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 Step1: Ratio Analysis and Calculations Ratio Analysis Profitability Ratios Net profit Margin The net profit margin ratio measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company.?Creditors and investors use this ratio to measure how effectively a company can convert sales into net income. Domino Printing’s net profit margin for 2014 financial year is 12.7%. My initial reaction was that this is quite a considerable profit that is being generated by Domino Printing. The statistics show that throughout the 2013 year profits did drop quite considerably, it can be interpreted that Domino Printing made less income or sales in year 2013. However, in year 2014 the performance came back to normal at the profit margin of 12.7%. 2014201320122011Net Profit Margin 12.7%1.7%13.0%13.0%Return on Assets The Return on Assets or ROA ratio measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period. Since company assets' sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in assets into profits. You can look at ROA as a return on investment for the company since capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits. 2014201320122011Return on Assets 14.8%1.8%12.6%14.5% The ROA for Domino Printing in 2014 is calculated at 14.8%, this is an extremely high ratio of return which is being generated by Domino Printing Assets. Comparing Domino Printing’s past 4 years of ROA it is clear that the company did not perform well in 2013. The ratio dropped by 10% from year 2012, which means that a company could not efficiently convert the money used to purchase assets into net income or profits. It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROA ratio usually indicates an upward profit trend as well. Efficiency (Or Asset Management) RatiosDays of inventory2014201320122011Days of inventory 85.7383.3188.3084.36The days of inventory ratio measures the number of days it will take a company to sell all of its inventory. In other words, the days of inventory ratio shows how many days a company's current stock of inventory will last. This is an important to creditors and investors for three main reasons. It measures value, liquidity, and cash flows. Both investors and creditors want to know how valuable a company's inventory is. The days of inventory shows how fast the company is moving its inventory. As you can see, Domino Printing's ratio in year 2014 is 85.73 days. This means Domino Printing has enough inventories to last the next 85.73 days or Keith will turn his inventory into cash in the next 85.73 days.Total Asset Turnover Ratio Total Asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. The data in year 2014 shows that for every $1 of assets Domino Printing is generating $1.16 of sales. 2014201320122011Total Asset Turnover Ratio 1.161.060.971.12My first reaction after looking at the data was that the asset turnover for Domino Printing is relatively high for each dollar of sales. It means that Domino Printing is very efficient with its use of assets.Liquidity Ratios Current Ratio The current ratio is a? HYPERLINK " HYPERLINK " ratio?that measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year. This means that a company has a limited amount of time in order to raise the funds to pay for these liabilities. Current assets like cash, cash equivalents, and marketable securities can easily be converted into cash in the short term. This means that companies with larger amounts of current assets will more easily be able to pay off current liabilities when they become due without having to sell off long-term, revenue generating assets.2014201320122011Current Ratio 2.041.741.761.81Domino Printing has a current ratio of 2.04 for the 2014 financial year. The current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. So a current ratio of 2.04 would mean that the company has 2.04 times more current assets than current liabilities. A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments. Banks would prefer a current ratio of at least 1 or 2, so that all the current liabilities would be covered by the current assets. If your ratio is so high, there is a high chance that the company will get approved for its loan.Financial Structure Ratios Debt/equity RatioThe debt to equity ratio is a financial and liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing or bank loans is used than investor financing or shareholders.2014201320122011Debt/Equity Ratio 42.3%59.2%52.1%45.7%A debt ratio of 42.3% in year 2014 means that there are almost half of liabilities compared to equity. This means that investors own 57.7 cents of every dollar of company assets while creditors only own 42.3 cents on the dollar. A lower debt to equity ratio usually implies a more financially stable business. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender. Since debt financing also requires debt servicing or regular interest payments, debt can be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to make the payments.Equity Ratio The equity ratio is an HYPERLINK " leverage or HYPERLINK " ratio that measures the amount of assets that are financed by owners' investments by comparing the total equity in the company to the total assets. In general, higher equity ratios are typically favourable for companies. This is usually the case for several reasons. Higher investment levels by shareholders shows potential shareholders that the company is worth investing in since so many investors are willing to finance the company. A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans. Equity financing in general is much cheaper than debt financing because of the interest expenses related to debt financing. Companies with higher HYPERLINK " ratios should have less financing and debt service costs than companies with lower ratios.2014201320122011Equity Ratio 70.3%62.8%65.7%68.7%As you can see, Domino Printing's ratio is 70.3% and above 60% throughout the period. This means that investors rather than debt are currently funding more assets. More than 60 percent of the company's assets are owned by shareholders and not creditors. This is considered a healthy ratio.Market Ratios Market ratios are important for investors to assess the market value of the company they are wishing to invest in. The main theory behind Market Ratios is that the higher the Earnings per Share and the Higher the Dividends per share the more valuable and profitable the company will be for equity investors. Market ratios are not industry specific, they provide an even ground for companies to offer shares in their firm. Earnings per Share (EPS)Earnings per share are the amount which can be earned per unit of a company’s stock. It is considered to be the most influential variable figure in determining the share price of a company. 2014201320122011Earnings per Share 0.400.050.370.37Prime Media’s earnings per share calculated as of 2015 are at 0.097 which means that Prime Media can earn $0.097 on each unit of shares being sold. The table above shows that Prime Media has been able to increase their earnings per share gradually since 2012 from $0.076 to $0.097. Dividends per Share (DPS)Dividends per share show us the amount which needs to be taken out of the earnings per share to be repaid in dividends to the equity investors. This figure is also influential in the decisions being made by equity investors, the higher the return per share, the higher the appeal will be for potential investors.2014201320122011Dividends per Share 0.220.210.200.17The dividends per share for Prime Media calculated to be 0.066 this means that for every share that is sold by Prime Media they need to return $0.066 in dividends per unit of share purchased by an equity investor. Price Earnings Ratio The price earnings ratio relates to the number of years it will take for the company to earn back the price you pay for the stock. The theory here is that the lower the time it takes to earn back the price of the market shares the better because this shows the companies efficiency in generating profits. This is not a constant value, price earnings per share vary from year to year. The price earnings ratio is not industry specific and is used by investors to compare each company that is not directly related to the media broadcasting industry on the stock exchange. 2014201320122011Price Earnings Ratio 34.03N/A44.6150.24 The data shows that Prime Media as of 2015 are able to earn back the price of its shares in 7.11 years. As shown by the data it does not remain constant, Prime Media in 2013 would take 18.36 years to make a return on the sale of its shares. The significantly high price earnings ratio in 2013 can be linked to the digital TV change over which occurred between 2012 and 2014, in stages across Australia. After looking at the data it is clear that Prime Media has been able to reduce the time taken to gain a return on the sales of its shares. I believe this shows a company which is constantly improving its efficiency on return profits to equity investors. This data does not indicate to us what was done by Prime Media to achieve the reduction in the price earnings ratio, However Prime Media is a company which I would feel comfortable with investing money, because they have shown the ability to improve in a number of areas from 2012 to 2015. Ratios Based on Reformulated Financial Statements Return on Equity (ROE)Return in equity ratio measures the rate of return on shareholder’s equity and measures the efficiency in which a company can generate profits. A desirable return on equity ratio for a profitable company is between 15% and 20%. The higher the percentage for this ratio the better, it indicates a company’s ability to use invested funds to generate profits. 2014201320122011Return on Equity 33.47%15.94%31.94%39.10%Prime Media’s return on equity is at 20.49% for the 2015 financial year. Prime Media has demonstrated the ability to grow its company and become more efficient in its investment of funds to provide a return to equity investors. The return on equity has grown from the company’s low point in 2013 with ROE sitting at 13.41% the company has managed to increase its profitable efficiency to 20.49% in 2015. As mentioned above the low point in prime media in 2013 is the result of the company being required to invest funds into the upgrading of television towers to prepare for the changeover to digital TV, this decrease in returns on equity would have been experienced by most media broadcasters. The return on equity ratio is also a contributing factor for prospective investors who wish to purchase shares in a company. The ROE shows how profitable the company is in terms of for every $1 invested, they receive a 20.49% return on their investment. Return on Net Operating Assets (RNOA)Return on net operating assets shows us the financial health of Prime Media. RNOA can be used to show how much of a return is being made on assets to return an income. The theory behind this ratio is that the higher the ratio the better, the key contributors to the RNOA ratio is operating income and operating assets sourced from the restated financial statements. 2014201320122011Return on Net Operating Assets 32.40%13.20%31.10%42.95%Prime Media’s RNOA has been growing gradually over the last four years. The current level of return on net operating assets for Prime Media is 12.48% this means that for every $1 of assets; Prime Media is generating an operating income return of 12.48%. Net Borrowing Cost (NBC)A net borrowing cost ratio simply shows us the amount of interest which is being paid on every $1 of financial obligations. The higher the percentage on financial obligations the higher the interest expense being incurred by the company. 2014201320122011Net Borrowing Cost N/A1.13%5.03%0.83%Prime Media’s NBC has been slowly dropping over the last four years however in 2015 the percentage of NBC increased. This increase symbolises that Prime Media increased its net financial obligations by increasing its amount of financial debt. It is not clear by looking at these percentages what Prime Media has invested funds into. The higher net borrowing cost in 2012 can be contributed to the change over from analogue TV to digital TV in 2013, Prime Media would have been required to take out a loan in order to prepare the company and upgrade its equipment for the change over in 2013. Profit Margin (PM)Profit Margin as mentioned above shows the company’s ability to make a profit. Again as mentioned above the higher the profit margin percentage the higher the return on sales, which means a greater profit for the company. Opposed to the Net Profit Margin the PM below is a clearer representation of the true profits being earned by Prime Media. The calculations for PM below used the income figures from the restated financial statements in ASS#2. The profit margins can only be compared with other companies in the same industry. 2014201320122011Profit Margin 19.64%9.09%21.39%24.22%Prime Media’s profit margin is at 12.76% for 2015, this is a relatively high return on sales. The calculations show that Prime Media has been able to increase its profit margin quite considerably since 2013 from 5.87% to 12.76%. This ratio means that for every $1 of sales prime media gains a return of $0.12. The lower return on profit in 2013 can be contributed to the higher financial obligations which were incurred in order to accommodate for the digital TV changeover. Asset Turnover (ATO)Asset Turnover ratio shows a company’s ability to efficiently generate sales. The main difference between the Total asset turnover and the asset turnover is that the ATO was calculated based on the net operating assets from the restated financial statements in ASS#2. The theory behind this ratio is that the higher the ATO ratio, the more efficient and more profitable a company will be for every $1 of assets. 2014201320122011Asset Turnover 1.651.451.451.77The Asset turnover for Prime Media for 2015 was calculated at 0.98. This value as mentioned above uses the figures from the restated financial statements thus providing a more accurate figure for asset turnover. Economic Profit Economic ProfitThe table below shows all of the key data which is used in calculating the economic profit. The table allows for the easy comparison of the RNOA, cost of capital, NOA, PM and ATO. All of these figures have been sourced from the restated financial statements and the ratios spreadsheet. (See attached spreadsheet) Return on Net Operating Assets Cost of Capital Net operating Assets Profit Margin Asset Turnover 201432.40%10%212,289 12.7%1.65201313.20%10%231,285 1.7%1.45201231.10%10%214,559 13.0%1.45201142.95%10%177,10013.0%1.77Economic profit provides a different perspective on the ratios and figures examined above. Economic profit takes into consideration the cost of capital, which are funds that are used in the financing of the company’s operations. The cost of capital can be varied across different companies. The weighted average cost of capital (WACC) is used to determine the economic profit. I was unable to find the WACC in Prime Media’s financial statements; the economic profit is calculated using the 10% advised by Martin. 2014201320122011Economic Profit 47,558.97,390.5 45,282.258,358.3Prime media has shown a relatively strong economic profit for the 2015 financial year. However the 2012, 2013 statistics show that Prime Media was operating at a considerable loss with the economic profit falling to -$14,546.9 in 2013. The reason for Prime Media running at a negative economic profit for 2012 and 2013 is that the company was required to increase financial obligations in order to fund new equipment and upgrades to the company to allow for the digital TV changeover in 2013. RNOA Vs WACC Comparisons 2014201320122011WACC10%10%10%10%RNOA 32.40%13.20%31.10%42.95%The theory behind RNOA and WACC percentages is that the higher the RNOA compared to the WACC percentages the better, because this indicates that Prime Media is able to finance the cost of capital themselves to operate the company. However 2012 and 2013 saw the RNOA fall below the WACC which means that Prime Media would have been required to outsource financing for the cost of capital. ATO Vs Total Asset Turnover Ratio Comparisons 2014201320122011ATO1.651.451.451.77Total ATO 1.161.060.971.12The total asset turnover ratio is a clearer representation of the true operating efficiency of Prime Media. Total ATO has had the financial obligations removed from the calculations making the ATO appear larger however the ATO is not a clear representation of operating efficiency due to financing activities being included in the calculations. Profit Margin Vs Net Profit Margin Comparisons 2014201320122011PM19.64%9.09%21.39%24.22%Net PM 12.7%1.7%13.0%13.0%The theory behind the figures shown above is similar to the concept of ATO and Total ATO also mentioned above. The difference between PM and Net PM is that they have been calculated differently. The PM is a clearer view of the Profit Margin for Prime Media; this figure has been calculated using the separation of financing and operating activities. Step 2: Investment Decisions Development of Capital Investments Capital investments are extremely important in the day to day operations of any firm. Capital investments can become very high risk if the necessary research and analysis is not undertaken. These investments involve a company investing large sums of money in new business ventures to improve the profitability for the company and to gain a return in the future and to increase the value of their firm. The assignment requires two separate proposals to be investigated for Prime Media to undertake, each proposal will assess the profitability and any risks associated with each venture. I have developed two investment decisions for Domino Printing Sciences PLC. Investment 1: 7 year investmentDomino Printing has been presented with a business proposal to invest $17 into digital printing development project. This project will enable manufacturers to print variable data on to their products as part of the production, packaging or finishing process. The printing quality will be more attractive and clearer. The yearly return would be on average 25%. The full project is expected to take 7 years however the projected breakeven point will occur after 5 years. Calculations for Investment 1 Investment 1 NPVInvestment of $M: 25,000,000Profit of $M: 17,000,000IRR15% Payback period Mid February of year 5 Based on the calculations above for investment 1, the proposed scenario seems to be quite a profitable option for Domino printing to invest in. The investment has a high profit of $17M, a relatively high internal rate of return which will cover the 10% cost of capital, and with the breakeven point being only 5 years into the expected life of the project there is a lower risk for investors to lose the money they contributed if this investment is undertaken. Investment 2: 10 year investmentThe second business proposal being presented to Domino Printing is an investment of $39M in new Chinese facility. The primary plan is to build three production lines, including ink production, ink jet printer assembly testing, as well as Thermal Transfer Overprinting (TTO) assembly testing. The Chinese market is an integral part of Domino’s overall vision for its future development. Domino China has been present in Beijing since 1995, and the rapid growth in sales performance has made Domino the preferred ink jet printer supplier in the region. The China is one of Domino’s biggest regional markets. With this location of the new factory, Domino will be able to serve the Asia Pacific Region more effectively, especially the Chinese market, by improving the efficiency of productions and logistics. The length of this project is expected to take 10 years because a project of this size requires the acquisition of land which will take a period of time to acquire. The projected breakeven point of this project will occur after 6 years. Calculations for Investment 2 Investment 2 NVPInvestment of $M: 37,000,000Profit of $M: 12,000,000IRR8% Payback period Late March of year 6Based on the calculations for investment 2, Domino printing should not proceed this project. The Internal Rate of Return is far too low for Domino Printing to sustain the operation of this project. This project also takes longer then project 1; this shows that there might be a higher risk of investors losing the equity they contributed. Comparison The most important step in deciding where funds should be allocated for major investments is to compare the results of the proposed investments by looking at the Net Present Value (NPV, Internal Rate of Return (IRR) and the Payback Period. Net Present Value Both of the investment opportunities outlined above have an excellent increase in present value for Prime Media. For investment 1, the NPV over the 7 years of estimated life of the project came to $17M on an investment of $25millon. Investment 2 has an NPV of $10.7M on an investment of $39M. The investment which would be most beneficial for Prime Media to invest in is investment 1; it provides a much higher increase in capital compared to investment 2. Internal Rate of Return The internal Rate of return is an extremely important determinant for the feasibility of an investment. The internal rate of return needs to cover the cost of capital, Prime media’s cost of capital is 10% therefore investments need to be above 10% in order cover the cost of investment and to be considered sustainable. From the two investment options above, investment one had the highest internal rate of return at 15% compared to 6% from investment 2. Therefore given the information provided above investment 1 is a more viable option for Prime Media. Payback Period The payback period is also important in determining the feasibility of an investment, ideally an investment which does not return value invested within 10 years is considered too high risk for companies to undertake. The time difference between the two investments is relatively close given the different lengths in expected project life, Investment 1 is a little over 12months shorter in the payback period then investment 2. Investment 1 will have returned the invested $25M in under 4 and a Half years, whereas investment 2 will have returned the invested $39M in a little over 5 and half years. Therefore investment 1 is a safer project to invest in with a shorter breakeven point. Recommendations Based on the figures discussed above, it is advised that Prime Media Undertakes Investment 1. This project returns a much higher NPV, Higher IRR and a much shorter time frame with which the initial investment is returned to the company. The initial expense of the internet advertisement division has a much lower investment figure of $25M; however this is no representation of the potential returns that can be achieved from this project. Therefore the most beneficial and superior option for prime media is investment 1. The final factor to consider for a company planning to undertake an investment opportunity is the financial health of the company and the risks associated with the new industry they will be entering. After analysing the various Ratios in step 1 of this assignment I feel that Prime Media is in a position where they would not have any issues entering the internet advertisement industry. Prime Media has shown the ability to adjust to new industry conditions in the past with significant changes to the structure of television broadcasting and advertisements. (See attached Excel spreadsheet for NPV, IRR and Payback Period)Step 3: Providing and Receiving Feedback

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