assignment 3 draft

Step 1:      

Ratio analysis

The spreadsheet has been submitted as required.

Calculating the ratio of each item is very helpful to understand clearly how much my firm contributed and the profit it had gained through 4years. From each ratios calculation, I can see how many changes my firm (RELX Group) experienced since 2011, and it could be both positive and negative. Profitability ratios show out the percentages of Net Profit Margin in each year increased from 2011 to 2013, but a little decrease appeared in 2014 as well as the Return on Assets. I have viewed spreadsheets of other’s companies everyone has the similar situation that showed the rise and fall in this part.

In the part of Liquidity ratios, the result calculated by current assets dividing current liability, from financial statement I found the current assets shows a decreasing trend which was £2548m in 2011 and £1936m in 2014, and the current liability seemed steady in the past years.

A big number calculated in Financial Structure ratios which is not similar with others in my class. I am not sure whether I calculated wrong or not, but in the Debt/Equity ratio I got the highest percentage in 2011- 426.3% as the total liability of financial statement in 2011 is £9306m, which is likely to influence the result of Debt/Equity ratio in my opinion. Then I asked Helena who helped me a lot during the processes of working on last two assignments in my class with my confusion, and she was patient to show me that the debt should be referred to something my firm had to pay interests rather than the total liabilities then I found in the financial statement the item of Borrowings which are requested to pay interests from the current liability and non-current liability. After modifying I got the figure of 194.9% in 2011 and then it showed a reducing trend in the next two years, however, it was going up to 179% in 2014 which was a growth of 44% higher than 2013 as the borrowings from non-current liability in 2013 was less £516m than 2014.

Through the process of calculating the Market Ratios I realised a difficulty that at first I checked and viewed the entire financial statement in RELX Group annual report there is no information about the numbers of issued ordinary shares, then taking 2 days to do search and google it finally found the information still in the annual report, however, they are not in the notes area. Likewise, information about the market price of per share is also hard to find out, nothing about that in annual report I have to browse the official website and ask classmates and tutor for help, fortunately we got a line graph about the market price and I appreciate everyone’ effort.

There are a number of items on the last part Ratios based on restated financial statement, by this means we have to reflect the works of the last assignment.  It shows a pleasant trend in Return on equity that the results of returns to shareholders’ equity divided by comprehensive income from restated financial statement.

As for the Return on Net Operating Assets the performance of that in 2014 shows a proportion of 17.7% similar as 2013 (17%). RNOA illustrates the returns incurred from the income of operating activities to result net operating assets. However, the restate financial statement of RELX Group that I did in the last assignment showed me an increase of net operating assets in 2014, so that the operating income after tax seems to be the factor that can impact the returns as the Income Tax expenses in 2014 were higher than the past years, which can be referred to the operating profit before the tax in each year- £1391m (2014), £1392m (2013), £1403m (2012) and £1183m (2011) respectively.

The most confusing part to me is the Net Borrowing Cost which showed four negative amounts in each year. It is referred to the financial obligations and financial expenses that are originally negative numbers from financial expenses, financial income and tax benefits, and in aspect of financial income it has been decreasing since 2012. Also, there was no any income of item tax recognised directly in equity both in 2013 and 2014 that was existed in the first 2 years.

I found it is similar between RNOA and Profit Margin. Both of them are referred the operating income after tax and PM is calculated by OI and sales. For example, the net operating assets is the difference between total operating assets and total operating liability (OA-OL=NOA), in 2014 the OA £10759.7m - OL£5031m = NOA£5728.7m and the sales revenue was £5773m in 2014.

According to the calculation above, as the sales revenue was higher a little bit than NOA the asset turnover resulted a positive number over 100%. In my opinion, it means that the turnover of assets in my company was not unstable and flowed fully to equity.

Economic profit

To calculate the Economic Profit is a little more complex than the other ratios. I have discussed with Helena in class her company is Michael Page International that was totally different from mine as the lowest economic profit earned was in 2013, and the best performance of economic profit was displayed in 2013 (£695.8m) since the highest OI of 2013 was £1241.9m that was caused by the lower income tax expenses in 2013. A reduction of £295m happened in the next year as the comprehensive operating income after tax (OI) decreased to £973m (2014) from £1241.9m (2013) which is the factor that seems to cause the reduction in 2014. To analyse the factor deeply, what made the OI decreased is the tax expense I did not fully understand why it was the highest in 2014 even the operating profit before tax was similar (£1391m in 2014, £1392m in 2013).

Step 2:

A capital investment decision

Assuming to consider new investment for my company RELX Group is looking towards setting up a new database for medical education or a new service for monitoring business. The estimated cost for the new database of medical education is £350,000 and for the new service of monitoring business is £450,000, and 7 years would be the estimated life in both options.

As this firm is a provider of information solution the investment referred to the collection of data which is the major cost to my company. Also, providing solution system is another new direction of development in recent years so that the cost of the service for monitoring business would be covered in terms of professional techniques and technologies.

The option 1- the Database of Medical Education, the NPV (Net Present Value) has showed a negative figure -$100,538.56 during the 7 years. The IRR was calculated 5% that was actually lower than the option 2. From the cumulative cash flow, payback is estimated to occur in the sixth year, and the returns of this investment would be $95000 occurred in the seventh year.

The option 2- the Service of Monitoring Business, the NPV indicated a positive figure $1847.45 through 7 years and Internal Rate of Return was 10%. The payback was expected to occur in the fifth year and two more months, and the return of this investment was expected $235000 in the seventh year.

In brief, even though the option 1 of investment decision showed a negative figure in NPV, the cost of this was lower and the demands of medical education are expected to be increasing in the future. Option 2 was focusing on monitoring business, and it would be cost a lot as this service needs to be operated with technologies and professional staff. However, the expected performance of option 2 was better that the returns were occurred earlier and higher than option 1.

Assignment 2 draft

Chapter 4: Analysing Financial Statements

It makes me excited that I am gaining something useful and new from each chapter as I am reading and thinking them every time. Also, I really enjoy the process even though it takes time. Yes, I had spent double time of the assignment requirement. At the beginning of getting started, I found it was boring and difficult to understand, I could not concentrate myself to pay attention, and of course I felt tiered to read sometimes. Then I realise that it is a good way to practice the skills of reading as we will be having a lot of reading and researches during the university life in the future. Recently, I have been getting more and more interested in this kind of readings as I found interesting case study such as the example of Sydney Fish Market which was mentioned in this chapter.

I have been to Sydney a couple of weeks ago, the only thing attracted me is the Fish Market, in which there are various seafood, it made me have no ideas what I should choose and eat, because of too many to select. The market was crowded, and people can order any fresh fish or oyster without cooking, lining up in the front of the store. From this chapter, I knew that this market also offers service of deliveries, I think this is what the author was trying to show us – Capital market.

To improve the value of a firm and expand the field of business are the major aims in capital market of an organisation. There will be a range of economic activities occurred in the period of development. What we can make plans or targets is to use financial statement by analysing data in past and predicting direction in the future.

How firms add value

Sometime formulas are complex and complicated, usually makes me confused. In this section, I have to write down not only the key concepts but also the abbreviation of each account. The most difficult part is to keep formulas in mind, because some of them are similar, so that I have to learn by rote. I am also confused that the FCF is a measure of transfer of value, and why it is not a measure of value add for a period at all? From the first section, a lot of examples and data information provided aims to tell us that value is added to a firm by investing and how each accounting system works in different items. What is the difference between economic profit and revenue? If an owner of a business invested a property for rental, does the income from renting belong to economic profit or revenue?

Operating and financial activities

From my own view, even though operating activities and financial activities are separate, however, these two types of activities are interacting. The operating activities are like a booster. The example of chocolate is very interesting to me, because I used to collect many toys by purchasing cookies of Oreo when I was younger, at that time the only thing I wanted is to find out what is inside that box. I think that operating activities are a strategy to attract extra value to a firm. The difference between OR and OE is OI, so is it making sense that OR-OE=OI? According to the part of statement of changes in equity, I also found other comprehensive income in the income statement of the report of my firm RELX Group. Why is it shown sometimes in the statement of changes in equity or in the statement of comprehensive income?

Restate two key financial statements

Balance sheet and income statement are the major financial statements in a firm. The most difficult challenge I am facing is the first time to restate financial statement which I had never contacted before. It is really a good suggestion to discuss and communicate with others in this project even though everyone has different companies. But sometimes I was shy to speak as English is not my first language. Is the reason why we have to restate financial statement to identify which part belongs to operating activities or financial activities? I do not understand much about this part. To separate each item of activities to operating or financial activities is in order to figure out the reason why these transactions incurred. I realise it is not easy to identify each activities and calculate tax by analysing formulas, which means there will be a number of works I have to pay attention to in this assignment 2. It makes me feel stressed.

Profitability and efficiency

This section told us that the real value must equals the reality of the products or services of a firm. It is not clear what the relationship between earnings of a business and earnings of investing in operating activities. I found it is hard to understand, practicing in reality might be a good way to get to know the concepts. To break things into bits means something has to be classified in detail. In my opinion, efficiency affects and interconnects profitability. This reminds me one of my friends who is running a supermarket currently, there are three owners and 2 warehouses, and in order to enhance efficiency of operating they are doing things separately, one is responsible for operation of sales, other two are doing recording and trading respectively. In other words, as well as in accounting each item should be classified into different statements to make a business clear and effectively.

It is easy to reading every single word, however, it is not easy to understand fully the implication of the aim author tried to tell. Sometimes we need time to absorb and comprehend, especially for international students. Back at the beginning, to restate financial statement aims to help us get to know our companies deeply and what kind of activities the firm performed, and what we should restate is statement of changes in equity, balance sheet and income statement. Also, it is a necessary part to analyse operating and financial activities.

Questions:

Why is not FCF a measure of value-add for a period at all?

What is the difference between economic profit and revenue?

The difference between OR and OE is OI, so is it OR-OE=OI?

Is the reason why we have to restate financial statement to identify which part belongs to operating activities or financial activities?

STEP 2: A brief commentary

The most confusing and complicated thing to me is to determine which item should be classified into operating or financial position. Also, everyone has different companies which have different financial reports. The names of items are called in different ways. I could not identify them even though I had discussed with others. I had met my classmates only once a week even sometimes there are different faces, at first I was shy to ask until the lovely girl Helena who is enthusiastic and friendly talk to me, we had discussed where the item of cash and cash equivalent should be into operating or not, and we both had troubles on understanding of the item Exchange differences on transaction of capital and reserve, and she also helped me find out more information about my firm such as what my firm actually offers in particular, such as in the medical area they are researching the Mosby’s Nursing Skills, the Clinicalkey, Cell and so on, she really helped me a lot. Also, I have viewed the exemplars provided on the Moodle site, it makes me more confused when I restated statement of changes in equity, I did not know what the differences between other comprehensive income and total comprehensive income, is the first one different from the latter one? Compare to other’s annual report, there are a number of items in the statement of changes in equity, I did not know how to sort them to operating or financial.

Step 3: identify three products and services

From the market segments of my firm’s annual report I found three major services the RELX Group offers, which are in terms of Scientific, Technical & Medical markets, Risk & Business Information and legal. It actually took time to research and read, because the firm I have been given is not like other companies which have real products in sales markets, my firm is to sell services and professional advises and assessments. In fact, what the hardest task is to identify and calculate the price of these services due to there is no standard and object of reference.

Service 1:

Scientific, Technical & Medical service

ClinicalKey

Selling price: $15 per month

Variable cost: $3 per access

Contribution margin: $12

From the website of my firm RELX Group, I found a range of products allocated in each service the firm offers. Clinicalkey is based on the area of Scientific, Technical & Medical service, which is a search engine for offering the relevant information and knowledge of clinical decision, and supporting medical students or professional to research by accessing it. I did not find any information about the price of this sort of product, and one thing I noticed from the official website is that the access of this application is free for the first 30 days, so that I assumed that the fee of accessing is paid monthly, like being a member of an association. I can image that there would be various costs in creating this product, such as hiring administrators who manage customers’ personal information, equipment of data storage, the costs of collecting research outcomes from providers and so on. I estimated these costs to be 30% of selling price for each access per month.

Service 2:

Risk & Business service

Elsevier Magazine

Selling price: $20

Variable cost: $3-$5

Contribution margin: $15-$17
InstantID is a solution system of identity verification. It is suitable to be used by companies that would like the ability of validating the identity of a consumer or business. The variable cost might be in terms of technology, analytics, statistics, research and development, which would be costing higher than ClinicalKey. Moreover, I assumed that the users prefer to purchase this system for a year or more because it is able to keep working on spotting fraud and uncovering identity discrepancies in real time.

Service 3:

Legal service

LexisNexis SmartWatch

 Selling price: $50 per month

Variable cost: $8 per access

Contribution margin: $42

LexisNexis SmartWatch is like a risk monitoring system. As for the supplier management, SmartWatch is a monitoring tool to show what situation the business process is standing and analyse the risk assessment. I think the variable cost may be lower because the system is designed smart and automatic, in other words, it is produced one time to be used expansively. The expenses incurred are in the process of designing and in terms of technology staff and so on.

Commentary/ contribution margin

The contribution margins of the three products are $10.5 (ClinicalKey), $30 (InstantID) and $32.5 (SmartWatch) respectively. In my opinion, the usage of Cliniclkey is more extensive as the demands of medical research are more widespread. In addition, the selling price of Clinicalkey is estimated as $15 per month, being reasonable to public and everyone is able to affort it. The range of other two systems is limited as the demand of identity verification in business and the monitoring in supplier management is narrow. As the variable costs of these two systems are higher, the selling price would be increased. The business of RELX Group is to cover plenty of fields of industry, there are different professional teams in each category of industry, so they produce products and services not only focus on the contribution margins, but also the demand of marketing.

Constraints

I guess the constraint that my firm would face is the collection of resource. A powerful storage must be needed to contain database in a research project, RELX Group has the background of information provider, so keeping the pace with global trend and updating database is the first and most primary challenge that they are facing. The less research outcomes provider contribute, the more lack of information this company will be facing.