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.
