are so different that starting the assignment itself was giving me a headache. Profitability Ratios?????Net Profit MarginNet profit after tax/Sales-113%-12%10%-53%Return on AssetsNet profit after tax/Total assets-6%-2%2%-12%As you can see the net profit margin, I have never seen anything like that. The percentage of -113% itself scares me, and to top up it goes down to -12% , i.e. change of 100%. However, I was able to overcome the fear once I had discussed this in the class and after receiving insights from Martin. Hence instead of being scared, I had to dig up and understand why this happened. And it is actually working to my advantage because I get to understand different situations, which are causing fluctuations to my company’s ratio. Profitability Ratios Profitability Ratios?????2016201720182019Net Profit MarginNet profit after tax/Sales-113%-12%10%-53%Return on AssetsNet profit after tax/Total assets-6%-2%2%-12%From my perspective, profitability ratios are self-explanatory. I know that higher the positive numbers, more favourable for the firm. And as we can see above, both my profitability ratios are in negative except the year 2018. HYPERLINK \l "Impairmentlossrationale" \t "5"2019 is the year where Superloop has encountered one- off item of 50.3 million loss, hence affecting the entire financial statements. This important encounter will be mentioned in this assignment numerous times. P.S : I have added links in these documents as I thought I would have to repetitively encounter same reasonings. Except of this of one-off item, I believe that the trend established in 2018 could have been followed in the following years. Coming to red flags, one red flag that I can see straight on is -113% for the net profit margin for the year 2016. Why has this occurred ? -This is because the company had just been founded in the year 2014-2015, hence the company is still making a foundation. Irrespective of having high sales, due to high liabilities the profit is higher than the sales, giving a result of -113% profit margin. Similarly, return on assets, implies every $ of assets , how much are we turning into net profit. In simpler words, how efficiently are we using assets (money invested) to generate profit. Again, the company had been doing good for a start- up company with incremental % on ROA reaching 2% in the year 2018. As already mentioned, the impairment loss, takes a hit on ROA for 2019 again.It can be taken into that it was not just impairment loss but drop in sales of 6 million can also be seen. However, there was an encounter of change in accounting standards, and when compared to restated amount for 2018, it actually depicts an increase in sales for the year 2019.Efficiency Ratios Efficiency (or Asset Management) Ratios?????Total Asset Turnover RatioSales/Total assets0.00.10.20.2Current Asset Turnover RatioSales/Current assets0.12.53.62.2The first thought that goes to mind having look at these ratios is how are my assets. What is it valued at ? And does my company have more current assets or non-current assets. Being in a service industry, specially providing NBN, I would think my company to have more non-current assets than current assets. And it is true, the company’s asset is more comprised of non-current assets. As of 2019, the highest asset that the company owned was intangible asset worth 234 million. The above picture depicts what constitutes of intangible assets for Superloop. Because I have established that there was a decline in sales of 6 million for the year 2019, and Total Asset Turnover ratio remaining same at 0.2 for the year 2018 and 2019, the analysis included of either the assets are not being efficiently utilised or assets has decreased for the year 2019. With evaluation and facts, for the year 2019, sales have decreased, and assets has increased, hence assets are not being efficiently utilised. While evaluating, total asset turnover ratio and current asset turnover ratio side by side, I can ascertain that the increase in assets are for non-current assets. I can determine this as Total Asset turnover ratio remained constant for the year 2018 and 2019, however there was a decline of 1.4 in the current asset turnover ratio. Liquidity Ratios Liquidity Ratios?2016201720182019Current RatioCurrent assets/Current liabilities6.70.80.80.9Quick Ratio 1(Current assets - inventory - prepayments)/Current liabilities6.70.80.80.9Quick Ratio 2(Current assets - inventory - prepayments - receivables)/Current liabilities6.50.40.60.5Liquidity Ratios as clearly explained by Maria identifies the ability of a company to pay its short-term debt. By looking at the ratios I can identify that the company’s liabilities have grown after 2017. This is because Superloop is still in its founding stage and slowly progressing into growth stage starting 2020. It can also be observed that the quick ratio is certainly very similar to Current Ratio, this is because Superloop being operated in a service industry, it does not have inventory. And I can also pinpoint that the aim of calculating quick ratios are to get stringent idea of company’s ability to pay short term debt. This is because quick ratio narrows down the numerator to actual cash that the firm has. We can see in the formula that inventory, prepayments, receivables are being deducted, which laves the remainder to be cash and cash equivalents. Financial Structure Ratios 2016201720182019Debt/Equity RatioDebt/Equity6%22%32%53%Equity RatioEquity/Total assets94%82%76%65%Times Interest EarnedEarnings before interest & tax/Interest#VALUE!(3.7)(15.7)(2.2)I have always loved calculating financial structure ratios. It reminds me of grade 12 when we were given projects and we had to identify which option was better 1. Taking debt or 2. Opting for equity. Moreover, it also reminds me studying about pecking theory that I studied in Business Finance. I know that interest rates play a big deal in setting up financial structure. In my viewpoint Debt to equity ratio is again self-explanatory, and for Superloop Debt to Equity ratio is increasing where it was 6% at 2016 and has reached 53% in 2019. As recalling the pecking theory, I would say that it is actually a good thing. This is because before we opt for equity, debt financing should be chosen first. However, both the proposals need to be evaluated, and if debt financing leads to better EBIT, then that needs to be opted. On Contrary, we can see the equity ratio diminishing and that to me is not surprising. Because we have established that debt financing is being preferred more in comparison with equity financing. Hence, it is evident that equity is decreasing. Therefore, asset somewhat fluctuating and remaining in the constant line, gradual decrease in equity ratio is sensible. Times Interest Earned, what is this ? I had no clue. Then watching Maria’ video it mentioned, “ How many times our profit covers the finance cost”. I understood why EBIT was used instead of the NPAT and higher the times interest earned better for the company. I can see that Superloop’s profit is not covering finance cost at all, but 2019 figure is better than 2017. However, there is a red flag for year 2018,where this ratio is (15.7). I being to evaluate why had this occurred. 20172018EBIT4,572,60029,105,863Interest on Loans (1,235,735)(1,852,246)I can understand why the ratio is -15.7, because EBIT has increase by 24.5 million. However, because profit was so high wouldn’t that mean we should have covered the entire cost. I hope Martin can help me understand this more. Because if I get stuck with this, I will not finish my assignment. Market Ratios2016201720182019Earnings per Share (EPS)Net profit after tax/Number of issued shares-$0.07 -$0.04 $0.05 -$0.27 Dividends per Share (DPS)Dividends/Number of issued shares0.00.00.00.0Dividend Yield RatioDividends per share/Market price per share0.00.00.00.0Price Earnings RatioMarket price per share/Earnings per share(34.9)(63.6)46.5(5.7)Net Asset Backing per Share RatioNet assets (i.e. Total equity)/Number of shares issued0.91.61.71.4Market/Book RatioMarket price per share/Net asset backing per share2.51.61.51.1I had started evaluating market ratios in the first assignment, it was not easy to comprehend price to earnings ratio and other ratios. Some ratios were new to me. It is evident that the EPS is not good as it should be. We can also see that there is positive EPS in year 2018, followed by negative for the year 2019. This is because of the 50.3 million impairment loss affecting NPAT for the year 2019. If not for this one-off item I expect the EPS to grow in coming years. I could not calculate the dividend ratios , as dividend were not distributed. However, I do understand these ratios. Price Earnings ratio has somewhat caught my eye since the start, and even Maria mentioned that this ratio can be very tricky. And she mentioned some prefer this ratio to be high, whereas some prefer it to be lower. Looking at Superloop’s PE ratio, we can see it has been negative for the first 2 years, followed by positive change being 46.5 for the year 2018 and back to -5.7 for 2019. This one is very tricky. Net Asset Backing Per Share and Market to Book ratio is again new to me. Looking at the formula I can understand that it represents net asset value per share. And evaluating this ratio, I can establish that there had been a steady growth until 2019. Summary When I evaluated all the ratios, I realised that my company is actually growing. And the only thing that I was scared when I started was nothing but one-off item with high value amounting to 50.3 million. When I was doing commentary on all these ratios, I had also realised that there were more ratios than there were in ACCT11081. And after the completion of these ratios, I think I have made a progress to myself, with stepping up from technical to analytical mindset. Accounting Drivers Commentary My commentary on accounting drivers will include how I related the numbers with economic and business realties. Furthermore, I will also include what was easy to comprehend and what required more thought . 2016201720182019RNOAOperating income (OI) after tax/Net operating assets-10%-2%3%-14%PMOI after tax/Sales-115%-11%11%-50%ATOSales/Net operating assets0.10.20.30.3Free Cash FlowOI - ?NOA4-294615186.90-84312399.0024608977.30Economic profit(RNOA - cost of capital3) x NOA-$13,070,764.94-$35,638,865.82-$21,811,406.25-$94,186,680.0What drives the economic profit which also the abnormal OI of the firm. In my firm, it is evident that the economic profit has had been taking a negative hit since the start. Well as we can see in the formula, the key drivers of economic profit are RNOA, cost of capital and NOA. In my viewpoint, all of these are interconnected and that is true. For economic profit to be greater, evidently RNOA needs to be higher, followed by less cost of capital and more NOA. With the cost of capital remaining constant at 8%, I can see how the economic profit has declined severely. Just looking at the table, negative economic profit is directly related with -14% RNOA for the year 2019. A trend can be seen in this table, that is general growth until 2018, and a sudden decline in all these ratios for 2019. Again, this has occurred to the impairment loss, hence my reasoning “Everything is interrelated”. In year 2018, there was a sudden growth in Sales of 65 million. Was this a good sales growth or bad sales growth. Contrasting the PM for the year with -11% to 11%, I would say it was good sales growth. The reason for enormous sales growth was they had increased their customer base in the wholesale market and had tapped out big opportunity while in transtioning phase from ADSL to NBN. Followingly, if any ratio has been stable for Superloop, is the ATO. It had been doing a progressive growth towards 2018 , followed by a stagnant rate for 2019. For a fact I know that in 2019, the assets had increased, however the sales had declined. And according to my evaluation, this had happened due not being able to attract new customers. In 2020 financial report it is evident by attracting home broadband, Superloop has been able to improve their sales, improving their ATO.Free cash flow determines how much cash do we have remaining to distribute it to equity investors. And it is clear why there had been no dividends paid out up until 2019. For free cash flow, its funny to see how 2019 figure is positive, whereas 2018 figure is negative. Most of ratios has usually been the other way round. Since I saw ?NOA in the formula, I thought , “ it is not only accounting year 2019, but is also taking values of 2018. Hence if NOA is higher for the previous year the Free cash flow would be higher, assuming that everything else is constant. And I was right, to start off with for 2018, even though the OI was high when NOA came into factor, the free cash flow was negative. It is funny how mathematical rules work.2016201720182019Comprehensive Operating Income after tax (OI)(7,110,161)(6,677,860)13,360,363(59,914,800)Overall, drafting a commentary on accounting drivers was not that easy, and I know this will be explored more when I do my forecasts and valuations. And understanding the concepts now will help me while doing the further steps. I did feel as if I wrote less for my commentary on Accounting drivers, but as I was writing my forecasts, I developed more ideas on these accounting drivers. Please click on this link to read more on my commentary. I may not have identified these while doing this step, but that is learning as Martin states, therefore I am not worried but proud of what I have accomplished. STEP 4- Economic and business drivers Economic and Business drivers love this topic. I think from the start of this unit we have been saying that its not the accounts or numbers that matter, it is the realities of the business that we are looking into. To be honest, if I had not done this unit, I would not even have thought what the numbers are being driven by. And I think all the students will agree with me that all the accounting subjects we have done so far are always related to rules and solving or understanding accounting. One thing that really helped me understand and compete this step was Study Guide Chapter 4, the economic and business drivers of Ryman Health Care. Seeing an example surely gave me more confidence in identifying the drivers for my firm. I obviously knew what the drivers were, but once I saw the drivers of Ryman’s, I could relate more, hence more confident. So, what are the economic and business drivers of Superloop ? I would like to classify the economic and business drivers into the business environment and internal controls and operations that Superloop is performing to tap in the industry. Business Environment (INDUSTRY)Superloop is a NBN provider which was founded in year 2014-2015. NBN (National Broadband Network) was founded in 2009 which is owned by Australian Government. This network is not available directly to public and NBNco acts as a wholesaler. NBN broadband is a new wireless internet service provider which is replacing the old ADSL and Fibre technology CITATION Sup202 \l 3081 (Superloop , 2020). Even though, the NBN was rolled out in 2009, the demand for NBN in current market is increasing more than ever CITATION NBN20 \l 3081 (NBN Co Ltd, 2020). This is because due to its wireless feature, NBN provides highest speed with high bandwidth. In my own personal experience, I did not know what NBN was until last year, when I started seeing advertisements and receiving mails addressing to change the current internet plan to NBN. Some home broadband consumers, like myself do not want to change to NBN because I know that transitioning to New NBN would mean new set-up costs. Furthermore, because I am quite satisfied with the speed that I have, I am not bothered to change. Internal Controls Figure 1: Different types of services provided by Superloop. Adapted from Superloop ,2020.Retrieved from provides home broadband, business, and wholesale network. When 2020 financial report had not been published, I had analysed few aspects mentioned below : 1. The customer base is more of wholesale market and Superloop had to progress in marketing and explore more towards home broad band network. 2. Customer are hesitant to pay new set up costs, hence Superloop would have to waiver the set-up costs, if they wanted consumers to transition to their NBN network. 3. Ongoing capital investment program.Once 2020 financial statement was published, I was happy to see the company highlights, which are mentioned below :1. Set-up cost was waived , hence there was 64% growth in Home Broadband subscriptions since July. 2.Recapitalisation completed. COVID-19 effects and responses 1. Due to Covid-19, the increase in demand for faster internet service are growing. This has emerged due to more and more consumers working from home.2. The company also utilised this opportunity to improve the free cash flow by opting COGS efficiencies, and reduced operating costsSummary of Superloop’s economic and business drivers 1. Ready for the cloud world: In other words, consumers in the market are still in the transitioning phase from traditional ADSL and fibre technology to NBN. Furthermore, in 2019, 50.3 million impairment loss occurred as a result of exiting from old service segment.The text below represents quoted words by the Chairman and CEO of Superloop. This depicts that the company is ready for the new emerging fast cloud service. Therefore, they are in leverage phase. This economic driver will lead to favourable accounting drivers, specially in profit margin. I have addressed this issue in the PM forecast (please click the link). -8467149013Superloop is now beginning to operationalise our founding thematic, “the ‘clouds’ will be coming out of the data centre and directly to where we live, work and play. In a cloud world the ‘last mile’ connection is now becoming the ‘first mile’ connection”.020000Superloop is now beginning to operationalise our founding thematic, “the ‘clouds’ will be coming out of the data centre and directly to where we live, work and play. In a cloud world the ‘last mile’ connection is now becoming the ‘first mile’ connection”.2. Demand: As already established in previous paragraphs, the demand for NBN is growing. With demand, comes the ability to fulfill the demand. Because Superloop has been established with an aim to meet the wholesale demand along with retail, the company is fully equipped with 1000+ km fibre with 430+ strategic sites. In addition, the company proved this by fulfilling demand effortlessly, where demand had increased 30% during COVID. 3. Cost: Superloop has the highest bandwidth and speed for the lowest price amongst all the competitors. Superloop also has “No Excess Data Charges”, meaning there is no extra cost when consumers go over the actual data bought. However, there is a limit to that and instead of charging more, the services will be paused after notifying the customer. 4.Cyber Security: By facilitating cloud services to wholesalers, business and home broadband, the key aspect involves providing cyber security. Superloop has acquired managed firewall, filtering, and Endpoint Protection to provide the best cyber defences. In conclusion, positive growth towards economic and business realties directly affect the accounting drivers of the company which is discussed more while forecasting the key value drivers. Once I identified the economic and business realties, I personally felt easy to connect it to the accounting drivers (as I figured that they are directly related and interconnected). I think I felt it easy as it is considerably convenient to understand how meeting the demands and being able to supply, affects the sales of the company. Moreover, how being able to reduce cost will strengthen the balance sheet. Discussion with Others : Most of the times I have discussed about my firm in the class than in individual basis. I think I know why Martin emphasises on why we discuss with our peers. Because when I was discussing with Rinkle, I think I was trying to solve her problem and if somebody did that for me, they would obviously find certain discoveries that I would not even have thought about. ?As I had worked in Loop Networks (internet service provider) back home, I also tried to relate Superloop to Loop Networks and I tally what Superloop is doing better and vice versa. STEP 5- Forecasting and Valuation At the end of your analysis, please recommend whether you think equity investors should BUY, SELL or HOLD their shares in your firm, after considering your valuation of the firm and its current share price.Forecasting & Valuation- spreadsheet (Please view the attached spreadsheet)Forecasting & valuation- analysis & report When I started this step, I was really worried. I felt confused, and absolutely had no idea how to approach further. I did have some ideas but was not sure how to comprehend them and process. After a lot of back and forth, I viewed some exemplars, discussed with peers, workshops, and had a go at this step. I started with the spreadsheet and got stuck when I had to assume growth rate and other particulars. I started connecting the dots, started asking questions to myself. What is growth rate and how is it going to change? What is going to affect my growth rate ? The answer was economic and business realties. From what we have studies so far, it is not about the number, it is what adds the value in firm. Hence, how are my economic and business realties going to change in the future. As mentioned in the previous paragraph, I had to forecast how my economic and business realties are going to change ? 1. What will the increase in demand of NBN ? 2. Can Superloop cope with this demand? 3. Can the company compete with their competitors?4. NBN pricing : Will that change, would the company have to decrease their prices to make a place in the market ? 5. Marketing Capacities : The ability to market and advertise to reach niche customers ? All these factors would affect the growth rate for the company. With evaluation and research, I came up to certain conclusions. 1. According to CITATION NBN20 \l 3081 (NBN Co Ltd, 2020), the demand for NBN is growing and will further grow in coming years. This is because, the growth of consumers working from home, studying, utilising video conference, online gaming requires the need for faster internet services. It has been argued over the years that Australian WIFI is slow because of the traditional internet service which is through cable. Hence, transitioning to NBN will provide better and faster internet with higher bandwidth. 2. Since Superloop provides wholesale, business and home broadband, the company always keeps up with the capacity required. The recent acquisitions with SubPartners validates that the Company is aware how to meet the demand and be active in the current market. 3. As for competition, since Superloop has recently entered the market into Australia, high value marketing and advertisement is required. Furthermore, as of now, their customers are higher end and deals with wholesale and business market. To make the company more trustable, recognisable, the company need to reach niche markets such as home broadband to make their name in the market and make a high-end position in the current market. 4. Since, the company made their entrance in the market in the year 2014-2015, the growth has been fluctuating due to acquisitions, expanding networks, and increasing their capacity and collaborating and acquiring business combinations. Hence the CEO of Superloop claims that they have transitioned from completion stage to leverage phase. This would mean that the company’s economic and business realties will have better impact on the accounting drivers, leading to incremental growth phase. 5. It can also be seen that the Superloop Company’s comprehensive income has decreased from 12 million (2018) to negative 63 million (2019). This was occurred due to impairment loss of 50.3 million. The impairment had occurred as it existed from traditional cloud services and non-core broadband services. The reason for stopping those services were because it had low performance rate. Hence this event can be considered one-off and non-recurring event. However, I can assume there will be impairment losses, just not as high value as 50.3 million. 6. The NBN has just started rolling out and competitors of Superloop are transitioning. The founder of Superloop believes that they are ready for future of cloud world, which is true. The one factor that they do have to aim is tapping this transitioning market and expanding their customer base. [ Fun fact: Just this morning, I received an email that Samsung was stopping some of their features and they are transitioning to a different cloud base service, even when I am studying I now love to work and save in the clod, which I was unaware just a year back. This validates that the internet world is changing and Superloop has started at the right foot] FORECASTS GROWTH RATE All of this fact has made me change the idea for my growth rate. When I started seeing the ratios, I thought I would have my growth rate as -2% or -3%. But evaluating the current market conditions, I have changed my analysis. Specially, because of Covid-19, more and more consumers are getting used to working from home through cloud base. As a matter of fact, statement by the CEO of Superloop that they are transitioning to the leverage phase; they already have the cloud base market (hence don’t have to change their services); and have exited from retired services segment in 2019 makes my analysis stronger that the growth rate will be better than ever. I thought of putting my growth rate at 10%, however establishing the fact that Superloop still needs to tap the market and grow their customer base made me change my analysis from 10% to 5% growth rate. I also thought that would be my safety margin. ?202020212022202320242025?ForecastForecastForecastForecastForecastForecastSales growth (%)-10.0%20.0%22.0%24.0%26.0%26.0%PM (%)12.0%14.0%17.0%14.0%13.0%13.0%ATO (times)0.400.600.650.900.950.95SALES GROWTH Figure 1: Notes of Revenue for the year 2020. Adapted from Superloop 2020 Annual Report, (2020). Retrieved from (forecast)2021 (forecast)2022 (forecast)2023 (forecast)2024 (forecast)Sales growth (%)-4.3%-10.0%20.0%22.0%24.0%26.0%Sales Growth120,756,774.4108,681,097.0130,417,316.4159,109,126.0197,295,316.2248,592,098.5Firstly, the figures from the spreadsheet is different to the Superloop financial report for the year 2019 because of the change in Accounting Standard. I have used figures which were not restated. For the year 2020, I had forecasted my sales growth to be 5%, and once I checked the financial report for 2020, my analysis had been wrong. I got this idea from Marks assignment. He had done a wonderful job of explaining how he contrasted his forecast to actual values for 2020. He was surely right when he said he was tempted to view 2020 annual report before he had finished forecasting. Coming back to the assignment, I was wondering how the revenue fell back by almost 11%.Specially because all the economic and business drivers were in favour of improving the Company’s revenue. Then I thought the pandemic had just started at around mid-year of 2020. Hence the industry is in the booming stage, which would really come in-effect starting 2021. Hence, my forecast of gradual increase of sales growth to 20% for the year 2021, followed by 2% increase every year until 2024. Furthermore, I also reviewed the notes for the year, where it was mentioned that 43.2 million worth of revenue were not satisfied by customers through group contracts. Out of which 4.8 million to be expected raised over next year. With increasing favourable conditions for the company, I have forecasted the sales growth to be 26% by the year 2024, i.e. the sales will be approximately 248 million. Profit Margin 2020 (forecast)2021 (forecast)2022 (forecast)2023 (forecast)2024 (forecast)PM (%)12.0%14.0%17.0%14.0%13.0%I have forecasted the profit margin to increase up to the year 2022. This is because Superloop has already established all the technological aspects related to transitioning from old broadband to the new NBN. In 2019, the company exited from old service segment causing the company impairment loss of 50.3 million. This establishes the fact that in coming years the company is able to have incremental profit margins. Superloop’s competitors (Optus, Telstra, TPG) are slowly going to transition phase hence this becomes an opportunity for the company . However, the company’s biggest competitor is Aussie Broadband which has been in the market much longer than Superloop. In comparison with Aussie Broadband, Superloop is relatively cheaper and provides faster bandwidth and speed. Superloop also has no set-up charge, hence allowing customers to transition from old broadband to NBN with a peace of mind as it is cost effective. Followingly, I have forecasted there will be decline in profit margin starting 2023. This is because I assume that by then all the competitors will have established the new NBN services. Hence, Superloop will have to provide more incentive to customers to retain and expand their customer base. Asset Turn Over 2020 (forecast)2021 (forecast)2022 (forecast)2023 (forecast)2024 (forecast)ATO(times)0.400.600.650.900.95The formula for ATO = Sales/ NOA. When I was forecasting my ATO, I was constantly evaluating my forecast on Sales growth and how my sales were being affected. Obviously, I cannot just focus on my Sales and overlook the NOA. Hence, I flipped back to my restated financial statements. 2016201720182019 Net Operating Assets (NOA)74,507,549362,012,575439,647,114428,398,500Superloop has had a good ATO over the past years. Moreover, I have assumed that after year 2021 both sales and NOA will have incremental growth. Therefore, the ATO for Superloop has been forecasted to be incremental. ATO ratio determines how efficiently a company has been using their assets to generate their sales. Consistently, as I have mentioned in above paragraphs, in coming years Superloop will have a ready to go platform which other competitors are still transiting into. This implies that the company will use their asset more efficiently than ever. Hence the positive ATO forecast. I also realised how the NOA was being forecasted as I was entering the values for my ATO. Return on Incremental Net Operating Assets When I started thinking, how I am going put my guess work here. At first, I thought I will just put random numbers which is somewhat consistent to my forecasted RNOA. Then when I was going through Mark’s assignment, he had written that he had multiplied continuing PM with ATO. I was going to make a post about same in Facebook. And I thought maybe I should give a ready in the study guide chapter (because I did remember the chapter where Martin had forecasted about Ryman Health care’s accounting drivers. When I read the content, it gave me flash back to that week, I realised how RNOA is related to PM(profitability) and ATO (efficiency). Moreover, it also reminded me of good sales growth and bad sales growth. In fact, I watched the video again because I love this topic and that video gives a clear idea and understanding. At first, I had set my RINOA as 15% but after the encounter of this concept, I forecasted it to be 12.35 % i.e. the continuing PM *ATO.Valuation As soon as I was done with Key Value Drivers spreadsheet, I started evaluating my valuation worksheet. I started off with comparing the results given by two frameworks. The enterprise value as per both the frameworks is 913 million approximately. The thing that took me to surprise was my negative free cash flow. I related back to the formula, Free cash flow = OI- ?NOA. Hence, OI remaining constant and increase in NOA would cause negative free cash flow. Negative free cash flow would also imply not having enough cash to operate the business, hence less distributions available to equity investors. Out of all the forecasted years, year 2020 and 2022 has positive free cash flow of 133million and 50 million, respectively. This is followed by negative 3 million and negative 21 million for the year 2022 and 2023, respectively. Now, I would wonder why my free cash flow is diminishing. To that I find myself of the decrease in profit margin that I have explained in above paragraph. Free cash flow for year 2020 surprised me, as it stood at 133 million. In the year 2020, contrasting with the actual financial statement i have put the sales growth as -10% (Reasoning explained in sales growth paragraph). Then how come the free cash flow is so high ? Once I put the formula in, all of it made sense to me. 20192020NOA301,891,936.1181,135,161.7Because the NOA for 2019 is higher than 2020. Hence when we put this in the formula, the cash flow is very high. I realised that previous year’s NOA has huge impact on Free Cash Flow. When I started observing the economic profit, it started giving me a ray of hope. As of 2024, the economic profit stood highest at 15.7 million after a steady growth in the previous years. I also contrasted the continuing value which differed. According to the DCF method, the company’s continuing value is 766.7 million and 588.5 million according to economic profit valuation. I have to admit, I am still working on understanding these valuations and it is daunting that the semester has ended, and I am still struggling to understand some of these items. I have taken this table from Amanda’s Exemplar in moodle. This table clearly helps me identify the valuation of Superloop. Enterprise Value$913 millionNumber of Ordinary Shares253 million Valuation Share Price$3.60Market Share Price 30th June 2019$1.86Market Share Price 12th October 2020$0.92 Table 4: Superloop’s ValuationRECOMMENDATIONS1. According to my analysis, I would not recommend investing on Superloop. 2. Despite the fact that the company is expected to have growth, the negative free cash flow gives me an idea that this growth is not efficient for the equity investors. Reflections on my experience learning Overall, my experience in this unit has been fun and complimentary. One thing is for sure, I have understood that accounting is not just number, and we cannot judge the book by its covers. I have immensely reflected upon myself while attending the workshops, doing KCQ’s, assignments and when discussing with my peers. First and foremost, I realised that I am more into quantitative factors than qualitative factor. That is, I love calculating and I have mentioned this more than once in my KCQ’s that I love getting satisfied when my answers right. Some things that I have learned while in this unit. 1. Workshops: I have tried to attend the workshops most of the times. And when I did miss my workshop, I watched the recorded workshop. The only problem when I was not attending was not getting exposure to Martin’s question. When I did attend the workshop, I always interacted with the class. Moreover, most of the times came up with vague answers and conclusions. And to that, I am happy that I made those mistakes, because every time I made a mistake, I got corrected, hence it got struck on my brain. Well , that is how we learn :D. 2. KCQ’s : I was bad at KCQ’s, in ACCT11081, I was so disappointed with the marks. But this term I was better at it. I could not only take the concepts and rewrite in my own words, but I also explored in other scenarios and different effects of it. This time instead of writing KCQ after studying the whole content, I wrote it side by side. This made revelations to my thoughts and actual facts. Now, if given KCQs in my other coming unit, I will never be hesitant. 3. Assignment 1: Assignment 1 was a piece of cake at the start. It was technical and it was something that we had done in ACCT11059. Again, this time when I watched Maria’s video, I understood it more. Rationale behind deductions to tax benefit, doing restatement, classifying F and O was easier than ever. Moreover, not just ACCT11059, all my other units helped me understand terms that I had not understood in my first year. Some of these items are derivates, hedging , speculations, non-controlling interests etc. 4. Assignment 2: Assignment 2 was a hard start. Procrastinated long enough. Juggling work, assignments, presentations, I did not want to make a start at all. I think I was scared of the ratios to start with. My ratios that I had calculated in Ass1 had negative figures and I was pretty scared as to how I would make sense of it. And valuation was a different story, guess work, just did not know what to do. Then one workshop, Martin had me share my screen and explain what I have encountered of my firm so far. One after the other it kept on unfolding. I made a start, and that workshop really helped me get through. I even had a zoom meeting with Rinkle and discussed about facts and problems we had. It did help us both realise how to go on with assignment and complete it. I had thought my financial spreadsheet was crazy. Rinkle’s company is Avio Health Care, and while my company was affected positively due to Covid, hers was completely opposite. She did not have constant growth rate or loss rate, when one year was high, the other had as low as 150% sales. She had to identify was it one off, or a continuing impact on her firm. Plus, accounting firm’s dynamic environment due to Covid her guess work would have been immensely volatile. When I learnt about these facts I realised more, as to how to dig deep into economic and business drivers. Because as I was helping her solve her problem, I realised how I can connect all these dots together for my firm. One thing I have learned while doing this assignment is understanding and relating the formulas to my understanding which I was not able to do in the start of my assignment. I actually believe Martin giving example of Ryman’s has actually helped a lot. Because when I was going through study guide and reading how Ryman was adding value, I thought what that aspect would be for my firm. Hence, I developed understanding for economic and business realties for my firm. I think I can be co- teacher in this unit because I have experienced it myself as a student. And I know where I would want to stop and procrastinate. And where the hurdle is really. Hence, I will be able to guide the students beforehand. When I was approaching assignment 2, I was really afraid and did not know what to do. But upon completion I am sure that I can help any other peer or students to steer back in the right track. Moreover, I think I one skill I have learnt is to learn how to take risks. Now when I talk to my partner or my friend, I tell them why we need to invest and how to better judge a company. I know that I am still not 100% confident, but I will make the start. In fact, as soon as I finish this term, am I going to start investing. I might lose or might make money, but I know that I have to make a start. Step 6 – Individual Feedback with students FEEDBACKS Given by me FEEDBACK SHEET: ASS#2Feedback From: Abashana Shrestha Feedback To: Kelly TranbergMy CommentsStep 3I liked the fact that you have included the snapshots of your ratios. Personally, I think when I have no clue what your firm does, the excel snapshots really helps with the commentary. Good job on the commentary, you have backed up your establishments with research and evidences. When I was going through your commentary, it did feel as if it was me speaking. What I mean is I think all the students go through some hurdles and confusions, but we end up learning a lot. Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business drivers Honestly, commendable work.Identified the drivers and explained it to the perfection. I was struggling to find if you have linked economic business drivers to accounting drivers. When I finally saw how asset management/ maintenance had been causing the growth in your sales. Step 5Forecasting & valuation The first thing that caught my eye on your valuation was Sales Growth of 15% for the year 2021, and sudden decline going to 4.2%. And it just so happens that you have taken Covid effects into account. The same trend has been followed for your PM. I was searching for explanation on g, RINOA and other aspects of the valuation and then I saw heading at the end of the document. This made me realise that you are still working on finishing your assignment. I think you have given stringent thoughts on your forecast and have managed to explain it really well. Overall ASS#2 (Steps 3-5)Overall, you have been doing really well. And all your figures and insights are really amazing to read. Moreover, I wish you all the best for the upcoming steps to complete. FEEDBACK SHEET: ASS#2Feedback From: Abashana Shrestha Feedback To: Scott AndersonMy CommentsStep 3I can relate to here commentary here. Some were self-explanatory, whereas some were little bit confusing. I appreciate the fact that you have highlighted some red flags and given explanation to them. In contrast to my company, your company has been making profit which is good to see for a change. Evidently, looking at marking guideline, commentary on accounting drivers holds 5 marks. And if it were old me, I would say that you would need to work more on it. I hope you will add some more insights on these aspects. However, you have covered some important concepts.Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business driversYou have clearly listed out the economic and business drivers for your company. Well Done. If you could add certain insights, such as how you felt when you tried to connect these economic and business drivers to the accounting drivers. That would be great. Step 5Forecasting & valuationYour spreadsheets are always perfect. In fact, if I need any help,I always turn up to your spreadsheet and it always helps. It is also evident that you had easy and comfortable time doing the valuation, which is good to hear. It is easy to understand the reasonings to your valuation, so good job on that. Overall ASS#2 (Steps 3-5)Overall, I think you value quality over quantity and I feel that is fair. Usually, we have an assumption in our mind that the more words written the better assignment. But I do not think that is true in your case. And even though you have not written much, its good work .FEEDBACK SHEET: ASS#2Feedback From: Abashana Shrestha Feedback To: Samantha PayneMy CommentsStep 3As soon as I started reviewing your work, I Knew it would be a great read where I can put my insights into it. To your question, what is a good ratio or bad ratio, I guess except “Price Earnings Ratio”, almost all the ratios are better if they are positive and increasing. Sometimes positive 10 might be a good ratio, but if it has dropped from 100 to 10 for following year, then that would mean something has gone wrong. And I believe you have obviously understood now that you are in completion stage of the assignment. Very well done by including snapshots of the spreadsheet. Time and again when I review my peers assignment and are just words, I kind of feel bored and lost. But numbers just keep me on track right. I could see that you had contrasted your ratios with other 2 companies , but I did not understand if they were related or were in the same industry. Some introductory statements could have been conducive in helping others understand.Something that caught my eye with your ratio was your declining dividend per share which I saw you were still working on. I think if you can explain how and why the dividends are decreasing, that would add value to your assignment. In your accounting drivers, I liked how you have explained why having a negative FCF is not bad. I also liked how you have explained about FLEV, because may students have not. Ratios - commentaryAccounting drivers - commentaryStep 4Economic & business driversI reckon you are still working on this step. However, I did not see a heading for this section. Hope you complete it soon. Also, you have got a god grasp of your business. All the best Step 5Forecasting & valuation N/A Not completed it Overall ASS#2 (Steps 3-5)All the best in completion of your assignment. SO far, its right on track.References BIBLIOGRAPHY NBN Co Ltd. (2020, April 02). Australian Data Demand: new weekly report reveals growth in nbn data demand. Retrieved from NBN: . (2020). About Superloop. Retrieved from superloop: ................
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