Step 3 - Ratios€¦ · Web viewStep 3 - Ratios. The ratios used to identify drivers for James Fisher and Sons PLC consists of six categories; profitability ratios, efficiency ratios,

ACCT13017 Assignment 2 Yvette Crofts – s0291217

Step 3 - Ratios

The ratios used to identify drivers for James Fisher and Sons PLC consists of six categories; profitability ratios, efficiency ratios, liquidity ratios, financial structure ratios, market ratios and ratios based on preformulated financial statements.

How do you make sense of them?

When analysing ratios, instead of comparing the numbers, I relate what the numbers mean back to what the company is doing. Let’s start with profitability ratios.

Net profit margin: is the how much of the sales money is just for profit, and not covering expenses and tax. JF&S has had a decreasing PM (with the exception of 2018). This can mean either sales have increased, but the price has decreased or sales have stayed the same (or decreased) but the price has dropped.

- Sales have been increasing as can be seen below. (This would be due to the fact that JF&S has been trying to expand their international trade).

2018 2017 2016 2015￡m ￡m ￡m ￡m

Group revenue $561.50 $499.30 $465.969 $437.930

Return on assets: Has JF&S been making good return on their assets they have purchased?

- A similar pattern to NPM is revealed. 2015 was a good year at 8% profit to total assets, yet 2016, and 2017 were down to 6.9% and 6.4% respectively, yet 2018 is back up again at 7.5% (not yet as good as 2015). What is interesting is total assets has been increasing (see below) yet 2018’s assets are lower. This would indicate that in 2018 JF&S has had more profit using less assets. It is interesting that between 2017 and 2018 JF&S had a change of CEO from Charles Rice to Malcolm Paul. During 2017/18 year JF&S did land a contract for maintenance services to the London Array Windfarm, they bought Martek (marine safety and calibration company) and Murjan (marine constructions for oil). This could explain the profit for the year going up because those other companies would have merged with JF&S, but it does not explain why the assets have decreased.

2018 2017 2016 2015￡m ￡m ￡m ￡m

Total assets $605.90 $612.20 $555.50 $507.10Profit for the year $45.30 $39.40 $38.147 $40.707

Efficiency: Best use of the assets. - Total asset turnover ratio is very high, with 2018 being the highest at 92.7%.

This would be having something to do with an increase in sales and drop in assets.

Liquidity: Can liquid assets cover liabilities as they fall due?


- This is where it starts to look bad. For the past four years current assets have only just covered liabilities once and a half time over (1.81 – 1.58 ratio). If there were to be a sudden change in the liabilities, the current assets could not cover them.

- Quick ratio 1 (which excludes inventory and prepayments) looks worse. In this ratio, assets can only have half the liabilities. Perhaps the new management is not as good as it looks after all.

2018 2017 2016 2015￡m ￡m ￡m ￡m

Quick Ratio 1 $(0.41) $(0.46) $(0.54) $(0.52)

Financial Structure: How has JF&S funded their company?- Another interesting factor, considering the expansion in 2018 of new

companies, is that in 2018 the debt to equity has gotten better since past years. Just the year before, JF&S had more debt to equity which is a risky position to be in. The equity ratio below this shows that equity has increased. I would assume that since purchasing the subsidiaries, Martek (marine safety and calibration company) and Murjan (marine construction), that they now list them as equity. The money from the London contract may have gone to reducing debt at the same time. It would appear a very opposite reaction has happened to what would be expected.

2018 2017 2016 2015￡m ￡m ￡m ￡m

Debt/Equity Ratio -43.1% -54.7% -49.3% -53.0%Equity Ratio 50.6% 45.6% 46.5% 43.5%

Market Ratios: What has the stock market been doing?- The last two years has seen a big drop is issued shares to net profit. It has

dropped from 3.22 to 0.9 in 2018. We know profit for the year 2018 was $45.30 ($5.9M more than the year before), yet earnings per share only increased by 0.12 between 2017 and 2018. Although directors can issue shares as they see fit, I cannot see any reason why they would not want to have a strong share base.

- Ratios Based on Reformulated Financial statements: What about looking at just the

operating side of JF&S?- Dividend payout ratio – Follows similar pattern of high in 2015, dropping

through 2016-17 and rising again in 2018. This would mean that they are trying to give more dividends for income they receive, yet they have been issuing less shares. This makes no sense unless they only wanted to keep current equity owners happen and were not looking for more shareholders yet.

- ROE is also not looking great. Since 2016 it has dropped 0.05. This is not a great ROE for a company who is claiming to be expanding in the future.

- RNOA seems really low at 0.08 for 2018 (has decreased since 2016). This means to me that they have not been making a great return on their assets.


- PM has been decreasing since 2016 and is a 0.06 in 2018. What they are selling they are is not giving a great profit margin and it is getting worse.

- FLEV is getting better. There are 0.36 net financial obligations to shareholder’s equity.

- ATO has no real trend over the past 4 years (it mostly stayed the same), but there are 1.17 sales to each net operating asset. So each net operating asset is only generating one and a bit sales.

- Growth in sales has actually been increasing from 0.06 to 0.12. It is concerning that PM has been decreasing but sales growth is increasing. It would seem that JF&S services has been decreasing in profit, and the growth has been remaining constant. This does not seem like good growth in sales.

- Free cash flow is the most puzzling result of all. If anyone would like to offer their insight (maybe my calculations are wrong) feel free!

2018 2017 2016 2015￡m ￡m ￡m ￡m

Free cash flow 33.58 -6.50 -0.54 -281.29

- Economic profit, by the looks of it, has been all over the place. In 2015 it was negative, which I mean it was not only not adding value it was losing value. 2016 saw a 180 degree turn around and changed to 13.83, but since then it has dropped again. This will be because of one of the drivers.

2018 2017 2016 2015Economic profit 0.73 2.87 13.83 -5.63

Accounting Drivers

Economic Profit (Abnormal earnings)

- Return on net operating assets (RNOA)RNOA has been decreasing since 2016 as it sitting at 0.08. But what has driven it down the past three years?

2018 2017 2016 2015 (RNOA) 0.08 0.09 0.12 0.06

a) Profit Margin (PM)Profit margin is not the accounting driver for the poor performing RNOA. It has only fluctuated up and down, year to year.

2018 2017 2016 2015Profit Margin (PM) 0.06 0.07 0.09 0.04

b) Asset turn over (ATO)Asset turnover looked like it was decreasing leading into 2018, but then it rose 11.1%.

2018 2017 2016 2015


Asset Turnover 92.7% 81.6% 83.9% 86.4%

So, what is driving RNOA? It would seem that JF&S is turning over more operating assets (selling product) with a lower and lower profit margin. Are they selling themselves out?

- Net operating assets (NOA)Net operating assets seems to be the biggest driver. It has increased by $105 million in four years. This would explain why asset turnover has also increased, if they are selling more NOA.

2018 2017 2016 2015￡m ￡m ￡m ￡m

Net Operating Assets (NOA) $417.32 $409.29 $362.19 $312.31

Free Cash flow (OI- NOA)

How much free cash flow is there to be transferred around JF&S?

- Operating income (OI)Operating income has been dropping since 2016. This feels like it is significant If profit margins are down, but more operating assets are bought each year, then eventually the operating income will be eaten away. This is what we have seen since 2016.

2018 2017 2016 2015￡m ￡m ￡m ￡m

(OI) $34.12 $35.62 $42.80 $19.36

- Net operating assets (NOA)NOA has been increasing.

Free cash flow overall had a rough time. The most important thing to note is in 2016 there was a big jump to 13.83 economic profit. The main driver of this is PM, as in this year it doubled from 0.06 to 0.12. NOA has also been the accounting driver because as it has decreased, so has economic profit.

Student Discussion

- Ratio analysis a) Ellishea Cotter: We both have negative Net Borrowing Costs. I didn’t even think

much about mine, but she has thought about it as her first question. I think it could mean that perhaps we are being paid to lend money to other companies? Otherwise, I think it could just be because the ratio uses net financial liabilities which is a negative, therefore, in the ratio we should add another (-) in front of it.


https://ellishea.school.blog/2019/10/09/final-assignment-draft/?fbclid=IwAR1yQ9lM6Ll6OeytUsewH4WXxacKWLFx8D_gJlkfHYB7oijnI4OL_p5EAEM

Ellishea’s FCF has increased steadily, unlike mine which has been all over the place (and negative some years). In her case she thinks this is because of OI increasing and NOA increasing (slower than OI).

b) Sarah Goodchild: “your breakdown was very detailed and showed that you have thought carefully about what the figures in your ratios where actually telling you about the state of your firm. moreover, it gives you a solid grounding for connecting to the economic and business realities of your firm. I particularly liked your discussion of the liquidity ratio. though in terms of covering liabilities with assets your firm is still better off than mine where the liquidity ratio is much less than one. In addition, the ROE ratio of your firm has been like mine in that it has been declining over the period. though while a low ROE for your firm might not bode well for planned expansions did you see which parts of the ratio aligned with the decline was it a decrease in CI and maintained equity or some other shift? in the case of my firm the decline has been quite extreme over the four years from 124.91% to – 18.07% which really isn’t confidence boosting. FCF ratio often has higher degrees of flux mine shift from a relatively low of 8.88 to a high of 1528.45. in regards to calculations that should have been checked in assessment one but I can’t see that without seeing your spreadsheet”

https://sarielstories.wordpress.com/2019/10/08/compiled-assessment/?fbclid=IwAR3ggM8bGGkPYZkgec-R-Pe64hGeS4XgKWEIk5z9zoPt9vUQMQEbOXahx7Q

Sarah’s own ratios were interesting. Hers is the first I have seen with an indication of positive growth. How is this so? Through strong PM, ATO and RNOA. It is also interesting that the FCF has increased, but maybe this is to be expected with the positive growth? I would love to see the Excel sheet with the ratios in for myself too.

- Accounting Drivers analysis a) Ellishea Cotter: We both have had RNOA decreasing. In her case it is because NOA

has increased which is the same for me! Her profit margins have stayed the same, but mine have been dropping, so her driver must be different to mine. Her driver looks like ATO for abnormal RNOA. Her FCF driver is NOA, where in my case it is coming from the PM and NOA.

Overview of step 3

Analysing the ratios was tricker than I expected. Trying to link back each formula to an actual accounting number, and then remembering what that number meant was tough! Having read a few other student’s assignments gives me the feeling that this was common.

Step 4: Identify the Key Economic and Business Drivers






Economic and Business drivers

To find out what the drivers are, I had to take a look into the real world for a bit. First stop… google.

Yahoo had this interesting article about JF&S and about how great of an investment they are. According to the very recent article, share prices have grown 3.1%. Either my ratios are wrong, or they are including other data in their calculations because EPS have been decreasing not increasing over the last four years.

Figure 1: Earnings per share

(Simply Wall St., 2019)

Past this, information on what JF&S has actually been doing was hard. Most sites are only reporting on what their share price is doing, or change of CEO back in 2018.

JF&S website stated that the mid-year 2019 report that the strongest part of the company was off shore oil and tankships (James Fisher, 2019). CEO Nick believe there is big growth opportunities in the future and has just closed a deal in Brazil. CEO Nick said their strategy is “to grow its business organically by leveraging its existing marine skill base in areas of specialist expertise to a global market, supplemented by selective bolt-on acquisitions which broaden the Group's range of specific niche services, products or geographical coverage.” (James Fisher, 2019). Not that I believe Nick’s words but it would seem he thinks that they will continue to push international acquisitions of other companies.

This led me to check out the oil market, since this was their strongest point in the last 6 months.

The executive director of IEA produced a report for oil demand and sales for the next 5 years. In this, it is said that demand will be high due to the implementation of the International Maritime Organisations regulations on fuel quality, and that the US will be increasing production (Birol, 2019). This would affect JF&S in two ways. Either they will make more money for their oil (if it is of standard) and boost value, or if their oil is not up to standard, they will lose money on all the acquisitions they have been doing.


Figure 2: US Oil price and demand forecast 2019

(Birol, 2019)Connections between Economic and Business Drivers and

Accounting Drivers

Identified drivers are: Growth from acquisition and asset expansion. (this links to the accounting driver-

NOA) Demand for oil (this will affect sale or the accounting driver – OI) International Maritime regulations in 2020 (this will affect sale or the accounting

driver – OI)

- Was it easy or hard to make connections?Yes, because most of the information when you google a company of this scale is about share price, not realities, and because the market of JF&S is very forging to me. No, because once I broke down what the major operations were, I was able to look into those industries (like oil) instead.

- What have I learned through the process?Conventional wisdom says that JF&S share price is going up and that they have made a lot of profit and value for shareholders. This is when I learned that conventional wisdom is rubbish.

- Is connecting even possible?Yes, connecting is possible. For myself I have made connections and I do not doubt my connections, but I can be sure and wrong at the same time too.

Student discussions

1. Shalika King – Audi: The way Shalika positioned Audi within the rest of the car world was really insightful. It must be easier to compare competitors when you know the brands, compared to JF&S who are an elusive oil/marine company. It is interesting to see how Audi’s PM has been fairing since the emission scandal. I would say it is fair to say that both our companies are in oligopoly markets. Shalika’s driver 7 was surprising that China has come so far with electric cars. It is very interesting that China would care the least about the emissions. Maybe they have more lax laws than America and Europe about emission laws. My final thought while reading Shalika’s insights to accounting drivers is that both our companies have seen a rough time in


the last four years. https://shalikaking.wordpress.com/2019/10/09/audis-economic-business-drivers/comment-page-1/?unapproved=25&moderation-hash=b907ab778871a086a2867312ec83ef6b#comment-25

What is the analysis of JF&S at this point? What do I think of the analysis?

At this point, my analysis for JF&S is not positive. I do not think things are looking great, yet this is controversial to the share market and countless articles. From the ratios I have calculated I just do not see how the share market have placed such a huge prediction of growth. Even the CEO expects to add value to the shareholders.

Step 5: Forecasting and ValuationFactors, forecasts and assumptions for Excel formula

- The growth rate was decided by looking at two things: the ratios and economic drivers. The ratios have made tiny increases in growth and it would appear that the business drivers leave room from JF&S to grow (See step 4 for details). For this reason, I went with a modest 3%.

- Return on incremental net operating assets (RINOA), or expected returns on invested capital was trickier to value. Historically, this has been decreasing. The CEO has said controversially that they will be growing improving with new projects in the pipe line. What my gut tells me is that the CEO is not wrong about expanding and growth in the future, but that it’s being done so that each year that more companies are bought/more equipment purchased the actual profit return the company sees is getting smaller and smaller. Therefore, I used -1%. Beyond the forecast horizon to where I can’t see, the RINOA will either jump positively, or plummet more.

- Sales growth (%) – I have no doubt that sales will not continue to grow. There is a growing demand on JF&S main sector of oil, and more acquisition of oil companies took place in the first half of the 2019/20 financial year. This will be short lived with the management of operating assets. For 2019-2023 I used 12.5%, 12.5%, 11%, 11% and 10% sales growth.

- Profit margin (PM) – I predict that PM will fall slowly into the coming years. With the increase in sales but no RNOA to support it, PM will be sure to fall more. I used 6%, 6%, 5%, 5% and 4%

- Asset turnover (ATO) – has in total was decreasing (until 2018), but when looking at only the operating assets it has not changed much at all. This would

https://shalikaking.wordpress.com/2019/10/09/audis-economic-business-drivers/comment-page-1/?unapproved=25&moderation-hash=b907ab778871a086a2867312ec83ef6b#comment-25




indicate that financing assets have been doing something, but perhaps the operating assets are turning over at the same rate. An ATO of 1.10 was used.

Valuation

- DCF valuation = $2,323.91m enterprise value

- Economic profit = $877.15m enterprise value

The DCF valuation is the higher of the two. I think this is because there are higher free cash flows than economic profit. What we must remember about the free cash flows though, is that before 2018 they have only been negative, but the huge leap from -6.50 to 33.58 would no doubt affect the DCF valuation.

When compared to the real share price it was surprising that the DCF value was quite close to the $2060 GBX price.

I feel the more accurate reflection of value is the economic profit of $877.15. There is no doubt that the economic profit has only been decreasing since 2016. This, along with the expansion of JF&S, decrease in PM and increase in asset turnover, I believe that there may be growth now but it is bad growth and will end up collapsing.

Figure 3: JF&S Share Price

(James Fisher and Sons PLC, 2019)

As for the accuracy of the valuation, I am of two minds. Pre-ACCT13017 I would have look at the strong growth in the share price over the last 5 years and said “yep this is a good share to buy.” Part of me still clings to that and wonders if my evaluation is wrong. The other part of me says “the work I have put in, and the analysis I have done can only lead to one


conclusion.” I wouldn’t bet my own money on the valuation, but I do believe I have taken one step closer to finding the value with DCF and Economic profit model.

Recommendation – Buy, Sell, Hold

If you already held shares in James Fisher and Sons, I would recommend selling them. At current, their share price is higher than the true value of the company. I predict that it will fall in the future and this might be the best-selling price you can get.

Unit Summary

ACCT13017 Financial statement analysis has come to a close and here are a few things I have to say. The unit did challenge all the theories I have learnt to far in finance and economics. At times I have been enlighten and others I still agree with the conventional theories. The assessment started out very similarly to previous units with Martin, however it did take a turn into something new – thinking outside of the box. If nothing else, I hope I can go into practice with the mind frame of never think I know everything, and to stay open minded to new ways of doing things, much like this new way of valuing a company.

Overall experience of learning

- Assignments were useful, challenged Excel proficiency, some accounting knowledge and general business theories.

- Peerwise – It is useful for quick marks, but I don’t think multiple choice is that great of a learning tool. Everyone spams it with easy questions, unrelated to the course. I found it very hard to want to keep up to date with it. I would make the five marks elsewhere with a marked attendance lecture.

Contributions to and interaction with others (highest to lowest contact)

- Facebook (best space yet as I was already on there, and can check from my phone on the go)

- Lectures (I love being challenged and asked questions – that’s how I really learn)- Forums (I did use these a little, but not greatly)- Blogs- Peerwise

What can you do now/know now?

- In terms of skill, I do not think I have learnt anything new (and rightly so being a capstone unit)

- In terms of what I know I feel like deep ingrained views have been forever challenged (like share price = company value, competitive market theory etc.)

Hindsight…- Although I do not like it, I would keep up to date more with Peerwise. - Start the readings the week before week 1, so that all KCQ’s are ready to go when due.


- Use the company spreadsheet offered in the Moodle site. I did not realise until the very end that there was a preformatted company spreadsheet. This made life hard when it came time to do the Key Value Drivers and Valuation.

Step 6: FeedbackPEER FEEDBACK SHEET: ASS#2

Feedback From: Yvette Crofts

Feedback To: Ellishea Cotter


My Comments

Step 3 Presentation of ratios is very neat and tidy. You understand straight away that performance is down, yet free cash flow is up. I think I have an answer to your NBC question, ill post it on the blog from my own step 3.

Really good analysis of accounting drivers.

If you had any student discussion add them in here too!

Ratios - commentary

Accounting drivers - commentary

Step 4Economic & business drivers

Great layout, easy to read. A link to some of the google searches for information collection would have been nice to check them out. You took a good perspective of the “employee” which is a different way to connect reality to business. Overall good, but would like to see some links too.

Step 5Forecasting & valuation

Good grasp on the economic environment the company is in with the trade war. Again, if you had any data or something to add it would strengthen the argument more.

CEO concerns are real, they want to look good so you would hope they would bring up performance.

Overall ASS#2 (Steps 3-5) It looks really good so far. If you had any, I would just add some student discussion and links to some of the company information listed in step 4 and 5. Good luck!

PEER FEEDBACK SHEET: ASS#2


Feedback To:


My Comments

Step 3Ratios - commentary




Overall ASS#2 (Steps 3-5)



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Feedback To: Yvette Crofts

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Documents

Step 3 - Ratios€¦ · Web viewStep 3 - Ratios. The ratios used to identify drivers for James Fisher and Sons PLC consists of six categories; profitability ratios, efficiency ratios,