Need help finishing this assignment in term of comparing companies. Document will be provided

ASSIGNMENT 2 - ACC/ACF5903 SEMESTER 1, 2017 This task is to be completed as a GROUP and accounts for 25% of the final mark for ACC/ACF5903 (provided the final exam is passed). The objective of this task is to gain experience interpreting accounting information in order to make judgements about an aspect of a company performance. The point of the assignment is encapsulated in the following statement from the text book: \"Although ratios offer a quick and useful method of analysing the financial position and financial performance of a business, they are not without their problems and limitations\" (p.276) Accordingly, when using reported accounting numbers and ratios to form an opinion about a company's performance over a three year period, or forming an opinion about how the performance of a group of companies compare with each other, consideration must be given to How well the accounting numbers and ratios reflect the \"real world\"; The company's choices of, or changes over time in, accounting policies and in the estimation of items, e.g. assets, doubtful debts; and the points in time when items are measured; The comparability of accounting information of different companies; e.g. if their respective choices are different, how these differences should affect your judgements; Other limitations of the financial statements and ratios. CONTEXT You are a member of a group of friends who wish to identify companies for which you would like to work. You all prefer to be employed in the same industry and you have agreed the company you would most like to work for is the company that is best at using its resources to generate wealth. Therefore you need to evaluate how well each company does this so that your group can rank the companies in order of how well they perform. You know that the ratio, Return on Assets, is an indicator of performance in this respect and you also know ratios can't be taken at face value. Also, it is difficult for your group to gather regularly in one place to do this work and therefore you depend on technology to help you collaborate effectively. Copyright Monash University 2017. All rights reserved. Except as provided in the Copyright Act 1968, this work may not be reproduced in any form without the written permission of Dept of Accounting, Monash University. 1 DUE DATES Note the deadlines have been eased by one week compared to the Unit Guide. Set up of Moodle and shared folder Part 1: Individual investigation (sharing the outcomes of your initial investigations with your group members) Part 2: Final version of individual essay, group essay, and participation & contribution spreadsheet) Friday 14th April (Week 7) 5pm Monday 1st May (Week 9) 5pm Monday 22nd May (Week 12) SET UP of Moodle and shared folder 1. Form an assignment group by joining with other students from the same tutorial class. The ideal group size is four students but sizes of three and five are permissible. It is your responsibility to ensure you have joined a group by the due date. Notify your tutor of your group members using the Team Sign-up sheet available on Moodle. 2. Your tutor will provide your group with an alpha-numeric code, e.g. CGM2pmG3. This code serves as the name of your group. 3. One of your group members must create a folder within Google Drive and share it with the other group members as well as your tutor. Use your group code as the name of the folder. This folder is where you will share information and collaborate in the production of the assignment. See the demonstration video \"How to set up the shared folder\" on Moodle for assistance with this. 4. Each group member should use the group code to join a discussion forum on Moodle. The discussion forum is therefore restricted to your group members as well as your tutor. This discussion forum is where you will raise and answer questions within the group, discuss evaluations of the companies, and debate the ranking of their performance. See the demonstration video \"How to use Moodle and Google Drive to collaborate\" on Moodle for assistance with this. 5. Marking for this Assignment includes a component for group participation and contribution. As inputs to this, you will score your satisfaction with the participation and contribution of your group members. These scores are collected twice during the course of completing the Assignment via two links on Moodle. Via both of these links, you need to 2 register yourself for peer assessment. The same video \"How to use Moodle and Google Drive to collaborate\" demonstrates how to do this. 6. From the Morningstar database: select an Industry within any Industry Group within any of the following GICS Sectors1 (see Fig. 1): Energy Materials Industrials Consumer Discretionary Consumer Staples Each group member is to select a different listed company2 within the Industry. See the demonstration video \"How to choose a company and access accounting information about it\" on Moodle for assistance with this. Fig. 1 A screenshot of where and how to select an industry within a Sector 1 The Global Industry Classification Standard (GICS) is an industry classification developed by Standard & Poor's (S&P) for use by the global financial community. The GICS structure consists of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries 2 Note: The assignment is likely to provide a better learning experience if you don't select a highly diversified company. Selecting a listed company provides the advantage of readily accessible Annual Reports. 3 REQUIRED: PART 1. Individual investigation a) Download the Financial Data spreadsheet for your selected company with data for years ended 2014 thru 2016 inclusive; b) Download Annual Reports for 2014, 2015, and 2016 for your selected company; c) Critically review the use of ROA (Return on Assets) as an indicator for your purposes of how a company's resources are used to generate wealth, and how different companies might measure it in different ways. Decide 3 asset categories (items) and 1 income statement item which you think will require closer inspection before you rely on ROA information to form your opinion about how well resources are used to generate wealth. For each of these financial statement items, present the relevant financial information for each of the three years, describe the company's choice of respective accounting policy, and any methods of making relevant estimates; d) In essay form, write your initial impressions of how well the company is using its resources to generate wealth and rate it on a scale of 1 to 10 (10 = excellent, 5 = satisfactory, 1 = very unsatisfactory)3. Justify your judgements by presenting appropriate accounting information and evidence (e.g. from the Company Report). In your evaluation of the company's performance, you should take account of o Relevant information in the Annual Reports, e.g. Director and CEO Reports; e.g. explanations for the level of profits generated from assets and how the level varied annually between 2014 and 2016 o How well the financial information reflects the \"real world\"; o Choices of, or changes over time in accounting policies, and in the measurement or estimation of items; o Reported ratios, i.e. return on assets, asset turnover, profitability ; o Other ways in which the limitations of the company's financial statements should be considered; 3 Note: You will be more able to rate the performance of your company after you have compared your company with the companies of the others in your Assignment Group in Part 2. 4 e) Store the outcomes of (c) and (d) in the shared folder on Google Drive by 5pm Monday 1st May. By storing it you both share it with the other group members and submit it to your tutor. PART 2. Group setting a) As a group, compare initial impressions and investigations of each group member; b) Identify the need for more work to better inform and justify group members' evaluations of their own companies, and to improve the comparability of companies' accounting information. Check your group has a common understanding of what 'performance in relation to use of resources to produce wealth' means. Aim to do this for the first time by Monday 8th May, because you should expect to work on these things at least a second time before finalizing the group essay; c) Provide feedback about your satisfaction to date with other group member's participation and contribution by scoring them via the Assignment 2 - participation and contribution - early peer assessment feedback link on Moodle by 11pm Wednesday 10th May. Upon completion of this by all group members, you will be presented with the other group members' satisfaction with your own participation and contribution. Use this as feedback that might help you improve and/or support others better during the remainder of the Assignment. d) As a group, attempt to reach consensus about the ranking of performance of the group's set of companies. In essay form, state the ranking and justify it using appropriate presentation of information and evidence. List any conventions adopted by the group to improve the comparability of the companies' accounting information, e.g. how account was taken of companies valuing assets in different ways4. e) In the process of performing 2(a) - (d), group members must finalize their own individual evaluations in essay form of how well their own company used resources to generate wealth. This essay must include a final version of the output from 1(c) and 1(d), i.e. Your opinion of how well your company used its resources to generate wealth, justified by real world explanations and financial information; 4 If consensus is not reached, then include dissenting opinion(s) in the essay along with appropriate information and justifications. 5 Details about the 3 asset categories (items) and 1 income statement item which you think required closer inspection before you could form your opinion about how well resources were used to generate wealth; For each of these, present the relevant financial information for each of the three years and descriptions of the company's choices of accounting policies and methods of making estimations. In an attachment, include copies of the relevant pages from the \"Notes to the Accounts\" from each of the three Annual reports. f) Submission: to be completed by 5pm Monday 22nd May Print the individual essay from Google Docs as a pdf and submit it via the link in Moodle. One group member must also print the group essay as a pdf and submit it via the Group assignment link in Moodle. Use the Assignment link \"Assignment 2 - group participation and contribution\" to finally rate your satisfaction with the participation and contribution of the other group members. 6 Word limit Individual evaluations (part 2(d) above): Maximum 1,000 words (not including data presented in tables or attachments). Group evaluation (part 2(c) above): Maximum 600 words (not including data presented in tables or attachments). However, a good assignment is one which makes a well-informed evaluation and communicates it succinctly. For example, a 500 word evaluation will score a better mark than a 1,000 word evaluation which does not provide additional substance and clarity. Submission Requirements Print the individual essay from Google Docs as a pdf and submit it via the link in Moodle. One group member must also print the group essay as a pdf and submit it via the Group assignment link in Moodle. Make sure you use only one version of individual and group essays so that they contain a complete Revision History. Ensure this by when saving changes to a Google document, simply the close the window, don't select File / \"Make a copy\". Save individual essays with the Student ID as the file name, e.g. \"23456789.docx\"; Save the group essay with your group code as its filename, e.g. \"CGM2pmG3.docx\"; Make sure your folder name is exactly the code given to you by your tutor Move any working papers to a sub folder. This means apart from the subfolder, the only documents visible in the group folder are the individual and group essays to be marked, and the group participation and contribution spread sheet. Document offline participation and contributions by group members on the discussion forum. For example, post reports of meeting attendees and outcomes. MARKING Individual evaluation 15 marks Group essay 5 marks Group participation / contribution 5 marks TOTAL 25 marks 7 Group participation The maximum individual score for group participation is the score given for the group essay. The mark will be awarded by the tutor and judged on the basis of discussion and contribution evident on the Moodle Discussion forum, and on a review of the Revision History (see Fig. 2) associated with the group essay in the shared folder on Google Drive. For these reasons, you should document offline participation and contributions by group members on the discussion forum. Peer assessment responses may also be considered. Fig. 2 An illustration of a document's Revision History See last page for the Marking Guide. FEEDBACK Most feedback will be provided in the course of completing the assignment (i.e. formative feedback) rather than after final submission. The reason for this is to provide you feedback whilst you are learning so that you can take advantage of it to improve the quality of your assignment. The main forms of feedback are Guidance in completing the assignment provided during lectures, Guidance from tutors during selected tutorials, From other group members as you use early versions of each other's individual essays to rank companies and improve your justifications of your judgements about company performance, and as you understand others' ways of using accounting information as evidence, From other group members in the form of interim peer assessments of your participation and contribution to the group, By inviting tutors to join in forum discussions when the group needs help to understand something or get questions answered. 8 MARKING CRITERIA Individual Essay (Out of 15. Essay scored out of 60 then divided by 4) 1. As well as clarity of expression, quality of individual essay depends on Criterion Performance Indicators Quality of opinion Performance judged and justified with reference to 1 A clear, justified opinion about how bench marks (e.g. other companies in group) well resources are being used to generate wealth (out of 10) Evaluation of performance How well real world explanations are Real world drivers of trends identified given for performance (out of 10), 2 Performance analysis Trends explained in terms of changes in their How well ratios in 2014 - 2016 and numerators and/or denominators trends are explained (analysis of ROA, o e.g. ROA improved because profit increased asset turnover and profitability trends) 3 due to increase in sales (out of 10), Looking behind the numbers Appropriateness of 'profit' and 'assets' as indicators of Not simply taking financial and ratio 'wealth' and 'resources' considered. numbers at face value Selection of balance sheet and income statement Taking account of how well wealth is 4 item(s) justified. represented by profit, and resources by Required excerpts from Notes to the Accounts assets; and how measurement of these provided. (and hence ratios) are affected by Appropriateness of the measurement of accounting accounting choices and need for items and calculation of ratios considered and estimations (out of 30) adjustments, involving either recalculations or subjective judgements, made as required. o Consistency of approach with those of other group members Relevant trend information provided (ROA, asset turnover, profitability). Group essay (Out of 5. Essay scored out of 20 then divided by 4) A good essay is one where the group members try to achieve consensus of what 'performance in relation to how resources are used to produce wealth' means, recognises ways in which accounting data may be inadequately representative of that, take account of how data about companies may not be directly comparable and they attempt to cater for these issues when deciding the ranking. 2. As well as clarity of expression, quality of group essay depends on Criterion Performance Indicator Issue Identification Quality of explanation of at least 3 issues How well issues affecting cross-company comparability of accounting information were identified5, (out of 12) Protocols for dealing with identified issues How well the group decided to handle these issues (out of 4) Justified performance ranking Having protocols for dealing with issues, how well the group forms and justifies an opinion about performance ranking of companies in the group (out of 4) Quality of explanation as to how the issues were handled (this may have required individuals to do extra work on, and thus improve, their individual evaluations) Quality of justification / supporting evidence 5 Examples are: agreement about meaning of 'performance', whether there are differences in asset valuations and depreciation expenses that affect comparability of company accounting data 9 Automotive Holdings Group Limited (AHG) is a company that specialises in automotive retail, transport and storage. They are a vehicle dealership and operates throughout Australia. The GIGS Industry, Industry Group and Sector that this company belongs to is Specialty Retail, Retailing and Consumer Discretionary Respectively. The company was established in 1952 in Perth, and its current share price is 3.73 million dollars. The Return on Assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. Analysing the ROA of AHG over three years can provide an insight to how the company is managing its assets to generate profit. ROA= EBIT/average assets 2014 = 148,264,000 / ((1,580,990,000 + 1,768,919,000)/2) x 100 = 8.85% 2015 = 175,225,000 / ((1,768,919,000+ 1,957,082,000)/2) x 100 = 9.40 % 2016 = 185,185,000 / ((1,957,082,000+ 2,191,435,000)/2) x 100 = 8.92 % A quick look at the ROA shows us that their return increased between 2014 and 2015, but then dropped down between 2015 and 2016. An analysis of a few assets such as Cash, Intangibles and Inventories, and a look at the EBITDA information will give a further insight to what influenced the change in ROA. Asset Year/Item 2014 2015 2016 Cash 99.50 69.86 108.59 Intangibles 164.99 million 205.43 million 252.98 million Inventories 671,920,000.00 732,030,000.00 828,111,000.00 Income Statement EBITDA 178.61 million 215.77 million 228.57 million ROA 8.85% 9.40 % 8.92 % Cash The closing cash flow for AGH shows a different pattern than reflected in the ROA; it decreased from 99.50 in 2014 to 69.86 in 2014, then increased significantly to 108.59 in 2016. It has maintained a positive status overall, cash input indicates a steady increase in cash over the three years. However, the ROA above is calculated using the average assets for each year, which considers the previous years' cash. There was only a slight increase in cash from 2013 to 2014, compared to the large drop in 2015, and the significant increase in 2016. These stark changes in cash are why the year of the highest ROA is the same as the year of the lowest cash assets. In comparison, the cash recorded for the company Noni B increased significantly between each of the three years, despite them also acquisitioning a new organisation around the same time. Intangibles The value of the Intangibles steadily increased over the three years, from $164.99 million to $205.43 million to $252.98 million. AGH include Goodwill and Franchise rights as their Intangible assets, similar to JB Hi-Fi which includes Goodwill and Brand Recognition. In 2014 and 2015, AGH's Goodwill and Franchise value was added to and so increased their Intangible assets. However, in 2015, impairment charges were taken away from the Goodwill and franchise rights, and in 2016, Divestment values were taken away. This caused the increase in 2015 and 2016 to be less than the increase in 2014. The increase in 2015 and 2016 was also affected by the acquisition of several organisations including Bradstreet Motor Group, Leo Muller CJD and Paceway Mitsubishi. Inventories The largest component of the company's assets are made up by their inventory, which is mostly made up of Vehicles and Vehicle parts. Inventories decreased in 2014 at the same time that AGH underwent a policy refinement. It is possible that the due to the change, the company increased in operating performance and usage of excess manufacturer supplies. They were able to use more of their vehicle parts in a more efficient way, therefore reducing their vehicle parts inventory assets. In 2015 and then in 2016, the inventory value increased significantly. This was due to the acquisition of Bradstreet Motor Group in 2015, and Western Pacific Mercedes-Benz in 2016. EBITDA The value of the total EBITA has increased each year. Included in this statement are reported earnings before tax, abnormals, net interest (interest revenue less interest expense), depreciation and amortisation. The reported earnings were significantly affected by the acquisitions mentioned above. With a refinement of AHG's processes, the buying and selling of the vehicles and their parts became more efficient and effectively helped the company to retain their profits. The depreciation of the assets have steadily decreased, as opposed to the amortisation, which increased from 2014 to 2015, and then decreased again in 2016. The amortisation directly affects the assets value and therefore the ROA. We can see the pattern of the amortisation reflected in the change in ROA of the three years. Conclusion The acquisition of the new organisations in 2015 and 2016 had a large impact on the depreciation, revenue and overall profit of the company. As the value of the inventory and the depreciation of that inventory makes up the majority of the company's assets, it can be seen that the change in behaviour over the three years, relating to tighter regulations and more efficient work, has had a direct and positive effect to the company's ROA. Through the analysis of the above assets, it is clear where and how the changes in ROA took place. The company appears to be doing well, and on the right track to further increasing their assets value. After this evaluation of their Return on Assets for the past three years, I give the company a rating of 7. Recommendation The company has been doing well by ensuring that their ROA stays fairly consistent. They have not fallen into a negative for any of their assets or liabilities. They successfully increased their ROA during the acquisitions of Bradstreet Motor Group in 2015, and Western Pacific Mercedes-Benz in 2016, and they have managed to keep their ROA quite consistent throughout all the changes in the company ie the acquisitions and the policy refinement. They should continue in the manner that they are, ensuring that the new policy changes are followed correctly to ensure speed and efficiency in operating processes. JB Hi-FI Limited Assessment Company Profile: JB Hi-Fi Ltd is an Australian and New Zealand retailer which specializes in video games, blu-rays, DVDs, CDs and general electronics and hardware. It is a discount retailer supported by a low cost model, which has maximized profits by leveraging Over 200 retail locations Growth over the last three years as JB Hi-Fi has continued to acquire other retailers in their industry. ($870 million acquisition of Good Guys Ltd). Most imminent threat is Amazon Inc coming to Australia Financial Review Strong returns for investors, 23% over last year Continued growth in market share year over year $36.6 million growth in EBITDA over last three years 3.77% net profit margin over the last three years Significantly decreased debt, from $136 million to $50 million in last three years Increase in sales over last three years Asset Assessment We looked at the following assets as a means of measuring financial success: Cash: JB Hi-Fi has seen an increase in cash flow year over year with a reported $43.5 million in 2014, $49.1 million in 2015 and $51.9 million in 2016. These increases have been made even while expanding their operations. This is due to significant increases they have seen in cash receivables - $1.3 billion over the last three years. Again this will be important to manage and examine in the face of Amazon's expansion into Australia and New Zealand. This will certainly have an impact on cash flow moving forward. Intangibles: The majority of JB Hi-Fi's intangible assets are indefinite in nature - meaning they have an indefinite useful life and are not subject to amortization and are tested annually for impairment. The company has had a fixed level of intangibles at $49 million year over year. This is directly tied to goodwill and brand recognition tied to location of retail outlets. Inventory: Similarly to cash flow, inventory has seen an increase in asset evaluation over the last three years. This is indicative of the growth the company has seen in sales and would account for a need to continue to grow. In 2014, inventory made up $460 million of assets, while in 2015 it grew to $480 million and finally in 2016 it grew yet again to $546 million. This consistent growth is a good proof point of JB HiFi's financial stability and strength. Income Statement Assessment Our group chose to evaluate EBITDA, in evaluating success in companies' financial standing. EBITDA stands for Earnings Before Interest Tax Depreciation and Amortization. Like other financial areas of the company, the returns as measured by EBITDA are extremely positive for JB Hi-Fi. They have seen consistent increases in EBITDA from $227 million in 2014, to $242 million in 2015 and finally $264 million in 2016. Return on Assets JB Hi-Fi has seen significant increases in return on assets (ROA) as depicted below. They have consistently seen greater than 15% return on their assets, and it matches what was forecasted in their annual reports year over year. JB Hi-Fi Limited ROA (%) 15.90 15.85 15.80 JB Hi-Fi Limited ROA (%) 15.75 15.70 15.65 15.60 15.55 06/14 06/15 06/16 NONI B LIMITED Background Noni B is a network of fashion retail stores across Australia that primarily focuses on women's fashion under exclusive brands such as Noni B and Liz Jordan. The company has developed a 'brand DNA' that aims to enhance their customers' in-store experience through collecting information on their clients' needs. That way, the company can be in a position to offer collections with style, quality and value that appeal to its customers and provide a more attractive shopping environment, as well as personalized service that addresses each of its customers' needs. During 2016, the company rationalized their store network, closing the stores that were underperforming while replacing them with new ones in new locations with new designs and a further 10 were added leading to a total of 220 stores at 26 June 2016. Further, the company experienced an increase in the sales through its online store. Investments have already been made in form of a new social and digital media strategy that will be expected to further drive growth in sales as well as strengthen customer loyalty. Additionally, investments made in a new fully integrated IT system combining point-of sale, warehousing, payroll, planning and Customer Relationship Management functions are aimed at increasing efficiencies across the business consequently reducing the operating costs. Financial Statement Items A. Cash The Cash recorded in the Statement of Financial Position are $5.313 million, $8.493 million and $12.919 million for 2014, 2015 and 2016 respectively. This indicates an increasing trend over the years. By the end of 2016, the company had no bank borrowings, which is a positive status. However, the company's Cash balance faces significant change due to the imminent acquisition of Pretty Girl Fashion Group, whose consideration will be both Cash and a stake in Noni B's Equity. Despite this, Noni B expects to experience an annual earnings growth of over 330 million due to the acquisition of Pretty Girl Fashion Group's operations. Additionally, the acquisition of Pretty Girl Fashion Group will result to the creation of the leading specialty apparel retailers in Australia. B. Intangible The Intangible assets, which is only present in Noni B's 2016 Statement of Financial Position relates to a purchased Computer Software, possibly the new fully integrated IT system combining point-of sale, warehousing, payroll, planning and Customer Relationship Management functions are aimed at increasing efficiencies across the business consequently reducing the operating costs. C. Inventory The value of inventory recorded in the Statement of Financial Position are $11.773 million, $9.939 million and $11.419 million for 2014, 2015 and 2016 respectively. The valuation method for inventory remained the same at the lower of coast and realizable value. However, due to the nature of the industry, which is Noni B being a retail fashion store for women, the inventory tends to suffer inventory obsolescence, despite the company's model of 'brand DNA' that aims to enhance their customers' in- store experience through collecting information on their clients' needs, because individuals' taste and preferences tend to change erratically. Income Statement Item The item identified is Earnings Before Interest Tax Depreciation and Amortization (EBITDA). The value of EBITDA recorded in the Statement of Financial Position are $3.338 million, $(5.417) million and $(3.409) million for 2014, 2015 and 2016 respectively. This indicates that the losses increased from 2014 to 2015. However, the company's EBITDA significantly increased in 2016 leading to a positive EBITDA. This shows a significant increase in the company's sales and has future prospects of increase in annual sales following the imminent acquisition of Pretty Girl Fashion Group. Evaluation of Return on Assets The most conservative / prudent measurement of Noni B's ROA is NOA = Net Income / Total Assets The Return on Assets is thus; 2014 $ (7,843,000) $ 15,329,000 -51.16% Net Income Total Assets ROA 2015 $ (4,790,000) $ 29,046,000 -16.49% 2016 $ 2,210,000 $ 36,971,000 5.98% Based on the trend analysis, the company is efficiently utilizing its assets since the ROA is increasing form 2014 at -51.16% to 5.98%. The graph below indicates the movement of the ROA for the company from 2014 to 2016. NONI B Return On Assets Movement 10.00% 0.00% 2013 -10.00% RETURN ON ASSETS 2014 2015 -20.00% -30.00% -40.00% -50.00% -60.00% TIME IN YEARS 2016 2017 Factors that affect calculation of assets The factors that may affect calculation of assets are; 1. Depreciation or Amortization rate; The rate at which an asset is depreciated will largely affect the value of that asset at the end of each financial period. The higher the rate at which both Inventory and Noni B's brand is amortized and the depreciation of its PPE will result to a low value at the end of each financial period. 2. Valuation model; The nature of any assets owned by Noni B will determine the value of that asset. An asset such as land that only appreciates in value will result to a high valuation model in each subsequent financial period. Assets such as software and PP&E that have a depreciating nature will reduce in value after each subsequent financial period. Valuation of Assets The company's assets are valued at fair value where possible, such as inventory. The fair value valuation technique aims to maximize, to the extent possible, the use of observable market data. Net Book Value valuation method is for assets that have a depreciating nature such as PP&E. Calculation of Depreciation by Noni B Limited Depreciation on Noni Limited's PP&E is based on a straight-line basis over the useful life of the assets. Conclusion Generally, the company has been having an increasing ROA. We expect a continued increase in ROA followed Noni B Limited's acquisition of Pretty Girl Fashion Group, which will result to an increase in Noni B Limited's annual earnings by $330 million. Recommendation In order for Noni B Limited to continue increasing its ROA, its manager should critically evaluate alternative projects that it is considering to make investments in and choose the ones that generate the highest Net Present Value and Internal Rate of Return causing a significant increase in the company's earnings. Take for example, the investment on the acquisition of Pretty Girl Group. Its acquisition will boost Noni B's annual revenues by 330 billion dollars. The costs associated with production in Pretty Girl Group, however, should not significantly erode this profit. In a nutshell, any investment into new ventures should have a positive net impact on Noni B's future earnings. SFH Background Information: Specialty Fashion Group Limited (SFH) is a fashion company that owns multiple women's retail fashion brands: Millers, Katies, Crossroads, Autograph, City Chic, and Rivers. SFH has 1095 stores altogether - most of them are in Australia, but there are also 56 stores in New Zealand (27 for Millers, 9 for Crossroads, 8 for Autograph, and 12 for City Chic), and City Chic has also expanded into the US (6 stores) and South Africa (2 stores). SFH has also emphasized their online presence through an \"omni-channel strategy\JB-Hifi first because that ROA is just a lot higher than anyone else's, the Noni B because even though ROA only maxes out at 5. it has risen significantly in the last 3 years and will likely rise higher due to the acquisition of the new company then Automotive holding group 3rd because it's ROA is constant around 9%, and Specialty Fashion fourth because the RCA was lowest (fell negative over 2015 and was still negative in 2016). I thought about ranking Specialty Fashion 3rd over Automotive HOlding, due to the fact that SF acquired a brand in 2014 which is the sole reason its EBIT fell negative, and the brand it acquired is expected to start trading profitably in 2017. However, the fact that the annual report is an optimistic view to encourage its investors, I cannot place too much faith in it's confidence, and we should view the annual report with skepticism. Also, the EBITDA of AH ($178-228) (assuming Evelyn's figure is in millions) is much higher than the EBITDA of SF ($39-25 million from 2014-2016) which makes me think it is simply a bigger company The last consideration I had in ranking the last two was the thought that an automotive group might not do so well in the future - the automotive industry's future is dubious considering environmental issues, upcoming technology such as self- driving cars, etc. Fashion companies will remain intact for a while, especially since Specialty Fashion has seen considerable success in switching much of its business strategy toward online sales. But even so, I don't think it's prudent to base current decisions on predictions of the future, so that's why I still rank Automotive holding above Specialty Fashion One issue I thought of is that companies may be in different parts of their business cycle. E.g. Two of our companies just acquired a smaller company, which will affect both their level of assets and profitability, especially in the short run I guess more generally, short-term ROA isn't a perfect indication of "using resources to generate wealth." but we need to do more than talk about each of our individual companies ___ _. __ _ iM-iq- '1 MMWHWMMB I lawn-Imnllu mminsumhml Imam-dun __iwmgn Ekulnmm 'I \"mama-Imagine ' \"WWW-I'M ' "' iii-cm "H'tmmunami-urwumu " Flu-sud mm- H IIII all mount-unlin- lummrmum u \".minndhnuupnm lmmmwv} hum-nub " Wd''m'nmi I m'um'm \"dh'h' In mmMm-- Yin. mdh-- ' with.\" urn-MM "u-4m\" - wlumhmuww I mhmdm M lhmtmmdlnh - them-l I \"II-q Mud-dim WMH-mwmr km and\"! mm mmmw *mMhnw u Cmummmum MW it hm'mmwlukm mung-uidly! \"midiII ismmudmmilo Itsdawn I: Hmkmwlwam mt thaw-mum mnnum-' mmwl hmmhmhm mdmmmdmnhwmwuhmwq \"Human-mama\" wanm.' .i t. . _. . p.\" I - (m : HIEmm. | =mw * '- Mdenh-uw -memmwm Iarmmmm It'll]! th-hmtihmmmml \"inhuman-audit Mun-u inammmm - Mufti-Manhun- mas-mm :OHI mwudunlhmh __ ___ _______ _ ________ ___ _ _nnml _ .wmm - oping-(puma... mm i lhwmkmmmh \"It -Mhm-unlhnku- mph-mm mNHML'EM'J} ' I'm-r "unanimimmmnmuw'm Ilia-unmask moon-mummy\" Most of the marks for the group essay are for identifying issues that made comparing them difficult Justifying each company's ranking is only 4/20 marks So yes we will need a short ranking of them, but we need to talk more about issues and how they were resolved This is all in the grading rubric, so that's what I'm going off of \fMy ideas of issues of comparability are 1) different parts of a business cycle, and 2) different industries - obviously they're all specialty retail, but clothing vs electronics vs automotive are still quite different. Talk about ROA not being constant, we could maybe even use profit margins/turnover ratios or something to show the lack of similarity between two businesses C9} 4 0' 16%ll:t '0'" vodafone AU "5" MARKING CRITERIA Individual Essay (Out of 15. Essay scored out of 60 then divided by 4) I. As well as clarity of expression quality of individual essay depends on Criterion Performance Indicators Quality of opinion . Perfomtance judged and justied with reference to A clear, justied opinion about how bench marks (cg. other companies in group) well resources are being used to generate wealth (out of [0) Evaluation of performance How well real world explanations are given for performance (out of 10), Real world drivers of trends identied Performance analysis How Well ratios in 2014 7 2016 and trends are explained (analysis of ROA, asset turnover and protability trends) (out of 10), Looking behind the numbers Not simply taking nancial and ratio numbers at face value Taking account of how well wealth is represented by prot, and resources by assets; and how measurement of these (and hence ratios) are affected by accounting choices and need for estimations (out of 30) Trends explained in terms of changes in their numerators andfor denominators eg. ROA improved because profit increased due to increase in sales Appropriateness of 'profit' and 'assets' as indicators of 'wealth' and 'resources' considered. Selection of balance sheet and income statement item{s) justied. Required excerpts from Notes to the Accounts provided. Appropriateness of the measurement of accounting items and calculation of ratios considered and adjustments, involving either recalculations or subjective judgements, made as required. 0 Consistency of approach with those of other group members Relevant trend information provided (RDA, asset turnover, protability). Group essay (Out of 5. Essay scored out of 20 then divided by 4) A good essay is one where the group members try to achieve consensus ofwhat 'perforrnance in relation to how resources are used to produce wealth' means, recognises ways in which accounting data may be inadequately representative of that, take account of how data about companies may not be directly comparable and they attempt to cater for these issues when deciding the ranking. 2. As well as claril 'l'DLlI essa deicnds on Performance Indicator Issue Identication - Quality of explanation of at least 3 issues How well issues affecting cross-company comparability of accounting information were idonticds, (out of 12.) Protocols for dealing with identied issues I Quality of explanation as to how the issues were How well the group decided to handle these issues (out handled (this may have required individuals to of 4) do extra work on, and thus improve, their individual evaluations Justied performance ranking I Quality of justication f supporting evidence Having protocols for dealing with issues, how well the group forms andjusties an opinion about performance rankin_ ofcom-anies in the run: out of4 5 Examples are: agreement about meaning of 'performance', whether there are differences in asset valuations and depreciation expenses that affect comparability of company accounting data ASSIGNMENT 2 - ACC/ACF5903 Noni B Limited had a negative asset turnover due to the losses it had sustained during the fiscal years 2014 and 2015 which amounted to -51.15% and -16.49% respectively. During the fiscal year 2016 the company showed positive results and the net income of the company stood at $2,210,000 showing a positive number of 5.98%. The return on assets (ROA) of Noni B Limited has shown a positive trend which indicates improvement in the performance of the company and efficient utilization of assets in generating net income. Marginal changes are observed in the ROA of JB Hi-Fi Limited during last three years. The ROA during the fiscal year 2014 was 15.65% which improved marginally during the fiscal year 2015 and stood at 15.84%. Again during the fiscal year 2016 the ROA decreased and stood at 15.67%. JB Hi-Fi Limited has a consistent ROA which is also high. It indicates that the company is managing its assets in an efficient manner and is generating good net income from their utilization. The ROA of Specialty Fashion Group limited (SFH) decreased from 9% during the fiscal year 2014 to -0.37% during the fiscal year 2015. The decline in the ROA was primarily due to decrease in the earnings before interest and taxes which showed negative numbers during the fiscal year 2015. The assets of the company also increased significantly during the same year. Owing to low profitability during the fiscal year 2016 the ROA showed positive numbers and stood at 0.74%. The performance of the company during past three years suggest an overall decline in the efficiency of the company to use its assets in generating net income. Automotive Holdings Group Limited (AHG) has a ROA of 8.85% during the fiscal year 2014 which increased to 9.40% during the fiscal year 2015. The increase in the ratio was primarily due to increase in EBIT of the company. During the fiscal year 2016 the ROA of the company declined and stood at 8.92%. The decrease in the ratio was not due to decrease in the net income of the company but was primarily due to significant increase in the assets of the company. Overall the AHG has a good ROA which is consistent and indicates an efficient utilization of the assets by the company for generating net income. The above analysis suggests a higher utilization of assets by JB Hi-Fi in generating net income. The company has a low cost model which enables it to earn higher net income. The company is also smart in making acquisitions and has a strong network of more than 200 retail locations. So JB Hi-Fi can be ranked first among the four companies in terms of profitability as well as asset utilization. The second rank can be given to AHG which also has a higher and consistent ROA. The profitability of the company has shown an increasing trend in past three years. Its asset base has also increased significantly during the period of analysis. Although there was a decline in ROA during the fiscal year 2016 which was primarily due to significant increase in the assets and a major portion of the profits was washed away in form of depreciation. At third spot is Noni B Limited which has come out of net losses in past two years and has shown smart performance in current year. The company has a strong network of 220 stores and has seen significant increase in online sales and it is expected that its ROA will increase in coming years. The SFH have performed poorly during the period of analysis and is placed at fourth spot in the comparison. The net income has declined significantly resulting in negative ROA. Although the company is having operations in US and Africa and it has also made acquisition but then also the revenue of the company declined which suggests inefficient use of assets by the company. NONI B LIMITED Background Noni B is a network of fashion retail stores across Australia that primarily focuses on women's fashion under exclusive brands such as Noni B and Liz Jordan. The company has developed a 'brand DNA' that aims to enhance their customers' in-store experience through collecting information on their clients' needs. That way, the company can be in a position to offer collections with style, quality and value that appeal to its customers and provide a more attractive shopping environment, as well as personalized service that addresses each of its customers' needs. During 2016, the company rationalized their store network, closing the stores that were underperforming while replacing them with new ones in new locations with new designs and a further 10 were added leading to a total of 220 stores at 26 June 2016. Further, the company experienced an increase in the sales through its online store. Investments have already been made in form of a new social and digital media strategy that will be expected to further drive growth in sales as well as strengthen customer loyalty. Additionally, investments made in a new fully integrated IT system combining point-of sale, warehousing, payroll, planning and Customer Relationship Management functions are aimed at increasing efficiencies across the business consequently reducing the operating costs. Noni B Limited became an ASX listed company in 2000 and in 2014 the company was sold to Alceon Bidco. The stock code of the company is NBL. Scott Evans is the Chief Executive Officer and Managing Director of the company and Richard Facioni is the Chairman of the Board. Financial Statement Items A. Cash The Cash recorded in the Statement of Financial Position are $5.313 million, $8.493 million and $12.919 million for 2014, 2015 and 2016 respectively. During the fiscal year 2016 the cash flow from operating activities resulted in inflow of cash of $7.7 million which was significantly higher than $5.1 million during the fiscal year 2015. Owing to high availability of cash the company made high investments in opening new stores throughout the year. This indicates an increasing trend over the years. By the end of 2016, the company had no bank borrowings, which is a positive status. However, the company's Cash balance faces significant change due to the imminent acquisition of Pretty Girl Fashion Group, whose consideration will be both Cash and a stake in Noni B's Equity. Despite this, Noni B expects to experience an annual earnings growth of over 330 million due to the acquisition of Pretty Girl Fashion Group's operations. Additionally, the acquisition of Pretty Girl Fashion Group will result to the creation of the leading specialty apparel retailers in Australia. B. Intangible The Intangible assets, which is only present in Noni B's 2016 Statement of Financial Position relates to a purchased Computer Software, possibly the new fully integrated IT system combining point-of sale, warehousing, payroll, planning and Customer Relationship Management functions are aimed at increasing efficiencies across the business consequently reducing the operating costs. The company accounts the definite life of intangible assets at cost and are amortized for their useful life on a straight line basis. Intangible assets are also tested for impairment when it is indicated that impairment is required. The company invested $5.02 million in purchasing the new computer software and amortized $0.08 million during the fiscal year 2016. Other than it the cost of goodwill of the company was $5.892 million which was amortized during the fiscal year 2016. C. Inventory The values of inventory recorded in the Statement of Financial Position are $11.773 million, $9.939 million and $11.419 million for 2014, 2015 and 2016 respectively. The inventory increased by $1.48 million or 14.89% during the fiscal year 2016 and decreased by 1.834 million or 15.58% during the fiscal year 2015. The valuation method for inventory remained the same at the lower of cost and realizable value. However, due to the nature of the industry, which is Noni B being a retail fashion store for women, the inventory tends to suffer inventory obsolescence, despite the company's model of 'brand DNA' that aims to enhance their customers' in-store experience through collecting information on their clients' needs, because individuals' taste and preferences tend to change erratically. Income Statement Item The item identified is Earnings Before Interest Tax Depreciation and Amortization (EBITDA). The value of EBITDA recorded in the Statement of Financial Position are $3.338 million, $(5.417) million and $(3.409) million for 2014, 2015 and 2016 respectively. This indicates that the losses increased from 2014 to 2015. However, the company's EBITDA significantly increased in 2016 leading to a positive EBITDA. This shows a significant increase in the company's sales and has future prospects of increase in annual sales following the imminent acquisition of Pretty Girl Fashion Group. Evaluation of Return on Assets The most conservative / prudent measurement of Noni B's ROA is NOA = Net Income / Total Assets The Return on Assets is thus; Net Income Total Assets ROA 2014 $ (7,843,000) $ 15,329,000 -51.16% 2015 $ (4,790,000) $ 29,046,000 -16.49% 2016 $ 2,210,000 $ 36,971,000 5.98% Based on the trend analysis, the company is efficiently utilizing its assets since the ROA is increasing form 2014 at -51.16% to 5.98%. The graph below indicates the movement of the ROA for the company from 2014 to 2016. NONI B Return On Assets Movement 10.00% 0.00% 2013 -10.00% RETURN ON ASSETS 2014 2015 2016 2017 -20.00% -30.00% -40.00% -50.00% -60.00% TIME IN YEARS Factors that affect calculation of assets The factors that may affect calculation of assets are; 1. Depreciation or Amortization rate; The rate at which an asset is depreciated will largely affect the value of that asset at the end of each financial period. The higher the rate at which both Inventory and Noni B's brand is amortized and the depreciation of its PPE will result to a low value at the end of each financial period. 2. Valuation model; The nature of any assets owned by Noni B will determine the value of that asset. An asset such as land that only appreciates in value will result to a high valuation model in each subsequent financial period. Assets such as software and PP&E that have a depreciating nature will reduce in value after each subsequent financial period. Valuation of Assets The assets of the company are valued on a recurring and a non-recurring basis and depend upon the requirement of the applicable accounting standard. The company's assets are valued at fair value where possible, such as inventory. The fair value valuation technique aims to maximize, to the extent possible, the use of observable market data. Net Book Value valuation method is for assets that have a depreciating nature such as PP&E. Calculation of Depreciation by Noni B Limited Depreciation on Noni Limited's PP&E is based on a straight-line basis over the useful life of the assets. The carrying value of property, plant and equipment is impaired annually. The assets allocated to low value pool are depreciated at the rate of 18.75% - 37.5%. The company also adjusts depreciation and amortization for change in the useful lives of the assets. If the useful life of the asset decreases than previously estimated life due to new technical innovation or some other event, the depreciation and amortization charges are increased. Conclusion Generally, the company has been having an increasing ROA. We expect a continued increase in ROA followed Noni B Limited's acquisition of Pretty Girl Fashion Group, which will result to an increase in Noni B Limited's annual earnings by $330 million. The increasing ROA is the evidence that the net income of the company is increasing and it is utilizing its assets in more efficient manner. The company has recovered itself from the losses that it was sustaining during the past years. With the growth in the profitability of the company the return on assets will also increase. Recommendation In order for Noni B Limited to continue increasing its ROA, its manager should critically evaluate alternative projects that it is considering to make investments in and choose the ones that generate the highest Net Present Value and Internal Rate of Return causing a significant increase in the company's earnings. A well analyzed investment or acquisition results in addition to the profits of the business which also results an increase in the return on assets. The return on assets of Noni B Limited is lower than two of its competitors. But the company has broken out of the losses and is on the path of earning profits. So it is expected that the return on assets will also grow with the growth in net income. The other area where the company can make improvement is the expenses (other than finance cost). More than 68% of the revenue of the company is paid in form of expenses. Controlling these expenses can further help the company to increase its return on assets. Take for example, the investment on the acquisition of Pretty Girl Group. Its acquisition will boost Noni B's annual revenues by 330 billion dollars. The costs associated with production in Pretty Girl Group, however, should not significantly erode this profit. In a nutshell, any investment into new ventures should have a positive net impact on Noni B's future earnings