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.