McMillan Shakespeare Group

ASS#3Ratio Analysis and Capital Budgeting

Name: Nicole Shannen PitoutDue: 6th June 2016

Student Number: s0278099

Step 1: Calculating ratios and assessing your business performance

Profitability Ratios

2015 2014 2013 2012Net Profit Margin 17.9% 16% 18.9% 17.7%Return on Assets 9% 10.6% 13.9% 13.7%

Net profit Margin and Return on assets are both seen as Profitability Ratios. Profitability ratios are used to measure the profitability of a firm and how well the firm is performing. Net profit Margin shows the percentage of sales remaining after all the expenses; taxes and interests have been deducted from the sales generated by the firm. As you can see in 2014 the net profit margin dropped to 16% when it was at a high in 2013. This shows that the firm did not perform as good in 2014 then what it did in 2013. Return on assets is a guide to how profitable a firm is, in relation to the total assets within the firm. As you can see from 2012 to 2015 the percentage has just declined through out the years. This shows that they firm was not making as much of a profit that it should have been making.

Efficiency (or Asset management) ratios

2015 2014 2013 2012Days of inventoryTotal Assets Turnover Ratio

0.50 0.66 0.74 0.77

Efficiency ratios are used to interpret how well a firm uses its assets and liabilities within the firm. Total assets turnover ratio is seen as an efficiency ratio because; it measures the firm’s ability to generate sales from assets by comparing the two together. As you can see through out the years it is declining as well which means that McMillan Shakespeare may have over invested on assets and is not operating at the correct efficiency level.

Liquidity Ratios

2015 2014 2013 2012Current ratio 1.72 1.41 1.28 1.26

Liquidity ratios are seen as the ability to meet the financial obligations, as they are due. Current ratios measure the firm’s ability to pay short term and long-term obligations. As you can see between year 2012 and 2015 there is a increase in

the ratios this could mean that the firm is doing well with meeting the obligations of paying back obligations owed to others.

Financial Structure Ratios

2015 2014 2013 2012Debt/Equity Ratio 144.1% 134.4% 128.8% 132.8%Equity Ratio 41.0% 42.7% 43.7% 43.0%

Financial structure ratios are the association that directly affects the risks and value of a business. Debt /Equity ratio indicates the relationship portion of shareholders equity and debt used to finance the firms assets. As you can see the debt to equity ratio is increasing from year 2012 to 2015 this could mean that this firm is at more of a risk to creditors. If it had a lower debt to equity ratio it would be more stable. Equity ratio is a good indication of the level of leverage used by a firm. As you can see the equity ratio stays at a constant percentage and doesn’t spike too much.

Market Ratios

2015 2014 2013 2012Earnings per share (EPS)

0.55 0.97 1.10 0.96

Dividends per share (DPS)

$0.36 $0.51 $0.65 $0.56

Price Earnings Ratio $26.26 $14.92 $13.19 $13.06

Market ratios are used to locate the value of a firm by comparing the book value and the market value of the firm. Earnings per share are the portions of a firms profit allocated to each outstanding share of common stock. As you can see above there is an increase through out the years of 2012 and 2013, which could mean that there was a higher share allocated to the owners per share sold. Where as in 2014 there was a decline in the share given back to the owners. Which could mean there wasn’t a high sales level. Dividends per share is the addition of every declared dividends for every ordinary share issued. As you can see it increases in the years of 2012 to 2013 and then declines again in 2014 to 2015.Price earnings ratio is calculated by the current market price of a firm shares divided by the earnings per share of the firm. There is a increase in the price earnings ratio which shows that the firm is doing well within the market pricing.

Ratios Based on reformulated Financial Statements

2015 2014 2013 2012Return on Equity (ROE)

21.9% 24.9% 31.92% 31.84%

Return on Net operating Assets (RNOA)

14.22% 15.36% 19.3% 19.62%

Net borrowing Cost (NBC)

3.37% 4.04% 4.61% 5.13%

Profit Margin (PM) 19.85% 18.23% 21.24% 20.12%Asset Turnover (ATO) 0.72 0.84 0.91 0.98

Return on equity calculates how many dollars of profit a firm can generate with each dollar of the shareholders equity. As you can see there is a decrease in the return on equity percentage, which shows that the firm is not using the shareholders funds efficiently. Higher percentages show that funds are being used correctly. Return on net operating assets show the ratio of a firm earnings compared to how much the firm has invested in its operating activities to make these earnings. A higher percentage is more favorable because it shows that the firm is managing its assets more effectively. So therefore the years of 2012 and 2013 were better years for McMillan Shakespeare then what the years of 2015 to 2014. Net borrowings cost are the total costs of taking on a debt obligation that can involve interest payments and other fees involved. As you can see there is a decrease in the net borrowing costs, which is a good sign because it shows the firm did not have a high borrowing costs so they wont be in a lot of debt. Profit margins are the amount by which revenue from sales exceed costs in a firm. As you can see there was a high profit margin in 2013 this could be showing that there is an increase in the sales of the firm. Where as in 2014 there was quite a decline, which could be showing us that there wasn’t a good amount of profit being made. Asset turnover is the ratio of the value of a firms sales and revenue relative to the value of its assets. As you can see there is a decline in the asset turnover, which could mean that the firm is not utilizing the assets correctly within the firm.

Economic profit

Formula: (RNOA – cost of capital) x net operating assets (NOA)Cost of capital = 10%

2015 2014 2013 2012Economic profit 22,970.4 22,115.3 33,788.1 29,801.6

Economic profit is the costs a firm pays and the revenue the firm receives. It also measures the performance of a firm and compares the net operating profit to total costs of capital. In 2013 there was a good rise in the economic profit,

which could mean that the firm was covering its capital costs and shows that in that year the firm was very profitable. However in the other years to come there was a decrease in the economic profit, which could mean that the firm was not covering its cost of capital and not making a high profit.

Conclusion:There has been a decline in the economic profit, this could mean that the firm is not operating correctly and not covering the cost of capital so therefore it is not making a profit it should be making. Some similarities and differences I learnt looking at other peoples firms is that their economic profit wasn’t as high as my company. But I did learn that not all companies are the same and all of them will differ in a lot of ways just based on how well the firm does within the market. To conclude I think based on the ratios I have calculated I feel like my firm has a good performance history.

Discussion with other students

Step 2: Developing a capital investment decision for your firm and completing a simple analysis of this decision using the payback period, NPV and IRR

I can honestly say that I found having to calculate the NPV and IRR and payback period to be the hardest part of all the assignments we were asked to do this semester. I still don not quite understand if I have done this correctly but hopefully I have. I have chosen a investment for McMillan Shakespeare to invest in new office blocks in Brisbane and Sydney. I decided to chose these investments because I feel like maybe McMillan Shakespeare will be able to broaden there branches all other Australia and not just in Melbourne. I feel like people all over Australia would like to use the services that they offer.

Office in Brisbane Office in SydneyOriginal Cost $40,000 $50,000Estimated Life 6 years 6 yearsEstimated Future Cash flows2016 $10,000 $10,0002015 $5,000 $15,0002014 $10,000 $15,0002013 $15,000 $10,0002012 $10,000 $10,000

Calculations

Option 1 Option 2Payback period 4 years 4 yearsNPV $37,190.70 $45,796.67IRR 14% 21%

After calculation the NPV, IRR and payback period (hoping that it is correct) I think the best option for McMillan Shakespeare to go with would be Option 2, which is opening a new office block in Sydney. I say this option because although the payback period is the same, the IRR is a higher percentage then option 1. Also you will be able to pay this investment off quicker and not having to worry about huge amounts of debt for many years.

Step 3: Feedback to other students.

Feedback From: Nicole PitoutFeedback To: Alenna Frost

My Comments:

Step 1:

Calculations of ratiosRatios – commentary (blogs)

Calculate economic profit

Commentary – drivers of economic profit (blogs)

You have shown that you have a great understanding of what your ratios tell you about your company.Your calculations look good to me, you have linked your cells from the other statements which shows you know how to work with excel.Your company has a very interesting economic profit and you have given a good explanation as to why it has increased and decreased the way it has.You have also shown your discussions with other students. Very good job.

Step 2:

Develop capital investment decision for your firm

Calculations of payback period, NPV, & IRR

Recommendations and discussion

You have a great understanding about what is going on within your company. You have explained your investments really well.

Your calculations seem to be correct but I cant say much on this as I struggled with this section.

My only recommendation would be to maybe include a bit more discussion with students.

Step 3:Individual feedback with others students

Not provided (pending)

Overall ASS#3 Overall I think you have done a great job Alenna. You have put a great

amount of effort into your final assignment. I am sure you will do just fine.

Feedback From: Nicole PitoutFeedback To: Norlim Binti Ariffin

My Comments:

Step 1:

Calculations of ratiosRatios – commentary (blogs)

Calculate economic profit

Commentary – drivers of economic profit (blogs)

You seem to have done all the calculations correct in the spreadsheet. Although your formula’s are a bit confusing and do not show where exactly you recovered the information.Your company has a very large economic profit and you have discuss in your word document what economic profit is, but maybe try and explain a bit more about why your companies economic profit is the way it is.Also you have not included any form of discussion with other students about calculating your ratios. Try to include this because these small marks may help in getting a better mark.

Step 2:

Develop capital investment decision for your firmCalculations of payback period, NPV, & IRRRecommendations and discussion

Your calculations all seem to be good.I would just recommend maybe including your calculations of your NPV, IRR and payback period into your word document. It makes it a lot easier to understand when reading.

Step 3:Individual feedback with others students

Not provided. (Pending)

Overall ASS#3 Overall, you have done a good job in your final assignment. Maybe try to include the few bits to get those extra marks. Well done

Feedback From: Nicole PitoutFeedback To: Rulande Kemp

My Comments:

Step 1:Calculations of ratiosRatios – commentary (blogs)Calculate economic profitCommentary – drivers of economic profit (blogs)

Your calculations for your ratios all seem to be done correct. However there is a couple formula’s that are not making sense and giving errors like #DIV/0.You have shown your calculations, which is good. However you have very strange amounts, maybe try to explain in your word document why your numbers are the way they are.Also you have not provided any discussions with other students. Try to include this in your word documents so that you can get the extra marks.

Step 2:Develop capital investment decision for your firmCalculations of payback period, NPV, & IRRRecommendations and discussion

Your calculations all seem to be very good. Maybe try to explain what investments you have chosen and why you have chosen them in your word document.Your step 2 is very short and does not explain much.

Step 3:Individual feedback with others students

Not provided. (Pending)

Overall ASS#3 Overall you have done a good job in your assignment. Maybe just try to add the small extra marks into your word document.