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ASS#2Step 3: Ratios - commentaryLook at the ratios you calculated for your firm in your ASS#1. What do these ratios tell you (or not tell you) about your firm? How do you make sense of them? Comment about your ratios in your blog and include in your Word document a link to your commentary.The ratios itself do not tell me that much, but when I compare them to an average company or to whole industry, then I can interpret how good the calculated ratio really is. However, it is quite difficult to compare 2016 to the other years, because at the end of 2016 the company released new shares (IPO) in order to receive more equity. From a general point of view, I can say that the years 2017 till 2019 look quite stable. For example if we compare the liquidity Ratios. A ratio of 1.0 or higher indicates that all current liabilities could be adequately covered by the company’s existing current assets. This is the case for the years 2017 to 2019. Maybe the IPO leads to a high amount of liquidity, which leads to good current and quick Ratios 1 & 2.Important ratios like the profitability ratios look also quite stable, although it decreased since 2017. Market ratios are always difficult to interpret since there are so many factors which have an impact on it, e.g. Net Profit after tax which defines the EPS. As the Net profit after tax is almost on the bottom of a balance sheet, many positions could have a impact on it and therefore on the EPS. Discuss your ratios with other students. How do your firm’s ratios differ to the ratios of the firms of other students? What do your firm’s ratios tell you about how well your firm is performing? In your blog, include your reflections on your firm’s ratios: what they tell you (or do not tell you) about the performance of your firm, how they compare to the ratios of other firms and what new questions the ratios might raise in your mind about your firm. Include links to other people’s blogs where they discuss their firm’s ratios.I think it is very difficult to compare my ratios to other companies which are not in the same industry. For example Yanik Gerigs company “OBJ Limited” is a research company whereas my company tries to catch & sell as many salmons as possible. Therefore I compared my company with the fishing industry on the website: I found the average ratios for the industry. It stands out that the average Profit Margin in the industry is much higher than the one from Salmon King NZ. This is caused by the low Operating Income from 2016, 2018 & 2019. In 2017, the sales were not that high but the OI was much better, which is caused by a very good Operating profit before income tax. The ratio between cost and sales was just very good in that year. Another ratio, the ROE ,varies quite strong in the industry. This is also the case at NZ King Salmon with ROE of 1%,17%,9% & 6%. IThe year 2017 stands out, because of the much higher OI. Comparison between “OBJ Limited” & “NZ King Salmon”:While the Efficiency Ratios & Liquidity Ratios are similar, the Market Ratios differ, because OBJ did not pay any dividends in the last 4 years. Another difference depicts the “Times Interest Earned” as an “Financial Structure Ratio”, because OBJ has a negative Earning before Interest & tax, which leads to a negative Times Interest Earned. One questions which arises for me is the following: Does it make sense to compare two companies from different industries?Accounting drivers – commentaryComment on what is driving or causing your firm’s economic profit and Free cash flow over the past four years to be at the levels they are. If your firm’s economic profit and Free cash flow are negative (or positive), what is causing them to be negative (or positive)? If they are large numbers, what is causing them to be so large? If they are small numbers, what is causing them to be so small? If they changed a lot over these years, why did they? If they stayed much the same, why was this? Comment on your firm’s key accounting drivers, what is driving your firm’s economic profit and Free cash flow. Which are the most important or critical? Discuss your thoughts on your firm’s key accounting drivers with other students. What similarities or differences are there between your different firms’ key accounting drivers?Economic profit: The economic profit is caused by RNOA and the cost of capital multiplied by NOA. RNOA is caused by the Operating Income after tax divided by the Net operating assets. One can see that the EP varies over the years. It looks like that the better RNOA is ,the better is the Economic profit. But there are several factors which had a an impact on this ratio. For example the good OI in 2017 and the yearly increase of NOA, which is also caused by the IPO. The economic profit is negative in 2016 & 2019 because the cost of capital exceeds the RNOA.Free Cash Flow: The FCF is caused b the Operating Income minus the change of NOA. One can see that the FCF is strongly negative in 2017, positive in 2018 and again negative in 2019. The Operation Income is quite high in 2017 and decreases in 2018 & 2019 – but why is the FCF in 2017 that bad? I think this is caused by the IPO at the end of 2016. The change of NOA is so high, which causes the high negative Cash Flow in 2017. Afterwards, the changes are not that big anymore. What similarities or differences are there between the economic profit and Free cash flow of your different firms? Why is this? What is causing these similarities or differences? What insights have you gained by ‘breaking into bits’ your firm’s financial statements? What insights have you not gained?After the discussion with Yanik Gehrig, who analysed the company “OBJ Limited” concerning the Free Cash Flow, as well as the Economic Profit, we came to the following conclusion: As I already mentioned above, it is quite hard to compare two different companies, which are not in the same industry On the other side it is very interesting to see with what kind of challenges different industries have to deal with.We saw that the Cash & cash equivalents of OBJ decreases every year, which has an massive impact on the Free Cash Flow as one can see below. The company also has huge amount of costs for research & development, whereas NZ King Salmon is not as capital-intensive as OBJ. Therefore, the FCF of NZ King Salmon is a lot lower than OBJ’s.While comparing the Economic profit, we think that the biggest difference between these two companies are that they deal with a different purpose (R&D vs. Catching & Selling Salmons), which leads to a completely different Economic profit. The EP is caused by th RNOA, which is caused by the Operating income. As NZ King Salom has a healthy margin concerning its sales & costs, the costs of OBJ’s purpose is a lot higher. OBJ:NZ King SalmonStep 4What do you think are driving the key aspects of your firm’s financial statements?I think that one key aspect is the IPO at the end of 2016 which had a very good impact on the ratios of NZ King Salmon. Another key aspect is the yearly increase of generated revenues, as well as a good margin between sales and costs. Comment on how you have connected your firm’s accounting drivers to your view of its economic and business drivers. How have you gone about doing this? How have you been learning to do this? How difficult, or easy, are you finding this? Why is that, do you think? Do you think it is possible for you to connect your firm’s key accounting drivers to its economic and business drivers? Why or why not?Business & economic drivers: I think one of the business & economic drivers is that the company nearly sales 50% of their products in New Zealand. This implies that transportation costs are lower which lead to a better margin. It is good that the demand is that high in New Zealand. Other important factors are that the marine environment of NZ is over 21x larger than the land mass, which means that there are a lot of salmons out there which secures revenues for the future. Another driver is the good Supply chain. Fresh whole fish are generally harvested and dispatched to customers within 24 hours. This indicates that the supply chain is quite efficient. While applying this efficient supply chain for every sold product, the company saves a lot of money. All these business & economic drivers are connected to the accounting drivers. For example the high domestic demand (low transportation costs) as well as the efficient supply chain lead to a high Profit Margin.What differences and similarities are there between your view of your firm’s key economic and business drivers and those of other students about their firms?I think that other industries like Manufacturing, Wholesale Trade & Retail Trade are have similar challenges which they have to face. In my point of view the efficiency of the supply chain, as well as a proper price setting is key to sell a lot of their products. Other industries like Finance & Insurance depend more on service quality in order to gain revenues.How do you feel about your analysis at this point? Do you feel confused, nervous, confident, worried? How much do you really feel you understand about what is really going on with your firm? How ‘successful’ would you describe your firm? Why?I feel good because I did not just calculate the ratios, I am also able to interpret them. But I can only interpret them when I compare them to a competitor or to the whole branch. When I compare them to a different company, which is in another industry, I feel insecure because I compare two completely different companies and therefore I am not sure if I interpret them properly. Step 5: Include any commentary you wish to include about your valuation in a Word file.Valuation Commentary: From my point of view, NZ King Salmon was not really stable in the last two years which feels me to believe that the Free Cash Flow will not be that good in the next years. Also because of the Corona Crises, it is not easy so sell the salmon on the international market. As a result, the Enterprise Value is not that high. I think one should not buy shares from NZ King Salmon. Key Value Drivers commentary:I think that the Key Value Drivers: Sales Growth & ATO will decrease in 2020 & 2021 because of the intense impact of Coronavirus on the world economy. Afterwards, the economy and therefore also the Sales & ATO will increase again. I think that the PM will be stable because the supply chain is already quite efficient. Submit your Excel spreadsheet along with a Word file that includes any comments or thoughts you wish to include about your forecasts and valuation. How confident are you with the results of your analysis? Would you make investment decisions based on your analysis? Why or why not? You may wish to comment about how effective you have found the Discounted cash flow (DCF) and economic profit approaches to be in valuing your firm. 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.Key Aspects of ForecastsAfter calculating the Key Value Drivers, I am more insecure that confident, because I think it is quite difficult to make a forecast for 5 years when I don’t work for that company and because I am not an expert in this industry. Nevertheless, it was fun to calculate and predict the future of NZ King Salmon and to “play” with the calculated numbers. However, in my point of view, I would not buy shares from NZ King Salmon. The company seems to be instable with no promising future. One factor is the FCF. The FCF is decreasing over time. I analysed why that is the case. The Total Operating Assets are increasing year by year, whereas the Total Operating Liabilities are descreasing. Therefore, the Net Operating Assets have a big gap year by year. At first glance, this is good. But the company has really high expenses, which causes a worse Operating Income, which leads to a bad FCF. I hope that the company will invest more in the future, instead of paying out more dividends. One can see that the Dividend Payout Ratio is increasing yearly. Moreover, the current share price is 1.89. The price fluctuated in the last years, which is not the best sign to buy a share. For example, the share price decreased by 11% from 2018 to 2019. Nevertheless, I also saw that from 2017 to 2018 the share price increased by 34%. I think the share price also depends on the how many salmon they catch per year or in other words, how the enterprises core operating was working during the year. However, the enterprise value divided by the number of shares issued, results a shareprice over 1.22$. From my previous knowledge I would recommend that if the calculated value of the share is below the current share price, one should not buy or even sell the shares. The end of our unit is also a good time to reflect on your experience of learning in this unit. Please include your brief comments on the following:An overall summary of how you have experienced learning in our unit.The learning in this subject was different than I have experienced so far. First of all, I had to familiarize myself with the new tools and all the information. I first started with Peerwise to familiarize myself with the topic. With the subsequent editing of the KCQ's, I realized what is important in this course. It is not important how to calculate a number, but how to interpret this ratio or even a topic as a whole. Creating the Financial Statements & Restated Financial Statements, as well as the Rations, showed me that one can represent almost any action/process within a company with a number. All these exercises have helped me a lot to advise my corporate clients at Credit Suisse even better. A description of your contributions to and interactions with others in our unit. The exchange with the other students has shown me how well you can get ahead when you ask others for advice or receive specific feedback. Also the other students liked my feedback which makes me feel good because I could help another person to pass this course (hopefully).A summary of your learning in this unit. What can you do now, and what do you know now, that you could not do and did not know when you first came into this unit? If I asked you to be a co-teacher for part of this unit next year, what topic, task, or activity would you volunteer to teach to a new student? And what happened to you in this unit that makes you think you would be a possible co-teacher? Also, what was your more important realisation concerning the subject matter of our unit? Why did you judge this to be of importance to you? What was the most important skill you learned? Again, what was it that was so significant about this skill? What is the primary learning that you feel you need to undertake the next time you could study in this area?I am now able to find out which drivers add value to a firm and what it all takes to interpret the enterprise value of a company. If I would be a co-teacher I would like to teach the topic about the key value drivers because I find this topic very interesting. You cannot easily have a look into the financial statements to find out what the key value drivers are. You have to analyse the company in detail to find these drivers. The most important realisation was that value drivers are much more important than other tasks in a company.The skill to identify these key value drivers is for sure one of the most important things I learned during this course, because these drivers are crucial. The next step would involve applying all these calculated ratios and key value drivers to different business cases, in order to gain experience and to get to know as many companies from different industries as possible. So that I would be able to interpret every ratio & key value drivers, regardless of which industry. ................
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