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ACCCT11059 ACCOUNTING, LEARNING AND ONLINE COMMUNICATION.

Assignment 2.

Christian Peterson

CQU 2018.

Assignment 2.

Step 7.Altium’s market offerings.

Altium services the electronics design market segment with the offering of design software, verified parts data bases and training services in the use of its design management software.I’ve decided to include a mix of products and services as this would provide a broader look at what this company offers the market space it currently occupies.

The printed circuit board design platform AD18, is a development on previous design software i.e. AD17, that Altium has offered the market. The next product that I’ve selected is the Altium Vault, which I think is an absolutely grand idea.

The Altium Vault is a database of designs, components, verified suppliers of components that has been developed to allow PCB designers to facilitate the uses of those factors in their projects. I see it as a software design library that offers the right equipment for your project.

The last product I’ve selected is a training service. It’s a structured, on demand, online course that offers the users a certificate of completion once they’re done with the training.

1.Products/services and pricing.

The pricing of these products has been partly assumed from web searches on previous editions of the same product line and like products and also Altium’s website.

1. Altium Designer 18. $6950.00 USD +1700.00 (licence fee, single licence, first purchase).

2. Altium Vault- $2400.00 USD (min five users).3. An on demand Altium AD18 PCB topics training course-$995.00 USD

Variable cost and Contribution margin.

1.Variable Cost.Calculating the variable costs for these products was a lesson in IT economics that took a little more research time to try and understand than I’d prefer. A business like Altium is basically classified as a software as a service (SaaS) business. In trying to define the variable costs for these products I’ve discovered that these types of products are commonly claimed as having a zero variable cost as once you’ve got the product on offer, that product doesn’t cost the firm anything more to supply another copy of that software. The only variable costs

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associated with these products I could deduce were additional costs in the form of extended bandwidth requirements for the company, which would probably be different across the globe as Altium deals with markets on that basis. And in addition to that, the only other variable costs I can see from reading about this type of service could be consultation and network maintenance. That said defining these costs aggregating them into one factor for this exercise is more fun than it looks and just how Altium has accounted for this isn’t declared in their financials. And also, I’ve been unable to assess the incidence of this cost being incurred in Altium’s dealings with the market which has lead me to use the guesstimate method for the sake of this exercise. A final clarification about the nature of the products I’ve chosen in respect to this exercise; even though they are different they are all delivered online, so I’d suspect that the variable costs for each would be somewhat similar.

1. Altium Designer 18- 10%2. Altium Vault- 17%3. Altium AD18 topics course- 15%

2.Contribution Margin.

Contribution Margin=Sales-Variable Costs.1. Altium Designer 18. 8650-10%(865) =$77852. Altium Vault- 2400-17%(408) =$19923. Altium AD18 topics course- 995-15%(149.25) =845.75

Altium Designer 18 Altium Vault AD18 topics course.Sales price. $8650 $2400 $995Variable costs. $865 $408 $149.25Contribution margin $7785 $1992 $845.75CM ratio. 90% 83% 85%

3.Contribution Margin-Commentary.This exercise was a little tricky to try and understand as the variable costs associated with these products don’t appear to be clearly defined. Altium operates in the electronics market with a focus on selling design software. The delivery of their products is not unlike purchasing software form any other vendor of like products. The only additional inputs that the clients may need relates to the market segment that Altium supplies. Those additional inputs being customer support and the maintaining of any existing and additionally required plant and equipment associated with this type of business.

In looking at the products I’ve selected and how they differ I’d have to say that even though they are different, they all support the customer in a complimentary way. Altium sells design software like the AD18 used to design printed circuit boards (PCB’s). The data base functions included in the Altium Vault assist the designer by connecting the client with suppliers of electronics components that the client will need to build their products. The final product I’ve included is a training course that underpins the use of the Altium designer software.

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On the question of product mix in relation to contribution margin, you can see by visiting Altium’s website that the company’s mission is focused on the supply of high end design software to the market. Both the AD18 and Vault are, in my opinion the products that are least vulnerable to the culling decision that the CM assessment offers the manager. These two products are core products thus business produces. The training courses, although useful, fulfil a complimentary role to customer and thus appear vulnerable in respect to this part of the assessment. That said, the role that training services offer the firm is that they replace a form of customer support. If a client business needs to understand how to use Altium’s products, there’s a selection of training courses available that are self-paced and accessible online. It was also interesting to see reports on these types of businesses using this means as well as blogs maintained by the vendor as a means to support their customers as well. In having a searchable series of entries on a blog, the client’s service teams are able to conduct their enquiries without Altium having to maintain support staff, in excess of what the market would demand, if the blogs and online courses hadn’t been developed.

Commentary on identified constraints.

Identifying the market and resource constraints that Altium faces is going to be complex as this assessment would have to include a consideration of the markets this company is supplying. I would suggest there could be two groupings to focus on in this question which would be the electronics market and the parts of the world the company supplies. The use of information technology is something that is seen as first world but as we see from Altium’s financials the company has a presence in the emerging markets in the Middle East and Africa.

The electronics market, which will benefit from greater accessibility in developed markets, includes the whole production cycle of which Altium assists with the initial product design phases. The market segment that Altium exists within is at the higher end in regards to capability and price. There exists a vulnerability in that the end user’s requirements and the pricing of Altium’s products can be mismatched. For example, I’ve seen that the smaller producers in the start-up phases often require expensive software and that the established producers can require a simpler design suite. The mismatch here being affordability.

The constraints Altium could face is accessing the emerging markets of the Middle East and Africa would be focused on infrastructure and supply chains. Although the development of these economies would include those aspects, the concurrency of those developments may not be sufficient to allow Altium’s market offerings to achieve what their clients could given better circumstances. As Altium offers electronics design software that is often used in manufacturing the electronics goods that are used in modern products, the client market will be larger in economies that feature that capability. In respect to the emerging markets of Africa and the ME, their economies are mostly focused on the light industries and the resources sector. The lack of IT manufacturing in those markets is a constraint that companies like Altium will have to wait on for future development.

In recognising the constraints inherent to the emerging markets and their current production focus. I’m reminded that Siemens is a competitor to Altium. As someone who’s spent over a decade in the Australian resource sector I’m familiar with this company’s

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products. In view of the African and ME positioning within the global commodities markets, I see a vulnerability that Altium faces with respect to a company like Siemens. Siemens has a product mix that includes design and production of electronics goods. This integration of the product cycle in one company strengthens their capability against firms like Altium. Another consideration of competition constraints is the cheaper providers of design software for this segment. The market will contain end users who don’t require design software that has all the capabilities that the AD18 contains. These products will come in at a price point well below what the AD18 is offered at and we can see that Altium has recognised this with their cheaper products such as the entry level CircuitStudio designer.

Another risk observed that could be a future constraint is economic volatility. The bulk Altium’s market share is located in the Americas and Europe. Economic downturns in these economies could negatively affect the firm’s profits.

When considering the product mix that Altium could offer the market I’d suggest that the focus for this firm should consider accessibility to and the growth of the end users as the deciding factors of what products Altium includes in their offerings. As Altium has positioned the firm in catering to the design phases of the product life cycle they rely on firms that will need to be themselves profitable. In offering a product mix that is reliable and supported by Altium this approach, as we see in the success of this firm should continue.

Step 8.

Ratio analysis.

When I approached this section of this assignment I was initially happy to see the numbers rolling out as per the ratios as described in the spreadsheet. That happy didn’t last too long though as my lack of Excel knowledge once again, led me on a crash course on how to use its functions. In addition to that, getting results with some of my calculations that weren’t anywhere near what the Altium financials were displaying was initially concerning. That in turn led to a lot of searching the ACT11059 Facebook page for past and current student’s discussions on the subject in addition to the usual web searches. That said, I found the exercise interesting as it’s part of the culmination of this course where you bring all your knowledge to the table and see what you’ve learnt and not learnt.

In going over Altium’s ratios I can see that there’s a trend over the last four years that shows a year of debt and then profits in the following years after that. I’ll go over this aspect in my discussion of the ratios separately as I try to understand exactly what has been happening with this company.

1. Profitability ratios.Altium’s profit ratios look good with the both Net Profit Margin and Return on Assets being positive. One thing that is evident throughout the financials for the four years is that 2015 was a good year for Altium after what appears to be a poor year in 2014 where it looks like the company was in a developmental stage. First, we have the Net Profit Margin to analyse. The NPM looks at what profits a firm can extract from its sales. Altium’s NPM for 2015 was the standout year showing profits at 114.7% and

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led me to question what was happening here as it would be revealing of the overall trend for this firm. The only significant factor I could identify for 2015 was the transfer of core business assets to the United States and the recognition of $77m worth of deferred tax assets.

The next ratio that we have to look at is the Return on Assets. Return on assets serves to display the efficiency that a firm has in relation to showing how effectively the profit from their assets. It’s a useful benchmarking tool for comparing like companies in that market segment. And again, Altium’s figures show that 2015 was the better year of the four.

In light of what Altium’s profitability ratios reveal its interesting to reference the company tax rate debate that is current in the Australian political scene at this point. I wonder how much that influences globally based companies in the decisions of where to locate their profitable business assets.

Figure 1. Profitability ratios.

2. Efficiency ratios.The next set of ratios we use are related to analysing the firm’s efficiency in generating turnover. In this exercise Days of Inventory and Total Asset Turnover is used to define the efficiency Altium has achieved within its operations.

Figure 2. Efficiency ratios.

Days of Inventory.In the working out of the days of inventory, we need the cost of goods sold and have that divided by the firm’s inventories and multiplied by the days in a year. This operation will show us the time the firm uses to turn inventory into sales. I needed to conduct a web search on what I was seeing in my financials as there were a few “missing parts” in recent years. What I’ve discovered is how tech firms look at inventories and the consumables used in production. The inventories for companies like Altium are different compared to firm’s that don’t produce software. The physical stock of a software company is going to be digital bits, ones and zeros. As we see in Figure 2.1(Inventories) and Figure 2.2 (Raw materials and consumables) there’ll be an initial use of materials and consumables used to develop the software in the form of any extra hardware the company needs for that accounting period. Where the costs of goods sold manifests a physical form and allows the accountant to attach a dollar amount to them, is in the equipment used to store and transmit this data, as we see in Figure 2.2 (Software and equipment expense).

This explanation would tie in with what we see throughout the last four years of Altium’s financials, with 2014 /15 appearing to be a developmental period. In looking at Altium’s days of inventory there’s much higher rates in the tears 2014/15

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compared to the nil figures of 2016/17. The figures for 2014/15 may indicate that the firm was anticipating a future growth periods and decided to maintain higher than usual inventory levels. This positioning is congruent with the trends observed elsewhere in this spreadsheet exercise.

Figure 2.1 Current assets revealing nil inventories for 2016 and 2017.

Figure 2.2 Expenses showing nil use of raw materials and consumables for 2016 and 2017.

Total asset turnover ratio.This ratio looks at the comparison of the firm’s revenue and its total assets to see how efficiently its assets are used to produce sales. A higher turnover ratio indicates that the firm could use a lower amount of assets. We see, in Figure 2 (TATO ratio) Altium’s FY 2014 is the odd year with the ratios for the next three years exhibiting like amounts. The 2014 period would possibly indicate a build phase with the asset base displaying a better efficiency trend over the next three years.

3. Liquidity ratios.Liquidity in a firm is a sign of health as it relates to the firm’s ability to convert assets into income. The current ratio is described as a short-term ratio that indicates the firm’s ability to maintain its expenses. This function is accomplished by comparing current liabilities and assets as a means to assess if the firm can cover its short-term expenses.

We can see from Altium’s financials that their liabilities in the 2016/17 period are trending upward compared to 2014. This may indicate that the company’s activity is flattening out in respect to its accumulation of liabilities to assets after a preceding period of investment in the business. My research online suggests that the ideal current ratio is 2:1, my assumption for this business going forward is this is something the management of Altium would seek to realign in favour of a healthier ratio.

Figure 3. Current assets.

Figure 3.1 Current liabilities.

Figure 3.2 Current ratio.

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4. Financial structure ratios.When we investigate a firm’s financial structure ratios we are looking to see how where the business’s funding is being sourced from. The two sources we examine in these ratios are debt and equity. I found myself having to make use of the YouTube lessons to once again learn more about these ratios as well as references from the web at www.accountingtools.com to develop my understanding here.

Debt/equity ratio.This ratio looks at the amount of debt that Altium has taken on to fund their operations. And once again 2014 is the standout year with a higher amount of debt taken by the company in that year. It was interesting tread in the 2014 Director’s report that Altium carries no debt except for finance leases. This is something else I had to look into and in doing I’ve discovered that a finance lease relates to how a firm will use a lending institute to purchase assets while the lessee operates and assumes the risk/reward factors inherent to that asset. In studying Altium’s expansions throughout the company’s timeline, I’ve learnt that Altium has expanded its market position by acquiring other firms in this market segment.

Figure 4.1 Total assets.

Figure 4.2 Total Liabilities.

Figure 4.3 Financial structure ratios.

Equity ratio.Equity ratio looks at how much of a firm uses equity investors to fund its asset base. As seen in Figure 4.1, Altium uses a high amount of equity which I’ve learnt is a healthy sign as it indicates that the business is seen as a favourable entity to investors. This factor is also favourable in light of the interest charges that debt can attract in economic downturns that affect the firms market segment. In respect to the spreadsheet exercise I am conducting for this firm, once again the we see that the comparison of 2014/15 showing that those years were significant for this company.

5. Market ratios.I made mention of the fun I had with Excel while completing this exercise. And this part of the lesson is where it all happened for me. I have to confess a minor case of envy as I saw the other students steadily announce during the week that they’d completed their work will I sat there contemplating turning my laptop into a frisbee. Anyway, after some homework on the subject I’ve come up with what I’ve totalled in Figure 5 (Market ratios).

Figure 5 Market ratios.

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https://www.accountingtools.com/articles/debt-ratios.html?rq=debt%20equity%20ratios


Earnings per share.Earnings per share shows is ascertained by dividing NPAT by the number of issued shares as means of understanding how much the firm could pay each shareholder if required to do so. The figure I’ve got for my EPS are fairly close to what is advertised in Altium’s financials. I’m not certain at this point as to why there’s a slight variance but If I were to guess it, I’d say that it would come down to how I selected the data from a sliding scale graph from the source I found on the ASX.

Dividends per share.I have my doubts about this exercise’s DPS as it seems way small but after viewing Marias presentation on the subject and working the numbers over in Excel this is what I’ve come up with. Regarding what I’ve learnt from Maria’s YouTube video, I notice that the EPS is simply NPAT/ Number of issued ordinary shares. It’s not declarative of company practice in regards to what the shareholder is paid hence the rather small number that is a result of this equation.

Figure 5.1 Dividends per share.

Price earnings ratio.A company’s P/E ratio can be used to show a number of factors about the firm’s performance. In reference to the course presentations we’re told it’s a measure of share price inflation and an indicator of how long a share could take to repay the investor. The P/E ratio is a comparison of the market price of the share and the earnings per share.

Market ratios summary.One aspect of the financials I keep seeing in Altium’s numbers so far is the effect of the 2014/2015 period and then a flattening out over the 2016/17 period. I’ve learnt from looking at the financial structure ratios that Altium is weighted towards equity investors as a source of funding for the firm’s operations. Which leads me to the question; why would an investor choose Altium? In looking at the declared dividends in Altium’s annual statements and the amounts shown from the spreadsheet exercise, I’m led to see our Excel work as using accounting methods to observe something other than what the official story tells me. In realising that a firm like Altium, which uses investor equity for funding as opposed to debt funding, I’m inclined to view my spreadsheet results as indicative of that factor.

Figure 5.2 Dividends paid.

6. Ratios based on restated financial statements.

Figure 6. Reformulated financial ratios.

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This section of the spreadsheet finalises this course’s Excel exercise purpose in defining the operational and financial aspects of this firm’s accounting. This is done to enable a deeper analysis of the operational aspects of a firm’s activity as opposed to the view of the business as given in their issued financials.

Return on equity.The first ratio in this section is return on equity. This ration analyses the comparison between a firm’s comprehensive income and shareholders’ equity. The purpose of this ratio is it allows the investor to see the returns to the investor on their equity in a business. In the restated financials we get to use this ratio to reveal the amount of return offered from the operating assets of a firm. In looking Altium’s ROE, we see that for all the four years the returns to the investor were positive. Once again, the earlier years in this data set show a comparative volatility which is indicative of a developmental stage in the life of this company.

Return on net operating assets.I found this ratio to be exemplary in regards to the purpose of restating a firm’s financial statements. I had to do a little extra research on the subject to gain some understanding of the purpose of this ratio. When we look at the ratio for ROA, we see what returns a business receives form it’s total assets. This can be misleading as a firm’s total asset base may not be necessary for generating income due to the purchase of unnecessary assets. In restating these ratios, we seek to refine the analysis of a firm’s operations by looking at its operational assets to see what they offer the business and investor. And this is where its gets interesting for Altium. In 2014, we see that the RNOA is at -723.66%! The ROA for that same year was 20.7%.

Figure 6.1. ROA vs RNOA.

When we look at the difference between total assets and NOA for 2014, we see the difference is massive. The total assets for that year were $54,002,000 as opposed to the NOA which were negative $1,638,400. It’s observable that the operating liabilities for that year were greater than the operating assets, hence the result we see in NOA for 2014. We see a reversal of that example in 2015 with a RNOA of 121.41%. I’ve searched for information on any major activity for Altium in 2014 and found a media release that stated the company had relocated its core operating assets from China to the United States. I failed to find any other information that may detail the operating liabilities for that year, but the accounting shows the comparison between operating assets and liabilities being negative albeit the upward trends observed in the following years. Looking at the years after 2014 in comparison to the ROA we see that 2015 is the standout but also that the operating assets outperform total assets for the following years.

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Net borrowing costs.The comparison of NFE after tax to NFO offers the viewer information that details how much is the cost of financial liabilities are out of total financing. What we see with this ratio are some small numbers. Which had me going over the ratios and revisiting the course presentations on the subject a few times over to see if I’d missed something. I had to remind myself that this ratio referenced the restated financial statement and thus was focused on looking at the finance costs as opposed to the debt ratio which looked at how much debt is used to finance assets. Altium’s debt ratios were quiet substantial at times and when compared to the Net Borrowing Costs reveals something about the nature of the company’s financing.

Figure 6.2 Comparison of Debt ratio to NBC.

One thing I noticed from the restated financials is that Altium’s financial assets to liabilities is weighted heavily in favour of its financial assets. This could possibly indicate why their finance costs exhibit the low numbers we see here in the NBC ratio.

Profit margin. Figure 6.3 Comparison of PM to NPM.

The comparison of Altium’s net profit margin to profit margin indicates that the company’s operating assets are driving profits for this firm. Although, not exactly the same, the PM follows the NPM fairly evenly as is seen in the reference Figure 6.3, without any major deviations. Again, the trend we see with the 2014/15 period is observable in the profit margins.

Asset turnover.

Figure 6.4 Comparison of TATO to ATO.

Asset turnover compares operating revenue to the firm’s net operating assets in order to reveal the amount of sales that the firm’s operating assets return. When looking at the Altium’s ATO we see that 2014 is the odd year out with a negative ATO. And on inspection of that ratio we see that the company had negative net operating assets for that year.

Figure 6.5 NOA.

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Continuing on with the comparison between total assets and operating assets, we see the operating assets perform better overall except for 2014 when the influence of financing appears to have played a greater role in the total asset performance.

7. Economic profit.

Figure 7. RNOA, Cost of Capital and Economic profit.

The last ratio we use in this exercise looks at the economic profit a firm generates from its operations. This is done by subtracting the cost of capital from the firm’s RNOA and multiplying the result by the firm’s NOA. The purpose of this exercise is to understand how the issue of opportunity cost influences the financial outcomes for a firm. The way this is achieved is to deduct a cost of capital to the firm’s cashflows, referred to in this course as the weighted average cost of capital. The cost of capital for Altium as referenced from their 2017 financials is an averaged 11 percent although it was interesting to see the individual percentage for the emerging markets have a cost of 15%. I’ve searched the other years for a WACC figure but was unable to find any, so for this exercise I’ve used the 2017 figure.

In this exercise, the economic profit for Altium looks healthy, which leads us to the question: what is driving Altium’s profits? I can see from looking at the RNOA and comparing it to the WACC that again it appears that the operating assets are returning percentages above the cost of capital. The only exception to that is 2014 in which the RNOA was massively reversed and while that year returned a profit we can see that their operating assets were negative in that year. When looking at PM and ATO we see that the higher operating liabilities of 2014 work to create the only negative year for the firm but after a correction in the imbalance between operating assets and liabilities climbs to over 100 percent before settling in the mid-twenties. In a similar trend we see operating assets build at progressively at a greater rate than liabilities in the 2015 to 2017 period. We know that the operating income follows the OA/OL trend as well.

It appears that strong sales have contributed to the recovery from the overweighted liabilities and combined with that the ability to avoid debt due to strong holdings in cash and cash equivalents have allowed Altium to make both accounting and economic profits. Altium has a stated goal to become a world leader in the market segment and achieving a revenue target of 200 million dollars in 2020. The company’s management appear to understand profit and loss by avoiding debt funding and utilising revenue and equity investment to achieve their aims. And as evident by their product line and continual expansions into current and emerging markets appear to be on their way to making their goals.

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Step 9.

Capital Investment Decision.

While reading Altium’s investor reports you can see that the management of this firm are looking forward into what the electronics market is moving into as a series of concepts. I noticed an interesting graphic that detailed the initial responses to new technology. After going through a peak and trough cycle as the new products were offered and tried and the failures rejected, and the successes built upon the forward trends in development begin to define themselves after exposure to the market.

In looking at what Altium seeks to offer the market in the near future I’ve selected two opportunities to be assessed for this exercise. As Altium’s management has not announced an exact series of products I’ll suggest, for this exercise, a development of the software and services that Altium provides the market in line with their proposed direction of being a market leader in design software.

In regards to the residual value of the products, I’ve done some research online as to the residual value of software. The way that software is accounted for after a time period is by way of amortisation as opposed to depreciation. There was some online discussion as to why this practice is used and it appears it comes down to the nature of software being an intangible good.

Figure 9. Product option details and future cash flows.Altium AD19 Altium Nexus

Original Cost. $1,550,000.00 $1,450,000.00Estimated Life of Product. 5 years 5 YearsResidual Value. Nil-intangible asset. Nil-Intangible asset.Estimated Future cashflows.Year 1 $350000 $280000Year 2 $350000 $290000Year 3 $450000 $300000Year 4 $550000 $350000Year 5 $550000 $410000

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Option 1.Altium Designer AD19 PCB Design program.

The AD19 is a continuation on the flagship PCB design tool that Altium offers the market.

Figure 9.1 NPV, IRR and payback period on the AD19.

Option 2.Altium Nexus PCB design project collaboration program

The Altium Nexus is a database tool used in electronics design projects that brings together project teams and sources of information on parts and equipment in order to streamline the design cycle.

Figure 9.2 NPV, IRR and payback period on the Altium Nexus.

Summary of Capital expenditure exercise.

In view of the superior out comes in NPV, IRR and payback period the Altium Designer 19 shows to be the better option in regards to projected financial outcomes for this exercise. Software can have a limited shelf life as the market is continually upgrading its offerings as new technology expands its capability. The AD19 would continue the evolution of market offerings by Altium, allowing the maintenance of the declared goals of this firm to become a leader in this segment without consuming resources unnecessarily. The AD19 is projected to break even with four years with revenue from that project then becoming available for future projects. The Nexus was a development on the existing Vault data base which was to slightly expand the capability of the Vault. In view of the projected returns and the existing capability of current similar products, the Nexus requires reanalysis of its future viability in order to locate it with in a profitable framework for this company.

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Step 10.

Feedback with other students.Feedback To:

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentary

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Step 10Individual feedback with other students

Overall ASS#2

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Overall FeedbackAdditional Notes / Questions



Step 8





Step 9





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Overall ASS#2




Step 8





Step 9




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Overall ASS#2


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