Using Accounting for Decision Making

Assignment 3Beverley K. Nyirenda S0209821

Ratios

    2014 2013 2012 2011Profitability Ratios          Net Profit Margin Net profit after tax/sales 0.5% -14.7% -7.2% -3.9%          Figure 1.0 Profitability Ratios for Medical Australia Ltd

Net Profit Margin

The net profit margin is net profit after tax divided by sales for the year. It shows how much

profit a company is making from each dollar of sales. Medical Australia Ltd’s net profit margin

was negative and decreased even more for the financial years ending 2011, 2012 and 2013

though the sales remained high throughout this period despite that trade receivables were past

overdue on payments and some had extended payment terms. In the 2014 financial year, the net

profit margin rose to a low positive number which showed that the company was finally making

a profit.

In the 2011 financial year, for every dollar of sales, Medical Australia incurred a loss of $0.039.

In the 2012 financial year, for every dollar of sales, Medical Australia incurred a loss of $0.072.

In relation to the 2011 and 2012 fiscal years, the company incurred losses and I noticed that the

expenses were significantly high, in particular the employee benefits and, the administration and

consultancy costs which resulted to a negative profit margin. The administration and consultancy

costs were high because of the out of court settlement of the THI/Multigate case which had been

ongoing for three years and had consumed a high level of human and financial resources up to its

closure. The employee benefits consisted of salaries, wages, annual leave, long service leave and

non monetary benefits and, the reason these costs are high in my assumption is that the company

had too many employees or management were allocating themselves high salaries. Thus the

company needs to review its employee benefit policy and implement a cost reduction plan to

lower costs. The negative profit margin is also telling me that there was no value added to equity

investors.

In the 2013 financial year, for every dollar of sales Medical Australia incurred a further loss of

$0.147. Medical Australia incurred a significant loss in this fiscal year as a result of costs

attributable to the acquisition of MediVet Pty Ltd and an impairment write down of the Clements

business. The challenging economic conditions and difficult trading conditions also contributed

to the negative profit margin.

In the 2014 financial year, for every dollar of sales, Medical Australia made a profit of $0.005. In

my opinion, the company was at breakeven point. Cost reduction was undertaken by

management as they reduced overhead costs better aligning them with revenues and profits

produced which is evident by the increase in net profit margin from -14.7% to 0.5%. Overall

sales also increased and the company made a small profit because of the acquisition of Medivet

Ltd making a positive contribution to net profit margin. The latter also tells me that the company

has improved control of its costs.

Return on Assets

    2014 2013 2012 2011Profitability Ratios          Return on Assets Net profit after tax/total assets 0.5% -20.7% -8.8% -4.6%          Figure 1.0 Profitability Ratios for Medical Australia Ltd

Return on assets is net profit after tax divided by total assets. It measures how a company is

using its assets to earn a profit, thus how much profit is earned on each dollar invested in assets.

From 2011 to 2013, return on assets decreased as the company was not being profitable. In the

2014 financial year, the return on assets ratio increased from -20.7% to 0.5% showing that the

company was improving profitability.

In 2011, for every dollar invested in assets, Medical Australia incurred a loss of $0.046 and in

2012, for every dollar invested in assets, Medical Australia incurred a further loss of $0.088.

Though total assets were significantly high, the main reason for the negative return on assets is

because of the net loss after tax incurred by the company as a result of high costs previously

mentioned above. The negative return on assets also tells me that Medical Australia was not

efficiently using its assets to add value to its shareholders.

In 2013, the return on assets further decreased and for every dollar invested in assets, the

company incurred a loss of $0.027. Though totals assets were high, they slightly decreased from

the previous year by 13.9% as the company faced challenging trading conditions and the cash

balance was near a historic low which contributed to a negative return on assets. The company

also incurred a significant loss as a result of high costs from the acquisition of MediVet, in

particular due diligence and capital raising costs which contributed to a decrease in ROA.

In 2014, the return on assets ratio increased showing more efficient use of working capital within

Medical Australia and improved cost position. Total assets increased by $5.6 million driven

mainly by the acquisition of MediVet and overhead costs were reduced thereby contributing to

net profit and an increase in ROA.

Efficiency Ratio

Efficiency (or Asset Management) Ratios  2014  2013  2012  2011Total Asset Turnover Ratio Sales/total assets 0.98 1.41 1.22 1.18

Figure 2.0 Efficiency Ratio for Medical Australia Ltd

The total asset turnover ratio shows the amount of sales generated for each dollar invested in

total assets. The ATO increased from 2011 to 2013 driven by an increase in sales as a result of

organic sales growth in international markets. Thus, the company is improving the use of its

assets and resources to generate sales.

In the 2014 financial year, the asset turnover ratio slightly decreased as total assets increased by

86% as a result of the acquisition of MediVet, though sales remained high for the period. The

acquisition of MediVet has proved beneficial for the company and shows potential for the

company to improve its efficiency and profitability in the future.

Liquidity Ratio

Liquidity Ratios  2014  2013  2012  2011Current Ratio Current assets/current liabilities 2.32 0.81 1.36 1.18Figure 3.0 Current Ratio for Medical Australia

The current ratio shows the relationship between current assets and current liabilities. It measures

the business’s ability to pay its current liabilities in the short term using current assets. From

2011 to 2012, the current ratio for Medical Australia increased showing improved liquidity and

financial position for the company. This improved financial position was driven by an increase in

inventory held by the company. In 2013, the current ratio decreased showing that the company

was facing challenging liquidity problems as a result of tough trading conditions in the market

and was not making enough revenue to support its operations. In 2014, the current ratio

increased significantly showing the company’s improved liquidity and financial position as a

result of the MediVet business combination.

Financial Structure ratios

Financial Structure Ratios

   2014

 2013

 2012

 2011

Debt/Equity Ratio

Debt (Total Liabilities)/equity 29.0% 80.3% 52.4% 69.6%

Equity Ratio Equity/total assets 77.5% 55.5% 65.6% 59.0%Debt Ratio Total liabilities / Total Assets 22.5% 44.5% 34.4% 41.0%Figure 4.0 Financial Structure Ratios Medical Australia

Debt/Equity Ratio

The debt/equity ratio shows the percentage of assets in a company that has been financed by

debt. In 2011, the debt ratio for Medical Australia was high showing that 69.6% of assets were

financed by lenders whilst the remaining proportion was financed by shareholders. This showed

that the company was financing its growth with debt. The debt ratio decreased in 2012 as the

company continued to pay their two monthly loan principal payment in total of $50 000

including interest. In 2013, the debt to equity ratio sharply increased as shown in Figure 4.0 as

total liabilities increased and, it was mainly driven by the a new debtor facility and payment of a

loan principle and interest. A high debt/equity ratio poses high risk for the company if it is

unable to pay its debts and reduces value for shareholders. In 2014, the debt to equity ratio

substantially decreased and the elimination of almost all debt was partially offset through the

acquisition of additional creditors and deferred revenue balances acquired through the

acquisition of MediVet. A low debt/equity ratio in 2014 is low risk since the shareholders have

financed a greater percentage of assets.

Equity Ratio

The equity ratio measures the percentage of equity used to finance a company’s assets. The

equity ratios for Medical Australia were high throughout the four year period showing that the

shareholders contributed a high percentage of capital into the business indicating a good long-

term solvency position. Also, high equity ratios show that if the company liquidated,

shareholders will receive a high return.

Debt Ratio

The debt ratio shows the percentage of assets that have been financed with debt. The debt ratio

throughout the four year period was low and there were at least twice as many assets as

liabilities. The low debt ratio in Medical Australia shows that it is less risky because it has a

lower overall debt and is stable showing potential of the going concern principle for long

periods.

Market Ratios

Market Ratios    2014

 2013

 2012

 2011

Earnings per Share (EPS)

Net profit after tax/number of issued ordinary shares

0.00 (0.03) (0.00) (0.00)

Dividends per Share (DPS)

Dividends/number of issued ordinary shares

0.00 0.00 0.00 0.00

Price Earnings Ratio

Market price per share/earnings per share

0.00 (5.57) 0.00 0.00

           Figure 5.0 Market Ratios Medical Australia Ltd

Earnings per share

Earnings per share reports the net profit after tax for each issued ordinary share. Medical

Australia reported an EPS of 0 in 2011, 2012 and 2014, and (0.03) in 2013 though they issued a

large number of ordinary shares. This is telling me that the company is not being profitable on a

shareholder basis and in the event of liquidation; the shareholders will not receive anything. The

high expenditure and tough trading conditions in Medical Australia resulted in a net loss after tax

thus an EPS of zero.

Dividends per share

Dividends per share show the amount of dividends per each issued ordinary share. No dividends

were issued by Medical Australia from 2011 to 2014, thus the DPS was zero as the company was

not being profitable. As a potential investor, the dividends per share of Medical Australia is

telling me that in the event of purchasing stock, I will not receive any dividends hence I will not

purchase stock from this company as it is not being profitable and not adding value to

shareholders.

Price/earnings ratio

Price/earnings per share is the ratio of the market price per share to the company’s earnings per

share. Medical Australia has P/E of 0.00 in 2011, 2012 and 2014 and, (5.57) in 2013. Since the

P/E ratio is extremely low, the market value per share will be the same and the company is

showing negative future performances meaning no dividends will be issued to shareholders. As a

result, investor confidence will be low.

Ratios Based on reformulated financial statements

Return on Equity

 2014

 2013  2012  2011

Return on Equity (ROE)

Comprehensive Income/shareholders' equity

0.67% -37.39% -13.45% -7.83%

Figure 6.0 Return On Equity Medical Australia

Return on equity shows the percentage of profit each dollar of shareholders’ equity generates.

The ROE for Medical Australia continued decreasing from 2011 to 2013. The negative ROE is

telling me that the company is not operating efficiently hence its shareholders are losing value.

The significant decrease of ROE in 2013 was mainly due to tough trading conditions and the cost

of acquiring MediVet. The ROE increased considerably in 2014 as a result of the acquisition of

MediVet and restructuring of overhead costs showing improving performance and positioning

for growth.

Return on Net Operating Assets

 2014  2013  2012  2011

Return on Net Operating Assets (RNOA)

Operating income after tax (OI)/net operating assets (NOA)

1.68% -25.17% -10.55% -4.43%

Figure 7.0 RNOA Medical Australia

Return on net operating assets shows the relationship between operating income and net

operating assets. The RNOA for Medical Australia revealed a decreasing trend from 2011 to

2013 as global financial markets continued to deliver significant challenges. During this time,

management were identifying opportunities to diversify and increase potential revenue streams

whilst assessing areas for cost reduction. The negative RNOA shows that the company was

losing value for its shareholders. In 2014, the RNOA increased significantly and became positive

showing the company had successfully implemented cost reduction strategies and increased

potential revenue streams with the expectation of adding value to its shareholders.

Net Borrowing Cost (NBC)

 2014  2013  2012  2011Net Borrowing

Net fin. expenses after tax/net financial

3.83% -8.41% -18.13% -19.31%

Cost (NBC) obligationsFigure 8.0 Net Borrowing Cost for Medical Australia

Net borrowing cost shows the relationship between net financial expenses after tax and net

financial obligations. The Net borrowing cost for Medical Australia increased from 2011 to

2014. During 2011 to 2013, the company had high financial obligations and received a small

amount of interest revenue hence the net borrowing cost was negative. During the 2014 fiscal

year, management settled all debt with the funds from capital raising and the remaining financial

obligation in 2014 was represented by a motor vehicle lease. Thus, the company showed a low

positive NBC as less risk was available with less debt.

Profit Margin

 2014  2013  2012  2011Profit Margin (PM)

Operating income after tax (OI)/sales

1.09% -13.53% -6.25% -2.52%

Figure 9.0 Profit Margin for medical Australia

The profit margin represents the profitability of each dollar of sales. From 2011 to 2013, the

profit margin for Medical Australia decreased as the company continued to make losses and no

value was being added to shareholders. The unstable global market continued to deliver

challenges for the firm and trading conditions were tough which contributed to the negative

profit margin. Also, the latter shows that the company had not been effective in converting sales

into net income and expenditure was high and needed to be reviewed to lower costs. The

increase in the profit margin in 2014 showed that the company had successfully implemented

cost reduction and are improving their effectiveness in converting sales into net income.

Asset Turnover Ratio

 2014  2013  2012  2011Asset Sales/net operating 1.55 1.86 1.69 1.76

Turnover (ATO)

assets (NOA)

Figure 9.0 Asset turnover ratio for Medical Australia

The asset turnover ratio is the amount of sales generated by each dollar of net operating assets.

The ATO for Medical Australia is high throughout the four year period though it slightly

decreases in 2012 and 2014. The slight decrease in 2014 was due to an increase in intangible

assets; goodwill on the acquisition of MediVet. The high asset turnover ratio is showing that the

company is generating more revenue per dollar of assets and using its operating assets

efficiently. In comparison to the industry average Asset turnover ratio of 0.86 in Figure 10.0,

Medical Australia is performing above its industry average showing that the company is

performing well in terms of efficiently using its operating assets to generate revenue.

Healthcare Facilities Industry Financial Ratios

3 Q 2 Q 1 Q 4 Q 3 Q

  2015 2015 2015 2014 2014

Revenue/Employee (TTM) $ 191,658 186,732 182,329 177,812 172,686

Sales/Employee Ranking # 77 # 79 # 79 # 78 # 79Net Income/Employee (TTM) $ 3,124 3,035 3,115 4,438 4,380

Net Income/Employee Ranking # 76 # 79 # 81 # 79 # 81Receivable Turnover Ratio (TTM) 7.08 7.16 7.22 7.32 7.62

Receivable Turnover Ranking # 47 # 46 # 46 # 45 # 40Inventory Turnover Ratio (TTM) Sales 74.45 75.61 76.9 78.55 85.87

Inventory Turnover (Sales) Ranking # 71 # 73 # 71 # 73 # 71nventory Turnover Ratio (TTM) COS 29.38 29.99 30.58 31.38 34.42

Inventory Turnover (COS) Ranking # 10 # 11 # 11 # 12 # 11Asset Turnover Ratio (TTM) 0.84 0.86 0.86 0.86 0.89Figure 10.0 Healthcare Facilities industry Financial ratios (CSI Market Company 2016, p. 1 of 1).

Discussions with other students

Discussion with Luke Perry

Luke posted the following on the forum: Just wondering if anyone else has come across their "Current Ratio" as

being greater than 2. My company is at approximately 5 for most years just wondering if any of my calculations

are incorrect or this is actually correct?

I replied saying: It seems your company is doing very well, your current ratio of approx. throughout the four

year period shows that you company has high liquidity and a good financial position compared to my company

medical Australia (healthcare industry: manufactures medical equipment). In 2014, the current ratio was 2.31

whilst in 2013 it was 0.81. In 2012 it was 1.36 and 2011 it was 1.18. Which industry is your company operating

in?

Luke replied saying: Thank for the reply Beverley, My Company is in the dentistry industry in which they produce

implants, tooth restoration options and regenerative tissue. They then on sell these to dental surgery companies.

Discussion with Mia Etelaaho

In looking at Mia’s company; Linde group net profit margin, it differed greatly from mine in that she had 

positive net profit margins throughout the four year period though they steadily decreased. The positive 

net profit margins are telling me that her company is making a profit on each dollar of sales and that 

they need to review what is causing the steady decrease in the former. My company; Medical Australia 

has negative profit margins which decreased from 2011 to 2013 as a result of high expenditure and 

challenging trading conditions. In 2014, my firm’s profit margin increased and became positive as 

management reduced overhead costs. I then asked the following question: What was contributing to

Linde's group positive net profit margins? What was causing the decreasing trend in net profit margins? Which

industry is your company in?

Mia replied saying: The Linde Group is a company that predominately supplies gases. The net profit margin

is decreasing due to decreased profit for the year after tax. Although the revenue has increased each year, the

costs of sales have also been increasing, therefore a steady decline. 

I replied Mia saying; It is interesting that their cost of sales have been increasing, has the gas market made any

impact on this? Also, I looked at your Total asset turnover ratio and your figures are in percentage form instead

of ration form, I suggest you put them in ratio form. I compared your Total asset turnover ratios (Efficiency ratio)

to my company’s and I noticed that my company has higher ratios than your company. Since you said your

firm’s revenue increased each year, I am guessing their total assets increased each year as well that is why

your ratios are low. My company showed an increasing total asset turnover ratio from 2011 to 2013 as sales

increased in the international market. In 2014, the ratio slightly decreased as assets increased despite the high

sales revenue. I attached my ratios onto the forum. Linde group’s low total asset turnover is telling me that the

company is not efficiently using its assets to generate revenue.

Mia then replied saying: Hi Beverley, I have changed the ATO figure. I just haven't uploaded a more recent

copy. Have you found that looking at the ratios has assisted your understanding of your company?

I replied Mia saying: My apologies for the late reply. Yes, looking at the ratios has helped me understand my

company better as it has highlighted the areas the company is having problems with as well as the successful

areas. How about you?

Discussion with Cassandra Gordon

Cassandra posted on the forum her company’s net profit margin: Net Profit Margin from 2014 to

2011: 4.0% 3.1% 2.2% 3.4%. My Company is Leighton Holdings (a large construction

company)

I replied her post saying: Hie Cassandra, your company seems to be doing well showing that it is being

profitable though they was a slight decrease in 2012. What caused this slight decrease in 2012? My

company's net profit margin differs from yours as my company; Medical Australia incurred losses hence they

had negative profit margins from 2011 to 2013. in 2014, they made a small profit and net profit margin

became positive. Please see below:

Net profit Margins: 2014: 0.5%  2013: -14.7%      2012: -7.2%       2011: -3.9% 

Discussion with Helena Blanco

Helena posted on the forum: Hello Everyone,

I was wondering about my company's profitability, looking at their figures i would think they have been doing

okay over the past few years. i would like to compare them to some other companies. So how do your

companies compare?

Net Profit Margin Net profit after tax/sales 5.7% 4.2% 3.7% 5.6%

I replied on the forum saying: Hie Helena, Your company is showing good profitability as the net profit

margin figures are high and positive compared to my company's figures which are negative except in 2014.

What caused the slight decrease in your profit margin in 2012?

My company: Medical Australia incurred losses hence they had negative profit margins from 2011 to 2013. in

2014, they made a small profit and net profit margin became positive. Please see below:

Net profit Margins: 2014: 0.5%  2013: -14.7%      2012: -7.2%       2011: -3.9% 

Discussion with Bhavna Singh

Bhavna posted on the forum: Hi All, Has anyone else got the most weird percentage while calculating for

debt to equity. See mine below.

I believe my companies debt is significantly higher than its equity reported, that's why the higher percentage. It

just shows the high amount of debt my company is using to finance its assets relative to the value of equity. To

me, it’s not a good thing for a company to be under so much debt ...it’s a huge risk!

Let me know what you all think

Debt/equity         2015:   669.95%      2014:   535.06%       2013:   754.16%        2012:   789.82%

I replied saying: I found it interesting that your company has a high debt to equity ratio. I agree that they

have large debts and it is a huge risk. What is causing such high levels of debt? My company had the following

debt to equity ratios:

Financial Structure Ratios

   2014  2013  2012  2011

Debt/Equity Ratio Debt (Total Liabilities)/equity 29.0% 80.3% 52.4% 69.6%

Economic Profit

 2014  2013  2012  2011Economic profit

(RNOA - cost of capital) x net operating assets (NOA) $

(639,317.6)

(1,730,445.4)

(1,121,370.2)

(721,813.3)

Figure 11.0 Economic profit for Medical Australia

Economic profit measures how much a firm has been able to add value to its shareholders over

and above its cost of capital during the period. I calculated my firm’s economic profit by linking

figures in my worksheet and inputting formulas. I used 10% as the cost of capital in my

calculations.

The economic profit from 2011 to 2013 decreased vastly during the three year period and

increased in 2014, though it remained negative the entire period. The negative economic profit

meant that Medical Australia had a high cost of capital and was unable to add value over and

above the high cost of capital. The key drivers of economic profit are return on net operating

assets (RNOA) which comprises of profit margin and asset turnover, cost of capital and net

operating assets (NOA).

How the RNOA contributed to a negative high economic profit

From 2011 to 2013 the company’s profit margin was negative and decreased throughout the

three year period as it was making losses and it was driven by the following;

i. Unstable global markets which proved challenging for the firm as trading conditions were

tough.

ii. High expenditure especially in the 2013 fiscal year when the firm acquired MediVet.

In 2014, the profit margin increased and became positive as trading conditions improved through

the acquisition of MediVet, cost reduction by management, increased revenue streams and

restructuring of the company.

Also, the asset turnover was high and the company was efficiently using its operating assets to

generate revenue as it was high due to organic growth. Thus, the high ATO barely made an

impact on the negative low profit margins hence the RNOA was negative in 2011 to 2013 and

subtracting the cost of capital even made the percentage a high negative number hence

contributing to a high negative economic profit throughout the four year period. The cost of

capital was also high hence the positive RNOA was outweighed by the cost of capital and the

resulting 2014 economic profit was negative though it had increased as the company made a

profit.

The Net operating assets were fairly high and positive despite a slight decrease in 2013 driven by

a decrease in cash and cash equivalents and an impairment write down of intangible assets. The

high NOA contributed to the large number of economic profit.

The decreasing economic profit from 2011 to 2013 was a result of unstable global markets which

led to tough trading conditions for the firm and high expenditure as mentioned above.

Discussions with other students

Discussion with Mia

I posted on the forum saying: I was surprised that your firm has negative economic profit after

they had reported millions of dollars in net profit for the year. My company had losses from 2011

to 2013 and reported a small profit in 2014. They incurred large amounts of negative economic

profits compared to your company with very small amounts of economic profit. Unstable global

conditions and high expenditure in the company caused my company’s economic profit to be a

high negative amount. What was driving your firm’s economic profit to be negative when they

reported millions of dollars in net profit?

No reply was received.

Discussion on the forum regarding economic profit

I started a new discussion on the forum titled economic profit and I posted the following: Hie

everyone

What was your firm's economic profit? What was driving your firm's economic profit?

 My company had losses from 2011 to 2013 and reported a small profit in 2014. They incurred large amounts of

negative economic profit. Unstable global conditions and high expenditure in the company caused my

company's economic profit to be a high negative amount.

my company's economic profit

Economic profit

(RNOA - cost of capital) x net operating assets (NOA) $

(639,317.6)

(1,730,445.4)

(1,121,370.2)

(721,813.3)

Nicholas Gregory replied saying: Hi Beverley. That doesn't sound surprising at all considering what we

discussed in ass1 and 2..  I've had some trouble trying to explain my firms economic profit and I've had a hard

time trying to explain into as much detail if using the exemplar is to go off.

 I've had some trouble trying to explain my firms economic profit and I've had a hard time trying to explain

into as much detail if using the exemplar is to go off. I've tried figuring out what happened in 2012 but it

seems to be a confusing year with many different changes across a lot of figures but not one obvious

reason behind it...

I replied saying: Hie Nicholas,Your firm's RNOA seems to be high, what was driving your firm's operating

income throughout the period? You might want to explain it in that way.

Bhavna Singh joined the discussion and posted: Hi Beverly, My company had not made any loss from 2012

-2013, however it has not been steady as well. It’s up and down and 2015 numbers are lowest in the 4yrs. The

reason being for this is similar to your company due to high operating expenditure incurred which includes cost

of sales and high amount of asset investments made by the company to grow profit . However this has lead to

a decline in economic profit from 2012-2015 as seen below.

Economic profit       2015:  5.78m       2014: 29.01m     2013:  20.46m     2012: 53.97m

However I am not quite sure of other factors that might have affected this downward movement in EP and will research a bit more on this.

I replied saying: Hie Bhavna, Your company is doing well and showing good profitability though the decrease

from 2012 to 2015 is concerning considering the millions of dollars. Has your company done anything to reduce

the high operating expenditures or they are looking into it. Your figures are different from mine as my company

had economic losses the entire period though the decrease caused by high expenditure is the same in both our

companies.

Discussion with Tiffany HillTiffany Hill posted the following on the forum: Hie guys/ girls,Just wondering if anyone else is

experiencing a larger EP. After completing the ratio's I've got the following, for Orion Corp:

Economic profit

42,069,464.05 18,601,925.26 32,629,268.06 137,877,476.30

The figures, I think are due Orion having a consistent RNOA % each year, with a high NOA, mainly due to

operating assets such as property, plants and equipment. I think short term deposits, and also trades and

other receivables also aid in the economic profit, making the NOA consistent each year.

Does anyone have a negative EP? Also, if anyone has any help on how to analyse the ratio's that would

be great, in particular the MARKET RATIO's cause I don't think I'm using the correct info, for number of

issue of ordinary shares.

Suzanne Wieland replied saying; Hi Tiff, 2 of my 4 years have a negative economic profit, these figures

are millions of Euros since that is how they were listed in the original statements.

(140) 887 (147) 641

I found the number of shares on issue as at 31st December as that was my reporting date) in my

company's annual reports.

Hope this helps,

I replied saying; My company is Medical Australia and it is in the Medical Industry. My company had

losses from 2011 to 2013 and reported a small profit in 2014. They incurred large amounts of negative

economic profit. Unstable global conditions and high expenditure in the company caused my company's

economic profit to be a high negative amount. My firm’s economic profit:

 2014  2013  2012  2011(639,317.6) (1,730,445.4) (1,121,370.2) (721,813.3)

I replied Tiffany Hill saying: Hie Tiffany, Your firm seems to be doing very well, it is showing high

profitability.

Discussion with Christian TestaChristian Testa replied: Hi, I have a negative EP for 2012.

This was because a company 'Delta' was disposed of. the good will for the asset had to be reduced

dramatically to reflect the sale price. RNOA was negative.

Initially i thought the company had ran a big one in 2012, but they were legit.

Economic profit  26.4 33.3 (156.6) 2.0

I replied saying; Hie Christian, What was causing your firm's economic profit to be positive in 2011, 2012

and 2014?

Christian Testa replied saying; Hi Beverley, I couldn't actually pin point one thing that is driving profit up

in all of those three years. Each year so much changes in my firm which alters the RNOA, PM, ATO, and

NOA. Even the cost of capital changes for my firm each year.

I replied Christian Testa saying; Your firm's economic profit is high compared to mine. it seems your

company is doing well in this challenging economy compared to my company which is being affected by

the unstable economy. How come the cost of capital changes each year? Are you not using 10% as your

cost of capital?

Discussion with Suzanne WielandHie Suzanne, What was causing your firm's economic profit to be positive in 2012 and 2014 and negative

in 2011 and 2013.

My company had losses from 2011 to 2013 and reported a small profit in 2014. They incurred large

amounts of negative economic profit. Unstable global conditions and high expenditure in the company

caused my company's economic profit to be a high negative amount.

My company’s economic profit

 2014  2013  2012  2011

Economic profit

(RNOA - cost of capital) x net operating assets (NOA) $

(639,317.6)

(1,730,445.4)

(1,121,370.2)

(721,813.3)

Suzzanne Wieland replied saying; In 2012 there was a billion euros in 'changes due to

remeasurements of net pension provision' and in 2014 the figure was over 2 billion euros, this had

significant impact on the comprehensive operating income.

I replied saying; So in 2012 and 2014, did your company incur a loss because of changes due to

remeasurements of net pension provisions? Your company's economic profit in 2012 is similar to my

company's as both of them were negative. In your firm in 2012, the similarity in economic profit being

negative was due to changes due to remeasurements of net pension provisions like you mentioned and

mine was due to Unstable global conditions and high expenditure in the company. Though your is a larger

amount. So what caused it to be positive in 2011 and 2013?

Insights I have gained in breaking my firm into bits

I have gained a lot of insight by breaking my firm into bits as it made me understand the areas of

my firm which needed attention such as the drivers of profit margin. Also I have developed an

understanding which is transferrable to my personal life as I make investment decisions in

relation to which stock I can purchase. As a potential investor, before buying shares, I can now

use this experience I have gained in this assignment and course and break my firm into bits,

analysing and developing insights into the business realities of the firm to find out if my

investment is worth the return projected by my analysis.

Step 2: Capital Investment decision for Medical Australia Ltd

Medical Australia is considering purchasing a new manufacturing facility for its medical

equipment. Option A is a manufacturing facility located in Lidcombe NSW, 18km west of the

Sydney business district. Option B is a manufacturing facility located in Ashfield 9km south

west of Sydney business district. Management have determined the cost price for option A and B

as shown below. Medical Australia is expecting growth in the company in the next 7 years and

will be looking into moving locations after that period. Management have determined that

because of the large manufacturing area of option A, they will be able to use the facility for 9

years before moving to even larger premises. For option B, management have determined to use

the facility for 7 years considering the manufacturing area is small in comparison to option A

though it is situated in their desired a located. The comparison table is shown below.

Comparison table for Option A and Option B

  Option A in Lidcombe Option B in AshfieldCost price $ 9,000,000 $ 12,000,000 estimated life 9 years 7 yearsResidual value $ 13,000,000 $ 16,000,000      Figure 12.0 Comparison table for Capital Investment decision

The investment opportunity is shown in the table below:

0 1 2 3 4 5 6 7 8 9(9,000,000) 5,000,000 10,000,000 11,000,000 13,000,000 14,000,000 14,000,000 16,000,000 17,000,000 20,000,000

$62,172,196.3592%

(9,000,000) (4,000,000) 6,000,000 17,000,000 30,000,000 44,000,000 58,000,000 74,000,000 91,000,000 111,000,0001 year 5 months

Internal Rate of Return (IRR)Cumulative cash flow ($)Payback period

Option AYearestimated future cash flows ($)Net Present Value (NPV)

Figure 13.0 Investment opportunity for Option A

0 1 2 3 4 5 6 7(12,000,000) 8,000,000 9,000,000 10,000,000 12,000,000 14,000,000 15,000,000 18,000,000

$44,816,906.8877%

(12,000,000) (4,000,000) 5,000,000 15,000,000 27,000,000 41,000,000 56,000,000 74,000,0001 year 10 months

Yearestimated future cash flows ($)Net Present Value (NPV)Internal Rate of Return (IRR)Cumulative cash flow ($)Payback period

Option B

Figure 14.0 Investment opportunity for Option B

Discussion of the strengths and weaknesses of my analysis and

Recommendations

Strengths and Weaknesses comparison table of analysis

Option A Option B

Initial investment of $9 million which is less than Option B’s initial investment cost.

Initial investment of $12 million which is more than Option A’s initial investment cost.

Larger manufacturing area in comparison to Option A and estimated useful life of 9 years.

Large manufacturing area but small in comparison to Option A and estimated useful life of 7 years

Has a very high Net present value of $62,172,196 in contrast to Option B. Thus option A has the greater amount of added value for the firm and investors.

Has a Net present value of $44,816,907 which adds value to the firm and is lower in contrast to Option A

Has an Internal rate of return of 92% which is

higher than option B’s IRR.

Has an Internal rate of return of 77% which is 

less than option A’s IRR

Has a payback period of 1 year 5 months

involving less risk than Option B

Has a payback period of 1 year 10 months 

which is more than that of option A thus more 

risk is involved in this project

Is not situated in the desired location Is situated in the desired location

Figure 15.0 Comparison Table for Option A and B

After analysing the strengths and weaknesses of option A and B in the table above, I recommend

Medical Australia to invest in Option A; the manufacturing facility located in Lidcombe NSW.

This is because of the low initial investment cost, greater added value for the firm and investors

as it offers a greater return, larger manufacturing area and longer useful life for a low initial cost

and short payback period of 1 year 5 months which involves less risk as after this period, it will

no longer be possible for the company to lose money on the investment.

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