Flev and nbc down and analyse and ato ratios further detail
Reformatting: (allocated 5 marks) Present detailed past five years’ reformatted financial statements as an appendix in the report.
A full breakdown of revenues and expenses, and balance sheet items as per QANTAS example (i.e. it is NOT sufficient just to say revenue, operating expenses, net operating assets, net financial obligations). Doing so makes it impossible for you to undertake a proper analysis and forecast so you must get it right here.
Ratio analysis: (allocated 6 marks)
Calculate and discuss key ratios - ROE, RNOA, PM, ATO, FLEV and NBC. Break down and analyse PM and ATO ratios in further detail. Identify and discuss three significant expense items that have caused major changes in profit margin. Identify and discuss three major assets or liabilities whose turnover ratios have contributed to the overall change in assets efficiency. Briefly describe the ratios trend. The analysis should elaborate on the economic, industry and business factors that drive the changes in ratios. The discussion should consistently reflect the same firm fundamentals identified in the group report.
The ratios should be analysed in the following order ROE, RNOA, PM, ATO, FLEV then NBC as this is a natural breakdown of ROE as per lecture and tutorial material. You must then clearly identify and discuss 3 significant expenses which have impacted profit performance over past 5 years. Then clearly identify 3 significant assets or liabilities which have impacted ATO for past 5 years. Again, this will vary depending on the company and industry in which the company is operating so don’t just adopt the same ideas as your peers as it may not be relevant to your company.
CF analysis should cover the aspects of liquidity, solvency and CF management. Students should provide the 5-year ratios (in a table or graphs), analyse them, then state the level of financial risk and strength or otherwise of their CF management. Students should understand what makes up the numerator and the denominator of each ratio and therefore what has caused the increase or decrease. Wide reading about the company from its annual report and the press will help with this. Do not simply repeat what the company has said in their report as this may just be spin. Analyse it yourself. The real value of this section is providing an insight into the trend of the ratios and the factors behind these trends. Weaker responses will simply track the movement over the 5 years which adds very little to the report as the reader can determine that from the table themselves. Stronger students will understand what is at play behind these movements in terms of company performance, economic factors, new markets, changes within industry, legislation, cost factors etc.
Explain the reasons for your initial forecast assumptions, i.e. assumptions for sales growth, ATO, PM, net dividend payout ratio, cost of debt and cost of equity.
Explain your reasons for forecast assumptions. Clearly explain your reasoning for your forecast items – Sales, ATO, PM, dividend payout ratio, cost of debt and cost of equity.
The information presented should also clearly state the actual share price (year-end or more recent specified date) and a clear statement provided comparing the outcome of the models compared to this share price. Students are asked to determine whether the share price is under, over or correctly valued by comparison to the models and state why some models may not project the most reliable share price outcome.
Sensitivity Analysis: (allocated 5 marks)
Clearly explain how you derived the optimistic and pessimistic factors for your sensitivity testing. Clearly identify which factors the model is most sensitive to. Be careful to recognise that a reduction in cost of debt and equity is a positive event.
Weaker responses simply state that the various factors of sales growth and PM etc are increased/decreased by a certain % without any justification of their assumptions based on the historical performance of the company and the economic factors at play.
Your assignment should be readily comprehensible, condensed and within the word limit. Information should be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information.